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Inescapable impact of credit cards

The impact of having a credit card on mortgage borrowing ability should be well-known – but it’s not, one prominent adviser says.

Monday, December 18th 2017, 11:53AM

by Miriam Bell

Loan Market's Bruce Patten

Results from a recent number crunching exercise by Mike Pero Mortgages show that mortgage borrowing power is reduced significantly if an applicant simply has a credit card.

The exercise analysed the impact of different credit card limits on the borrowing power of a mortgage seeking couple with a joint income of $130,000.

If the couple had a $10,000 credit card limit it would reduce their borrowing power by $47,000. If they had a $25,000 limit it would reduce their borrowing power by $120,000.

Mike Pero Mortgages chief executive Mark Collins says those results do not come from the total owing on a credit card, they come from the impact of simply having one.

Many borrowers think it’s okay to have credit cards as long as they don’t ever draw down on them, but that’s not how the banks look at it, he says.

“They have to consider that at any point you could draw down on the full amount, so they look at future potential credit card debt when calculating serviceability, rather than just the amount owing.”

Collins says mortgage seekers can help their cause by paying off their credit cards and then getting rid of them completely.

But, while the Mike Pero Mortgages exercise focused on first home buyers, it is not just novice mortgage borrowers who are unaware of how much impact credit cards can have on loan applications.

Loan Market’s Bruce Patten says he sees clients across the spectrum – from first home buyers to seasoned investors - who don’t realise the full impact of their credit cards on their borrowing ability.

“It’s a misnomer that if you pay off your credit card in full each month it won’t have an impact on your borrowing ability.”

While it used to be that banks would ignore credit limits if the customer could show they have paid it in full for the last three months, that is not the case anymore, he says.

“Over the last 18 months or so, following the introduction of responsible lending provisions, there has been a definite change in bank lending policy around credit cards.”

Mortgage seekers need to be aware that the banks take account of everything credit related now – and that includes zero interest credit cards as well as overdrafts and the like, Patten adds.

“Further, the banks now often actively stipulate that customers need to reduce their credit limits before they will lend.

“People should know all this but many don’t.”

Tags: Lending Mike Pero mortgages

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Lender Flt 1yr 2yr 3yr
AIA 4.55 3.19 3.19 3.49
AIA Special - 2.69 2.69 2.99
ANZ 4.44 3.15 3.25 ▼3.39
ANZ Special - ▼2.55 ▼2.69 ▼2.79
ASB Bank 4.45 3.19 3.19 3.49
ASB Bank Special - 2.69 2.69 2.99
Bluestone 4.44 4.44 4.44 4.44
BNZ - Classic - 2.65 2.69 2.99
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.25 3.29 3.59
Lender Flt 1yr 2yr 3yr
BNZ - TotalMoney 4.55 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 4.75 4.75 -
Credit Union South 5.65 4.75 4.75 -
First Credit Union Special 5.85 3.35 3.85 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online - - - -
Heretaunga Building Society 4.99 4.35 4.45 -
HSBC Premier 4.49 2.60 2.65 2.80
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 3.99 2.58 2.68 2.79
Kainga Ora 4.43 3.29 3.39 3.85
Kiwibank 3.40 3.40 3.54 4.00
Kiwibank - Capped - - - -
Kiwibank - Offset - - - -
Kiwibank Special 3.40 2.65 2.79 3.25
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Lender Flt 1yr 2yr 3yr
Resimac 3.49 3.45 3.39 3.69
SBS Bank 4.54 3.29 3.19 3.49
SBS Bank Special - 2.79 2.69 2.99
The Co-operative Bank - Owner Occ 4.40 ▼2.69 ▼2.75 ▼2.99
The Co-operative Bank - Standard 4.40 ▼3.19 ▼3.25 ▼3.49
TSB Bank 5.34 ▼3.35 3.49 3.79
TSB Special 4.54 ▼2.55 2.69 2.99
Wairarapa Building Society 4.99 3.75 3.99 -
Westpac 4.59 4.15 4.09 4.49
Westpac - Offset 4.59 - - -
Westpac Special - ▼2.55 2.69 2.79
Median 4.55 3.19 3.22 3.39

Last updated: 10 July 2020 9:02am

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