Did you know, you might be able to cut down on mortgage loans just because of a credit card – even if you don’t use it or always meet your repayment obligations?
The problem is that when the bank considers how you will serve your mortgage, they will consider the fact you are likely to get as much debt as your card will allow you.
In other words, they’ll look at the number of debts you’re likely to pay, not your existing debts.
Mike Pero Mortgages has made an experiment to illustrate this.
It has filed the same mortgage application with a variety of banks to learn the impact of different credit card limits on borrowing power.
It used a couple that had an annual general income of 130,000 dollars, a deposit of 100,000 dollars, a clean credit history, and no debt of any other than 600 dollars a month of rent, in its case study.
Here’s what it finds:
Credit Card Limit: $5,000 $10,000 $15,000 $20,000 $25,000
Reduction in Borrowing Power: -$28,000 -$47,000- $80,000 -$97,000 -$120,000
Therefore, the credit card limit of 10,000 dollars will reduce the amount that this couple will be able to borrow to be 47,000 dollars.
CEO Mike Pero Mortgages Mark Collins says: Many of the first home buyers tend to think it’s okay to have credit cards as long as they never withdraw money from them.
That trophy is not the way banks look at it. They must consider that at any moment you can withdraw the entire amount, so they consider potential credit card debts in the future when calculating their ability to serve, rather than just the amount owed.
Although there will be a loosening of lending restrictions over the next year, the fact is that banks are still making a very conservative approach to the ability to serve lenders.
People who plan to seek mortgage loans in the new year can benefit them by paying off the credit card and then removing them altogether.