Want to boost your borrowing capacity without waiting for interest rates to fall?
It could be as simple as reshuffling your current debts.
Credit cards, car loans and personal loans might be holding you back more than you think.
But with a few smart moves, you can unlock a surprising increase in what lenders will allow you to borrow.
In today’s blog we cover:
- How Credit Cards Are Secretly Squeezing Your Borrowing Capacity
- So, How Much Difference Can Reducing Your Card Limit Really Make?
- Reducing Your Credit Card Limit Can Have a Bigger Impact Than an Interest Rate Cut
How Credit Cards Are Secretly Squeezing Your Borrowing Capacity
One of the most common misconceptions we hear is: “But I pay off my credit card every month, surely the bank won’t count it as a liability and it won’t impact my borrowing capacity?”
Unfortunately, credit cards are assessed based on their limit, not the balance.
Even if you haven’t touched your credit card in months or if you always clear the balance at the end of the month, lenders just don’t really care!
They treat the ‘limit’ on the credit facility as the potential liability, because in the lenders’ eyes, you could max out your credit card at any time.
Most lenders apply a buffer of around 3% of the card limit as a monthly repayment which will reduce your borrowing capacity.
So, if you’ve got a $20,000 card, that’s a $600 monthly commitment counted against your borrowing power, regardless of whether the balance is $0 at the end of every month.
This has a surprisingly large effect on what you can borrow.
So, How Much Difference Can Reducing Your Card Limit Really Make?
Let’s crunch the numbers together!
Reducing your credit card limit by $5,000
- That could increase your borrowing capacity by around $23,000.
- Borrowing at 80% of a property’s value, that $23,000 boost could translate to approximately $29,000 more added to your purchase price.
Drop your credit limit from a $20,000 to $5,000 limit:
- That could free up about $70,000 in borrowing capacity.
Close the card altogether with a $20,000 Limit:
- You could unlock around $93,000, which equates to up to $116,250 more in potential purchase price, assuming you’ve got the deposit to match for an 80% loan to value ratio (LVR).
That’s not just a theoretical benefit.
For many buyers, this boost in borrowing capacity can mean the difference between settling for a less-than-ideal property and securing the home or investment they truly desire.
Reducing Your Credit Card Limit Can Have a Bigger Impact Than an Interest Rate Cut
A 0.25% drop in interest rates typically increases your borrowing capacity by about:
- $18,000 for a single earning $150,000, or
- $35,000 for a couple with a $300,000 combined income.
Closing a credit card or lowering your overall limit by $5,000 or more can have a bigger impact on your borrowing capacity today, without waiting on the RBA to lower rates as outlined above.
“If you’re falling short on the amount the lender is offering for your dream home, investment property, or renovation, but know you can afford more, reducing your credit card limits is one of the quickest and most effective strategies to unlock extra borrowing power.”
Want to Learn More?
Listen to #309 – How to Boost Borrowing Power – Debt Management Strategy for Smart Property Decisions & Unlock Investment, Home & Refinance Opportunities
Reach Out to Us for Expert Advice and Schedule a Meeting
To discuss your:
- Mortgage Strategy, Next Purchase or Refinance
- Develop a Comprehensive Property Plan
