For many migrants settling in Australia, securing a home loan is a significant step toward establishing roots and achieving financial stability. However, one crucial factor that can impact your home loan approval and interest rates is often overlooked: your credit card.
The Hidden Impact of Credit Cards on Home Loans
According to Julian Finch, a leading mortgage broker and founder of Finch Financial, having a credit card can drastically affect your ability to secure a home loan. Finch highlights that even a modest credit card limit of $5,000 per month can reduce your borrowing capacity by up to $50,000. Moreover, late payments on your credit card can severely hinder your chances of getting a home loan approved.
With decades of experience in mortgage brokerage, Finch offers insights that are invaluable for migrants navigating the complexities of the Australian financial system. His firm, Finch Financial, boasts some of the highest loan approval rates in the country, often securing approvals within minutes.
Why Credit Cards Matter to Lenders
“A lot of people think that the humble credit card is just a convenient form of credit. Financial institutions take a very different view when they are assessing your application for a home loan,” Finch explains.
Here are key reasons why credit cards can negatively impact your home loan application:
1. Increased Debt-to-Income Ratio (DTI)
Your DTI ratio is the percentage of your monthly income that goes towards paying debts. High balances or multiple credit cards can increase your monthly debt obligations, raising your DTI ratio. Lenders prefer a lower DTI ratio as it indicates you have sufficient income to manage additional debt, like a mortgage.
2. Credit Utilisation Rate
A credit utilisation rate is the amount of credit you are using compared to your total available credit. High credit utilisation can lower your credit score. Lenders typically prefer a credit utilisation rate below 30 per cent. A high utilisation rate suggests potential financial stress, making you a riskier borrower.
3. Credit Score Impact
Late or missed payments on credit cards can significantly lower your credit score. Lenders use your credit score to assess your creditworthiness and ability to repay the mortgage. They also consider the length of your credit history. While a longer credit history can be beneficial, new credit cards can shorten your average account age, negatively impacting your score.
4. Hard Inquiries
Each time you apply for a new credit card, a hard inquiry is made on your credit report. Multiple hard inquiries in a short period can lower your credit score and may indicate to lenders that you are seeking more credit than you can handle.
5. Potential for Increased Debt
Having a credit card can lead to increased spending and higher debt levels if not managed properly. Lenders may see high credit card balances as a risk factor for future financial trouble.
6. Monthly Payment Obligations
Even if you pay off your balance monthly, the minimum payment obligations are considered when calculating your ability to afford a mortgage. High minimum payments reduce the amount of income available for mortgage payments.
7. Perception of Financial Responsibility
Lenders may scrutinise your financial habits. Consistently carrying large credit card balances or frequently maxing out credit cards can signal poor financial management, impacting your mortgage approval.
Strategies to Improve Your Home Loan Approval Chances
Finch advises migrants to take proactive steps to improve their financial standing before applying for a home loan:
- Reduce Credit Card Balances: Lowering your credit card balances can help reduce your DTI ratio and credit utilisation rate.
- Pay On Time: Ensure all credit card payments are made on time to maintain a good credit score.
- Avoid New Credit Applications: Avoid applying for new credit cards before applying for a mortgage to minimise hard inquiries and preserve your average account age.
- Monitor Your Credit Report: Regularly check your credit report to understand your credit standing and identify areas for improvement.
- Manage Spending: Keep credit card spending under control to avoid accumulating high balances and debt.
By understanding the impact of credit cards and actively managing your credit card use, you can significantly improve your chances of getting approved for a home loan and securing favourable terms. This is especially crucial for migrants in Australia aiming to establish a stable and prosperous future in their new home.
For more tailored advice and support, Julian Finch and his team at Finch Financial are available to guide you through the home loan application process, helping you make informed decisions and achieve your homeownership goals.