When preparing to buy a home, most of us focus on saving for a deposit, securing a stable income, and keeping our credit history squeaky clean. But here’s the thing — there’s a sneaky factor that could be quietly sabotaging your borrowing power: unused credit limits.
Here’s how it works and what you can do to fix it.
How lenders assess unused credit limits.
Lenders assess your financial situation based on your income, expenses, debts, and credit history. Importantly, they don’t just look at your current debts — they also factor in your potential debts. That’s where unused credit limits come into play.
For example:
- Let’s say you have a credit card with a $20,000 limit but a $0 balance. Even if you haven’t spent a cent, lenders assume you could max out that card tomorrow.
- To account for this risk, they calculate a hypothetical monthly repayment. In Australia, many lenders use a figure of around 3.8%-4% of the credit limit. On a $20,000 limit, that’s $760-$800 per month.
That $760 is treated as an ongoing financial commitment, reducing the amount you can borrow for your home loan. Multiply this across multiple credit cards or personal loan facilities, and your borrowing capacity could take a significant hit.
The impact on your borrowing power.
Unused credit limits might seem harmless, but they can have a big impact on your home loan eligibility. Here’s an example:
- Scenario 1: You’re applying for a mortgage with no unused credit limits. The lender calculates your borrowing capacity as $600,000.
- Scenario 2: You have $30,000 in combined unused credit limits across a credit card and a personal overdraft for $2,000. The lender reduces your borrowing capacity to $500,000 to account for $820 in hypothetical monthly repayments.
In this case, unused credit limits have reduced your buying power by $100,000. That could be the difference between securing your ideal property or having to compromise.
How to fix it.
The good news? There’s a simple solution: reduce or cancel unused credit limits before applying for a home loan. Here’s how:
- Audit your credit accounts. Review all your credit cards, store cards, personal overdrafts, and newer forms of debt like Buy Now, Pay Later services (e.g., Afterpay or Zip Pay). Lenders often treat these services as active credit, even if you’re not using them heavily.
- Contact your provider. Most financial institutions allow you to reduce your credit limit online, over the phone, or in a branch. If you’re not using a credit facility at all, consider closing it entirely.
- Get advice if needed. Not sure which accounts to close or how it will affect your credit score? We can guide you through the process.
- Keep evidence. Once your credit limits are reduced or cancelled, keep confirmation from your provider. This can be useful when discussing your situation with a lender.
Why it matters now.
With property prices still high in many parts of Australia — even as some areas see slight declines — maximising your borrowing power is essential. Small adjustments, like reducing unused credit limits, can make a big difference.
Even if you’re not planning to buy immediately, taking these steps early ensures you’re in a strong position when the time comes to apply for finance.
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Book your strategy session today.
Want to know how much you could borrow or what steps to take to maximise your borrowing power? Schedule Your FREE 30-Minute Finance Strategy Session Today. In just half an hour, we’ll cover:
- How much you can borrow based on your current financial situation.
- What loan type suits your needs best.
- How to secure the most competitive rate available.
Whether you’re planning to buy now or just want to prepare for the future, this session will give you the clarity and confidence you need to move forward.
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Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)