Your Homeloan Also Depends On Your Credit Card!

If you have (too) many credit card and you are thinking about getting a homeloan/mortgage, you need to read this article carefully. Yes, your credit card could actually the one determine whether you get approval for that home loan or not. Even you are not using that credit card at all! And you cannot really lie about it as it is documented in your credit history. So, what can we do about it ? Fortunately, not that difficult.

All about Loan Serviceability

When you apply for a home loan on a mortgage, it’s all about loan serviceability. A bank or other lender only want to know whether your income can pay for the loan – in other word whether your income can “service” the loan. This is what they call as “loan serviceability”.

This is how it works. Let say if you want to borrow $500,000 with 5% interest rate and you only take the “interest-only” loan.

1. Hence you need to pay the bank $2083 monthly.
2. The bank will now taken into consideration of the living cost. They have standard table for your local city/area based on number of children, age of the children,  your marital status, etc. For example: In Sydney, family with both parents working with 2 children below 5 years old will have more expensive living cost compare to Family with boths parent working but with 2 children between 5 and 10. Well the reason is because the cost of child care is more expensive than primary school cost.
   Let say for this example the living cost is deemed to be $2500 per month.
3. Then the bank will now look into other loan: car loan, personal loan, shop card, credit card, etc. They need to know how much you need to pay/service those loan monthly. Let say your monthly obligation is $500 monthly.
4. So, total from 3 items above will be:  $5083 monthly

This is where the notion “cash flow is the king” come into effect. From example above, your income (can be combined with your spouse/parter) HAVE TO BE more than $5083 monthly or $61k per annual after tax. Some lender will prefer to have also additional safety band and add 10% or more into the calculation. But basically this is how it works. Your income have to cover this monthly commitment.

But how about if you have quite some money sitting in the bank, say: $100,000 sitting on the bank? Nope, it wont help. The amount of money you have in the bank will not affect your serviceability above, because:

1. You can spend those money without any control from the bank/lender anyway
2. Without regular income, the amount of money sooner or later will be depleted.

(You can though, withdraw this amount and make it as additional deposit so instead of borrowing $500,000 you only borrow $400,000 which in turn will reduce your serviceability criteria)

Your Credit Card Reduces The Serviceability

Some people will always pay off the monthly expense on the credit card, but some other people won’t. So, the bank or lender will assume the worse. If you are committed with the new loan that they provide and you have some kind of financial difficulties, the chances are you will max-ed up your credit card and pay only the minimum amount. So, this is the calculation that will be used by the bank.

The typical minimum amount to pay each month from a credit card will be around 2%. So every $10,000 credit card debt you will need to pay at least $200  monthly. So, in example above, as you pay 5% for the home loan, then additional $200 monthly will be equal if you borrow additional $4,000. Therefore in other words, every $10,000 credit card limit will cost you $4000 home loan serviceability. Although this example is mathematically correct, we will never know the exact calculation that the lender do when it comes to reducing the serviceability. Therefore , I would recommend this rule of thumb:

Reduce the serviceability by the same amount of the credit c ard limit.

So, if you have a few credit card with total credit limit of $50,000 then if you think you can service $500,000 home loan, then with because of this credit card limit, then expect that the bank will only allow you to have $450,000 home loan.

Even if you don’t use the credit card at all, the lender will assume you will use all of the credit. This is quite unique to credit card as for other type or fixed loan, such as car loan, if you already pay off 75% of the loan, then your “obligation” will be only calculated as only the rest of the 25% of that loan.

Things that You Can Do

There are 2 easy things that you can do to help with this issue:

1. Close the credit card that you never use. Ask for the closing statement (the one which explicitly mention in words that you have closed your account)
2. Reduce the credit limit to your comfortable level (read this article about maximize your credit card benefit before decide). Make sure to ask the statement that explicitly mention that you have reduced your credit limit.

