Home loans Australia: Why borrowers now have to chop up their credit cards

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

A series of Reserve Bank interest rate rises since May – the steepest in almost three decades – are reducing the lending capacity of banks.

With more interest rate rises expected, borrowers are set to have a harder time getting home loan approval.

The banks have, since November, been required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.

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

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

A RateCity analysis showed that a single borrower, earning $100,000 a year, would be able to borrow a maximum of $638,400 if they had no credit cards.

Someone on that kind of six-figure salary would be earning more than the average, full-time salary of $90,917 and borrowing slightly more than the average new home loan of $609,789. 

But if this borrower on a six-figure salary wanted to have a credit card – to be able to have an Apple iTunes account, buy goods online or book holiday accommodation – they would have to reduce the amount they borrowed.

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

This same borrower wanting a $5,000 credit card limit would only be able to take out a $613,000 mortgage.

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

RateCity research director Sally Tindall said cancelling a credit card now meant the difference between getting approval or being rejected for a home loan.

‘People looking to get the green light on their home loan application often cancel their credit card to boost their chance of approval, particularly if they’re carrying around more than one card,’ she told Daily Mail Australia.

‘So often, a credit card can be the difference between getting the green light on a new mortgage and having your application denied.

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

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

While the big banks are expecting house prices to fall in 2022 and 2023, stricter credit card rules are set to make life harder for prospective borrowers who had already bought land with the intention of getting a construction loan to build a house.

The Cordell Construction Index showed residential building costs in the year to June had surged by 10 per cent, with a timber shortage driving up prices.

The double-digit increase in home building costs is even more severe than the 6.1 per cent inflation rate, itself the highest since 1990 without the one-off effect of the GST introduction in 2000 and 2001.

‘People looking to build are also having to counter the soaring cost of construction at a time when mortgage repayments are also on the rise,’ Ms Tindall said.

The Commonwealth Bank, Australia’s biggest home lender allows individuals to take out construction loans on a property they co-own with a family member or a friend, something that 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 borrowing capacity, including their income, expenses, savings, liabilities and credit history,’ a CBA spokeswoman told Daily Mail Australia.

‘No two borrowers are the same, and everyone has a different financial situation and needs that may change over time.’

National Australia Bank, however, doesn’t impose a zero dollar limit on credit cards for new home loan borrowers.

Under stricter new credit card rules that became into effect in 2019, a consumer with a $5,000 credit card has to make minimum monthly repayments of $178. 

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

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

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

Borrowers in May, June, July and August have copped 1.75 percentage points worth of rate increases, the steepest since 1994. 

ANZ is expecting the Reserve Bank cash rate to rise from a six-year of 1.85 per cent to a 10-year high of 3.35 per cent by November, with 0.5 percentage point increases in September, October and on Melbourne Cup day.

A borrower with a $600,000 mortgage would owe their bank $1,060 more every month in repayments compared with May when the RBA cash rate was still at a record low of 0.1 per cent.