Home loans Australia: why borrowers must now cut up their credit cards

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Australians who want to get a home loan are now being told they will have to scrap all their credit cards.

A series of Reserve Bank interest rate hikes since May – the largest in nearly three decades – are reducing banks’ lending capacity.

With more interest rate hikes expected, borrowers will have a harder time getting approved for a home loan.

Banks have been required since November to assess a borrower’s ability to handle a three percentage point increase in variable mortgage rates.

Laws also came into effect in January 2019 that require a consumer to prove that they would be able to completely pay off their credit card debt within three years, rather than just making minimum monthly repayments.

Australians who want to get a home loan are now being told they will have to cut all their credit cards altogether. New laws also came into effect in January 2019 requiring a consumer to prove they would be able to fully pay off their credit card debt within three years rather than just making minimum monthly repayments (pictured is a stock picture)

For borrowers, this means that a home loan that would have been easily approved just three months ago would now only be possible if a potential home borrower closed all of their credit card accounts.

What someone earning $100,000 a year would be allowed to borrow

NO CREDIT CARD: $638,400

$1,000 CREDIT CARD LIMIT: $636,400

$2,000 CREDIT CARD LIMIT: $630,600

$5,000 CREDIT CARD LIMIT: $613,000

CREDIT CARD LIMIT OF $6,000: $607,200

$7,500 CREDIT CARD LIMIT: $598,500

$10,000 CREDIT CARD LIMIT: $583,800

Source: RateCity

A RateCity analysis showed that a single borrower, earning $100,000 a year, could borrow a maximum of $638,400 if he didn’t have a credit card.

Someone with that kind of six-figure salary would earn more than the average full-time salary of $90,917 and borrow slightly more than the average new home loan of $609,789.

But if this six-figure earner wanted a credit card — so he could have an Apple iTunes account, buy goods online, or book vacation accommodations — he would have to reduce the amount he borrowed.

An Australian earning $100,000 a year and wanting a credit card could borrow $636,400 – but would have a hard limit of $1,000 on their card.

That same borrower wanting a credit card limit of $5,000 could only take out a mortgage of $613,000.

To qualify for a credit card with a limit of $10,000, the borrowing capacity would be reduced to $583,800. But to have a five-figure credit card limit, that individual’s borrowing capacity is reduced by $54,600.

RateCity research director Sally Tindall says canceling a credit card now means the difference between getting approved or rejected for a home loan.

“People looking to get the green light on their home loan application often cancel their credit card to increase their chances of approval, particularly if they are carrying more than one card,” she told Daily MailAustralia.

“Very often a credit card can be the difference between getting the green light for a new mortgage and having your application turned down.

RateCity research director Sally Tindall says canceling a credit card now means the difference between getting approved or being rejected for a home loan

RateCity research director Sally Tindall says canceling a credit card now means the difference between getting approved or being rejected for a home loan

“If you’re looking for a home loan, understand how your credit card might impact your borrowing capacity and make an informed decision about your options.

“You might decide that a credit card is a luxury you can do without in the short term in order to get the green light from your bank for the home you want.”

As major banks expect house prices to fall in 2022 and 2023, tougher credit card rules are expected to make life harder for potential borrowers who had previously bought land with the intention to obtain a construction loan to build a house.

The Cordell Building Index showed residential construction costs in the year to June jumped 10% as a shortage of lumber pushed up prices.

The double-digit increase in housing construction is even more severe than the inflation rate of 6.1%, itself the highest since 1990 without the one-time effect of the introduction of the GST in 2000 and 2001.

“People looking to build must also counter soaring building costs at a time when mortgage repayments are also rising,” Ms Tindall said.

A RateCity analysis showed that a single borrower, earning $100,000 a year, could borrow a maximum of $638,400 if he didn't have a credit card.  But if this six-figure earning borrower wanted a credit card - so he could have an Apple iTunes account, buy goods online or book vacation accommodation - he would have to reduce the amount he borrowed (pictured , an auction in Melbourne )

A RateCity analysis showed that a single borrower, earning $100,000 a year, could borrow a maximum of $638,400 if he didn’t have a credit card. But if this six-figure earning borrower wanted a credit card – so he could have an Apple iTunes account, buy goods online or book vacation accommodation – he would have to reduce the amount he borrowed (pictured , an auction in Melbourne )

Stricter credit card rules

$5,000 LIMIT: Minimum monthly repayment of $178

$10,000 LIMIT: Minimum monthly repayment of $357

$15,000 LIMIT: Minimum monthly repayment of $535

$20,000 LIMIT: Minimum monthly repayment of $713

Commonwealth Bank, Australia’s largest property lender, allows individuals to take out construction loans on property they co-own with a family member or friend, something not all banks allow. .

But it is particularly strict in applying credit card rules to new borrowers.

“There are many different factors that can impact a person’s ability to borrow, including income, expenses, savings, debt and credit history,” a spokeswoman for the agency said. ‘ABC at Daily Mail Australia.

“No two borrowers are the same, and each has different financial circumstances and needs that may change over time.”

The National Australia Bank, however, does not impose a zero dollar limit on credit cards for new home loan borrowers.

Under tougher new credit card rules that took effect in 2019, a consumer with a $5,000 credit card must make minimum monthly repayments of $178.

To have a limit of $10,000, a minimum monthly repayment of $357 is required.

Someone with a credit card limit of $15,000 must make minimum monthly repayments of $535.

A $20,000 credit card requires minimum repayments of $713.

Borrowers in May, June, July and August saw a rate hike of 1.75 percentage points, the biggest since 1994.

ANZ expects the Reserve Bank’s cash rate to rise from 1.85% over six years to 3.35% over 10 years by November, with increases of 0.5 percentage points in September, October and Melbourne Cup day.

A borrower with a $600,000 mortgage would owe their bank $1,060 more each month in repayments than in May, when the RBA’s cash rate was still at an all-time high of 0.1%.

What borrowers could pay in November of each month compared to May

$500,000: Up to $883 from $1,922 to $2,805

$600,000: Up to $1,060 from $2,306 to $3,366

$700,000: Up to $1,236 from $2,691 to $3,927

$800,000: Up to $1,413 from $3,075 to $4,488

$900,000: Up to $1,590 from $3,459 to $5,049

$1,000,000: Up to $1,767 from $3,843 to $5,610

Calculations based on the cash rate dropping from a record high of 0.1% in May to 3.35% in November, as forecast by ANZ. Monthly repayments based on popular Commonwealth Bank floating rate increase from 2.29% to 5.39% expected

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