Personal loans, credit card limits severely impacting borrowing capacity

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The desire for a new car or lavish holiday is seriously jeopardising the ability of many Australians to break into the property market.

According to recent analysis by Finder.com.au, the average personal loan balance in Australia currently sits at $12,643 and carries an average interest rate of 10.49%.

While that sum may not seem like massive amount of money, Finder claims debt level has a very detrimental effect on the borrowing capacity of people applying for a mortgage.

“Personal debt reduces borrowing power and the $12,643 average personal loan would reduce borrowing power significantly - by up to $41,000,” Finder money expert Bessie Hassan said.

According to Finder, most common reason people took out a personal loan was for the purchase of a car, with debt consolidation, a holiday and a student loan or education also popular reasons.

The idea of additional debt affecting borrowing capacity may seem like an obvious one to some people, but Philippe Brach, chief executive officer of Multifocus Properties & Finance said many borrowers have little understanding how costly a personal loan can be.

“A lot of people have got no idea until you tell them,” Brach said.

“It’s normal that it affects your borrowing capacity because a personal loan is typically over five to seven years so your monthly repayments are a lot higher even though the amount of the loan is smaller than a mortgage,” he said.

Brach said dealing with people whose borrowing capacity has been reduced by a personal loan is relatively common and for those people there is really only one course of action.

“If a person cannot get a loan because of their personal debt, then their first priority has to be to pay that personal loan as quick as they can,” he said.

“I see people with personal debt and at the same time they have a savings account with a decent amount of money in it. It’s normal for people to have a bit of a buffer, but it’s crazy to have a personal loan where you might be paying 16% interest and at the same time have a substantial amount of savings that generate 2% or 3%.

“In those situations where people have a lot of savings and personal debt, we say to them what’s the point of that? You’re better off just paying off the debt.”

While personal loans may be one way people hurt their ability to get a mortgage, Brach said there are other common traps people fall into as well, particularly having an inflated limit on a credit card.

“On average a bank will typically use 3% of the limit as your monthly expenses.

“People get caught in the fact that banks keep offering to increase their limit and suddenly they find themselves with a limit of $30,000 a month when really they’re only using maybe $2,000 a month.

“Banks will always assess on the limit, they don’t care about your pattern is in terms of spending. They say the limit is X and use 3% of that.”

While it’s important that mortgage applications are detailed, Brach said some potential borrowers are hurting their chances by oversharing information.

"The other thing people do is overestimate their living expenses. A family of two adults and one kid might say they’re spending $5,000 or $6,000 in living expenses. But when you analyse what they’re putting down it’s not actually what a lender would consider living expenses.

"People don’t make the effort to detail their expenses. We tell clients to be a lot more specific. Living expenses would be things like food, clothing, insurance costs, phone bills and that sort of thing. But a lot people put their discretionary spending like going on a holiday or something which they don’t need to.”
 

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