Many Australians have high levels of personal and credit card debt, but those looking to borrow to buy a home in the near future are advised to jump off the consumption bandwagon to improve their home loan chances.
Not only can current personal debt levels have a significant impact on your ability to secure a loan, but ‘shopping’ for credit – that is making numerous applications for credit – or accepting those unsolicited credit card offers in the mail can be detrimental to your chances of being approved for a home loan.
Every dollar of both existing and potential credit card or store card debt is a black mark against your name.
These credit applications are taken into account when determining your credit score and credit scoring is increasingly being used by lenders to approve or decline mortgage applications.
Credit scoring is quite a big issue, with lenders becoming increasingly sensitive about the number of applications people make for credit.
All of these applications show up on your credit file and lenders worry that your debt burden will impact on your ability to make your home loan repayments.
Most lenders now use automated ‘credit scoring’, which consist of very complex algorithms. While there is no information available on how exactly these scores are calculated, Smartline’s advisers find that the number of recent credit enquiries can be one of the most significant factors in an applicant’s credit ‘score’ being deemed to be unacceptable.
Several credit applications or enquiries in the space of the past year will score poorly with many lenders, and can lead to your application being instantly declined.
Unfortunately, most lenders will then not consider overturning this ‘computer says no’ response. Once the damage is done, it is simply too late.
Demonstrate that you’re responsible with credit
Careful management of credit is particularly important for first home buyers who have been impacted by the tightening of the home loan market as a result of the GFC.
While it can take years for borrowers to build a strong net asset position or a lengthy employment history, keeping a low level of activity on a credit record is one way a younger borrower can maximise their chances of securing a home loan.
If you’re planning to apply for a home loan, even in the future, it can be a good idea to cancel all the credit cards you don’t need, or at least reduce the limit to a manageable level on the ones you want to keep.
When most lenders assess your ability to repay a mortgage, they assume that your credit card will be, or could be, fully drawn to its limit.
Once your loan has been approved…
When you arrive in your new home, having sensible credit limits minimises the temptation to buy a new lounge suite or plasma TV on credit.
This way, you can concentrate first on reducing your home loan and then getting ahead, particularly if there are further interest rate rises – as some predict for later in the year.
Talk to a Smartline mortgage broker today to assess your current credit debt levels and find out how you can improve your home loan chances.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.