When applying for a home loan, your credit card limit plays a significant role in determining your borrowing capacity. Lenders view your credit card limit as a potential liability, even if you don’t carry a balance. Here’s how it impacts your home loan application:
1. Reduced Borrowing Power
Lenders consider your credit card limit when calculating your debt-to-income ratio. A higher limit can reduce your borrowing power because they assume you might max out your credit card and struggle to repay your home loan.
2. Increased Monthly Repayments
Even if your credit card is not fully utilised, lenders estimate repayments as a percentage of your limit. Typically, they assume around 3.8% of your limit as a monthly repayment, impacting your assessed ability to afford mortgage repayments.
3. Lower Home Loan Amount
Due to the assumed monthly repayments, the amount you can borrow for a home loan decreases. For instance, a $10,000 credit card limit might reduce your borrowing capacity by up to $50,000.
4. Credit Score Impact
High credit card limits can affect your credit score. A lower credit score can result in higher interest rates or loan rejections.
How to Improve Your Chances
- Reduce Credit Card Limits: Contact your bank to lower your credit card limit before applying for a home loan.
- Pay Down Balances: Maintain low balances to improve your debt-to-income ratio.
- Close Unused Cards: If you have multiple cards, consider closing those you don’t use.
How We Can Help
At KK Talks Finance, we guide you through optimizing your financial profile to maximize your borrowing power. Our expert advisors help you understand the impact of credit limits and offer strategies to improve your home loan application.
Conclusion
Understanding how your credit card limit affects your home loan application is crucial. By managing your credit responsibly, you can enhance your borrowing capacity and secure a better home loan deal.