Credit cards can be convenient financial tools, offering flexibility and rewards. However, their impact on your borrowing capacity is often underestimated. Here’s how your credit card might impact your future home loan:
Lenders assess your ability to repay a mortgage based on your debt-to-income ratio (DTI). This ratio compares your monthly debt payments to your gross monthly income. The higher your DTI, the riskier you appear to lenders and the less you’ll be able to borrow.
Even if you don't carry a balance on your credit cards, lenders consider your credit card limits as potential debt. For example, if you have a credit card with a $10,000 limit, lenders might perceive it as $10,000 worth of debt that you could potentially accumulate at any time. A higher credit card limit means you're potentially capable of accumulating more debt, which reduces the amount you can borrow for a mortgage.
A lower borrowing capacity due to high credit card limits can impact the affordability of the home you can purchase. It might force you to settle for a smaller loan amount or a less desirable property.
While credit cards offer convenience and financial flexibility, their impact on your borrowing capacity for a home loan should not be overlooked. Understanding how credit card limits affect your debt-to-income ratio and taking proactive steps to manage them can improve your chances of securing a mortgage with favourable terms and realising your homeownership goals.
For more information about how to secure the best home loan for you, chat to our friendly Finance Broker Matt Collier on 0418 263 606.
Please note, the above information does not constitute financial advice and does not take into account your current circumstances or goals. Please speak with a financial adviser before acting on any information found here or throughout the 5 Financial website.