How Credit Card Debt Impacts Your Mortgage Affordability

It’s probably not news to anyone that credit card debt is typical in New Zealand. Many of us use personal credit, without making a conscious choice. When it comes time to apply for a mortgage, first-home buyers can be surprised by how much their credit card debt and history can limit their ability to borrow.

Credit Card Debt

In this article, we arm you with the knowledge to make choices today that will improve your mortgage affordability in the future. We use the term ‘credit cards’ for easy reading, but the information applies to all personal credit, such as Afterpay and in-store buy now, pay later schemes. So, let’s get into how credit card debt can influence your mortgage application and the steps you can take to improve your prospects.

Credit cards and your debt-to-income ratio

Credit cards and your debt-to-income ratio

When you apply for a mortgage, lenders assess your finances to determine how much they can safely lend you. One of the key factors they consider is your debt-to-income (DTI) ratio. This is the percentage of your gross monthly income that goes towards paying your debts.

Lenders don’t care what you currently owe when calculating DTI. As the lender doesn’t know what you’ll spend on your credit card month to month, they assume that your credit limit will be maxed out and you will be paying interest on the full amount. With interest at around 18% p/a, credit cards with high limits especially can make a sizeable dent in the amount you can borrow.

To instantly improve your DTI, reduce your credit card limit as much as possible. The same goes for overdraft facilities and buy-now-pay-later accounts.

Credit card debt and your credit score

Credit card debt and your credit score

Your credit score will also be used when calculating the level of risk in lending to you. High credit card debt and missed payments will lower your credit score.

Our credit culture has been compounded in recent years by the increased cost of living and higher credit card interest rates, leading some into further debt. Nearly half a million Kiwis are behind on personal loan payments.

As the country recovers from the recession, most of these Kiwis will undoubtedly recover financially. But what can they do about their low credit scores?

If you find yourself able to afford a mortgage but the banks say no due to your credit history, we can source finance with non-bank lenders who will take the chance on a riskier mortgage in return for higher interest rate payments. Platinum Mortgages specialises in helping clients get mortgage approvals with bad credit or debt.

Check out our article on everything you need to know about credit scores and tips to improve your score.

Credit Card Debt Impacts Your Mortgage Affordability

We’re here to help

Confronting your debt can be challenging. If you want a mortgage and are concerned about your debt, you don’t need to find the answers alone. We can help you understand your financial situation and identify what actions, if any, you need to take to qualify for a mortgage. Get in touch so we can help you develop a plan and guide you through the mortgage application process.