Credit cards & home loans: why they AREN’T a match made in heaven

You’re all set to apply for a home loan but you still have a hefty credit card debt. So you figure you’ll pay it all off and just keep the card for emergencies. Surely the bank will be impressed with your debt-free status, right? Wrong.

The bank’s view on credit cards

Banks look at credit cards through a single lens – as debt. Having a huge credit card debt is definitely a no-no, but what matters more is your credit limit.

Why? Because from the bank’s perspective, a high credit limit means a high debt risk. After all, what’s stopping you from maxing out your credit card the day after your loan is approved? Maybe on new items for the new house you purchased!

How your credit card limit affects the amount you can borrow

Regardless of how much you owe on your credit card, the bank needs to account for 3% of your credit card limit when assessing your home loan application. As an example, if you have a $10,000 credit card limit, 3% (or $300) is what you have to pay each month at minimum.

Even if you never spend a cent on your card, a high credit card limit will negatively affect your loan serviceability (whether the bank thinks you can afford repayments after income and expenses are taken into account).

So not only do you need to pay off your credit card debt, but you should also reduce your credit card limit. Or better yet, cancel it altogether if you can.

Other ways to be improve your serviceability

Getting rid of your credit card is not the only way to up your serviceability status and chance of securing a home loan. We have a host of tools at our disposal we can use to sharpen your serviceability, including ways to help you assess your borrowing capacity. If you’d like some further assistance on this front, please feel free to call us.

Securing finance if you’re a contractor or casual employee doesn’t have to be hard

Not everyone has a 9-5 job. There’s many flavours of employees out there, with contractors and casual employees being just two. For people who fall these categories, getting finance for a new home can be tricky as it’s harder to prove they have a stable income.

But things are changing. Modern home loan lenders are beginning to understand that not everyone fits their traditional lending criteria, and they’re slowly putting in place policies to account for this.

All sorts of workers

In years gone by, it was primarily hospitality and performing arts employees that struggled to get the banks to say yes to a home loan. But today, there are many more people employed on a casual, part-time or contract basis. There’s also a large sector who heavily rely overtime income.

If you’re in any of these groups, it’s not likely you fit the bank’s standard rules of lending. They worry about you because they believe you have an unstable source of income. As such, they consider you a high risk borrower. This is even more so for casual employees, as lenders believe they would be the first to go if an employer needed to cut back on staff.

What the bank will want to know

All lenders have certain criteria you must meet to be considered for a loan. If you’re a casual or contract worker seeking a loan, there are some added variables. When applying for finance, the bank will want to know:

  • The number of hours you work & how consistent they are
  • Your likely loan-to-value (LVR) ratio
  • How long you’ve been in your current job (should be at least 3 months)
  • Whether you’ve been in the same industry for at least 1 year

Should you pass the lender’s criteria and can demonstrate you can repay the loan, you might still be able to borrow up to 95% loan-to-value ratio (LVR) in many cases.

Be realistic, be cautious

Even if a lender gives you loan approval, you should only go ahead if you believe your income is stable enough to enable you to confidently make repayments. If you’re aren’t sure if you’re in this boat, connect with us today. We work with many lenders who approve loans to casual and contract workers, and our strong network means we often successfully get loans approved where other brokers have failed.