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Your Questions Answered - Credit Balances and Borrowing Capacity

I have 3 credit cards (all worth $0 balances) which I know is too many, but they were all approved when I was an employee, 4yrs later I am now self-employed and know that I would struggle to get another one in the future, however I am worried they will affect my ability to borrow for a home next year.. is this correct? And if so, what can I do about it?

When banks assess how much they are prepared to lend for a home loan, they apply two tests to determine an applicant’s borrowing capacity. The first is security; is the property on which the mortgage will be registered of sufficient value to secure the amount being borrowed plus a margin of, typically, 23%. Putting it another way, they would lend $400,000 against a home worth $500,000, at least without charging Lender’s Mortgage Insurance (LMI), that is.

The second test is serviceability; do the borrowers have sufficient “uncommitted monthly income (UMI)” to comfortably service the debt even if interest rates were somewhat higher than present rates. Most lenders currently apply an interest rate around 7% pa to that calculation. In determining UMI, allowance is made for servicing existing loans and this includes credit cards on the assumption they were “maxed out”. This means, when a bank determines your borrowing capacity, they would typically assume an allowance for credit card repayment equal to 3% of the card limit each month.

Having explained this process, this would apply whether you were an employee or self-employed, meaning the existence of the credit cards may effect a person’s additional borrowing capacity irrespective of their employment status.

The only impact that your self-employed status would have on borrowing capacity would be either if your self-employed income was substantially lower than your employed salary or if you had not been in business long enough to have two consecutive years of business earnings at a suitable level. Notwithstanding any of this, should the credit cards cause an issue for a prospective lender, it would simply be a matter of closing the credit card accounts in order to enable the lender to remove them as a factor in their calculations and that would apply for either the employee OR the self-employed.


This information is current as at 13/12/2016 This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.

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