When preparing to apply for a home loan, most borrowers focus on the obvious factors: their income, savings history, and the size of their deposit. However, one often-overlooked element can significantly influence how much a lender is willing to offer you, and it might already be sitting in your wallet.

Your credit card, even if you use it responsibly or rarely at all, plays a more substantial role in your borrowing power than many Australians realise. Understanding this relationship can help you make informed decisions before submitting your home loan application.

How Lenders Assess Your Borrowing Capacity

When you apply for a home loan, lenders conduct a thorough assessment of your financial position. This process, known as serviceability assessment, determines whether you can comfortably meet your mortgage repayments while managing your existing financial commitments.

Lenders examine your income, regular expenses, existing debts, and potential liabilities. Credit cards fall into this last category, and they receive particular attention during the assessment process.

The key point that surprises many borrowers is this: lenders do not assess your credit card based on your current balance. Instead, they assess it based on your total credit limit. This distinction has significant implications for your borrowing power.

The Credit Limit Factor Explained

Imagine you have a credit card with a limit of $15,000, but you consistently pay it off in full each month and rarely carry a balance above a few hundred dollars. You might assume lenders would view this positively as evidence of responsible financial management.

While your repayment history does contribute to a favourable credit score, the serviceability calculation works differently. Lenders assume you could, at any time, draw down the full credit limit and need to service that debt. They typically calculate a monthly repayment obligation based on a percentage of your total available credit.

This means that unused credit card limits reduce your borrowing capacity, even when you never intend to use them. For borrowers with multiple cards or high limits accumulated over time, this impact can add up considerably.

Practical Steps to Maximise Your Borrowing Power

If you are planning to apply for a home loan in the coming months, consider reviewing your credit card arrangements as part of your preparation.

Review your credit limits. Contact your credit card providers to request limit reductions on cards you do not need at their current levels. A lower limit translates directly to improved borrowing capacity.

Close unused accounts. If you have credit cards sitting in a drawer that you no longer use, consider closing them entirely. Each open account with an available limit affects your assessment, regardless of activity.

Consolidate where practical. Rather than maintaining several cards with modest limits, you may benefit from consolidating to a single card with a limit that genuinely reflects your needs.

Time your changes appropriately. Make these adjustments well before your home loan application. Lenders will request recent statements, and having a clear record of your updated credit position strengthens your application.

It is worth noting that closing credit accounts can sometimes affect your credit score in the short term, particularly if it changes your credit utilisation ratio or reduces the average age of your accounts. Discussing your specific circumstances with a qualified mortgage broker can help you weigh these considerations.

The Broader Credit Health Picture

Beyond the direct impact on borrowing calculations, your credit card history contributes to your overall credit profile. Lenders access your credit report to review your repayment history, any defaults or missed payments, and your pattern of credit applications.

A history of on-time payments and responsible credit use supports a stronger application. Conversely, late payments, exceeding your limit, or frequent applications for new credit can raise concerns.

Before applying for a home loan, consider obtaining a copy of your credit report to check for any errors or issues you may need to address. Australian consumers can access their credit reports for free through the major credit reporting bureaus.

Taking the Next Step

Your credit card arrangements represent just one piece of the home loan puzzle, but they are a piece you can actively manage. By understanding how lenders view your available credit and taking proactive steps to optimise your position, you give yourself the best chance of maximising your borrowing power.

Every borrower’s situation is unique, and the right strategy depends on your complete financial picture. If you are considering a home purchase and want to understand how your current credit arrangements might affect your options, speaking with an experienced mortgage broker can provide clarity and direction.

Reach out to our team today for a personalised assessment of your borrowing capacity. We can help you navigate the path to home ownership with confidence and a clear strategy tailored to your goals.