The statement about your account closing or limit decrease is quite important. Why? The bank/lender knows that you have a credit card from other bank (from your credit history check) and you will be most likely be asked to provide the latest statement, but a change of credit limit or closure is not that obvious (they cannot really check it) – hence you just provided it for your own benefit.

Also you can do: close all of your credit card except 2 (read Benefit of having 2 (two) Credit Cards of Similar Value) and consolidate all of your credit card debt into your new home-secured loan. Remember home loan is the cheapest loan around, so maybe it’s a good ide to have them all consolidated.

As final word, remember that getting a new home loan should not change your lifestyle dramatically (you won’t survive as home loan is long term commitment). Also credit card should be just your convenience tools. So you need to balance between these two:

• don’t push it to the highest home loan possible by increasing your serviceability by closing credit card account such that you have no convenience anymore -or-
• having too much credit limit in credit card so that your home loan serviceability is too small.

Well, you decide – no one else does. Good luck !

Taking a mortgage ? Do Not Change Your Lifestyle Dramatically

My observation could be too narrow, but from what I saw, when someone want to take a mortgage, he/she tends to go for the maximum available even exceed it. The argument usually that they can still afford the repayment, so there should be no problem taking that amount of mortgage/homeloan. It seems they forget one golden rule that I always endorse: if you take a mortgage you cannot change your lifestyle dramatically.

Read more

Offset Account: A Must Have For Your Mortgage

If you have a homeloan / mortgage account, and especially if you are on variable rate, one thing that you MUST have is offset account facility. Usually homeloan product that offer this facility will attract annual fee for the convenience, but it’s absolutely essential and worth it. Let us see why exactly it is in this article.

How It Works

As the name implied, if you have offset account, amount of money that you put on that account will offset / reduce the actual homeloan. For example: say you have $300,000 homeloan and it has offset account linked to this homeloan. Then if you put $10,000 inside that offset account, the interest of your homeloan  is no longer $300,000, but it’s now $290,000. Read more

Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know

One of the selection when you  take a homeloan/mortgage is that you can choose to pay “Principal and Interest” or “Interest Only”. On many occassion, I do recommend to take interest only whenever possible especially if you’re an investor, because the advantage is that you will pay cheaper repayment every month, and if you’re investor that extra money (the difference) can be use for other type of investment that give you more Return of Investment. However, before you really do choose “interest only” loan, you need to understand fully a potential problem associated with this type of loan. Read more

Getting Your First Home Loan or Mortgage: Not That Hard!

One of the reasons people cannot really make up their mind whether to continue renting a home or get a home loan and buy one themselves is that the thinking that getting homeloan must be quite tricky. Fortunately it’s not. In this article we will outline the big picture process of getting a homeloan and you will see yourselves that it’s not that hard.

The Overall Process Read more

Why You Should Always Use Mortgage Broker For Your Homeloan

When it comes to selecting home loan or mortgage, doesn’t matter if it’s a new loan or a refinance / remortgage, I without hesitant will recommend all of us to get a service of mortgage broker. A mortgage broker can be “‘disguised” as “financial planner”, “loan advisor”, “property consultant”, “property strategist”, etc… But as long as  they offer you home loan product from various lender, they are mortgage broker.

Why We Need A Mortgage Broker? Read more

Mortgage: Change To Fixed Rate or Keep It Variable ?

The rule of thumb for mortgage is to fixed the rate if it’s going to go up and keep it variable if it’s going down. As a mortgage holder (definition: the one that has a lot of debt to the lender), of course we want to pay the smallest amount of interest. Especially if the mortgage is on our own home (not on investment property) because usually we won’t get a tax benefit from it. After all, mortgage interest is not giving us any added value, it’s just income for the lender as their reward to lend us the money to buy the property.

During 2008 to early 2009, we can see the interest rate across the globe is dropping down due to global financial crisis. And also now we know that on December 2008, the official US interest rate is virtually zero. (While the interest rate like in Australia or UK are still heading down). But, the real problem is how do we know that it’s going to go up or go down next month ? Read more