With Lenders rigorously assessing Home Finance applications, two common finance traps to be mindful of that may impact the amount you can borrow are:
- Credit Cards
- Use of popular Payday Schemes
Even if you have no debt owing at the time of application, both credit cards and using payday schemes can limit your borrowing capacity.
Finance Trap No1. Unused Credit Cards
Many Australians use their credit cards prudently, clearing the balance outstanding each month before the interest free period expires.
But even if you do this, it can still impact what you can borrow as the Lenders will add 3.80% of the limit to your monthly expenses for loan serviceability purposes.
Whilst 3.80% may not sound a lot, it can be significant from a serviceability perspective!
For example, if you had a credit card limit of $20,000 this would equate to an extra $760 that would need to be included in your monthly budget for serviceability purposes!
If the limit was $50,000 – the debt servicing impost increases to $1900.
For many people including this additional amount into their monthly budget may reduce the size of loan the Lenders are prepared to approve!
It could be the difference between getting the home you truly want or having to compromise.
Finance Trap No 2 - Payday Schemes
Payday Schemes have exploded in popularity in Australia over the past few years.
Again, whilst many people use such services prudently, clearing what they borrow within the agreed terms, if there has been a pattern of using such services in the past, Lenders will assume it will continue in the future.
Lenders will review your Bank and Credit Card Statements for the last 3 months (in some cases 6 months) and add the monthly spend on such services to your expenses for serviceability purposes.
Like credit cards, this can reduce the amount you are able to borrow.
The solution – be mindful of the potential impact of using such services particularly if your debt servicing capacity is likely to be tight.
Summary
The key to a successful outcome is to plan ahead and be mindful of these two common finance traps.
To avoid disappointment and frustration the earlier you start planning the better shape you will be in when the time comes to apply for home finance.
If you are thinking about finance for the purchase of a home or an investment property and would like to learn more, don’t hesitate to give me a call
