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.

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