The bank of mum and dad must come with rules

We hear a lot about the bank of mum and dad being the answer to buying your first home when lenders refuse to talk to you without a sizable deposit. Indeed parents can often help their children take their fist steps on to the property ladder giving then significant advantage over other first home buyers.

However there are some risks with this mode of finance especially for the parents and first rules need to be established around how the parental contribution will be documented, secured and when it will be repaid.

Documenting the parental loan/gift

You may wish to lend your child some or all of the necessary deposit to purchase their first property. Some parents are able and wiling to gift such a deposit, but may wish to place some conditions on this gift. It does not matter how you decide to proceed, documenting your wishes using the services of a solicitor is a good idea. At the same time seek professional advice as to how to assist the child without putting your own assets in jeopardy.

The money may not be physically available but rather is offered in the form of supplementary equity from the parental family home. Every family will have their own vision as to what they are prepared to offer and on what terms. Failing to document this transaction creates unreasonable risk for the parents and is not a good idea.

Even in the case that the money is a gift an not a loan – you may not wish to offer the gift unless the child agrees to hold the property for at least 5 or 10 years. Parents can be very disappointed to find that after they gift their hard earned money to a child, they live in the house for a year or two, and then sell at the wrong time resulting in a loss of the gifted deposit. To ensure your money is not lost make sure you establish the rules before paying the money over.

Securing the money lent

If the money is a loan, you may need to agree that you will be allowed to place  caveat on the property or a second mortgage to stop the child from transacting with the property and not repaying your loan. Remember that people’s circumstances change over time. If you fail to secure your position right from the start – later may be too late.

If lent, how and when will the money be repaid

Parents should establish to rules with respect to the money lent. What interest if any is to be paid? When is the loan to be repaid? This needs to be set out in a document put together by a solicitor. Many parents would be uncomfortable signing a formal loan contract with their child. However things can go wrong. There can be new marriages, divorces, children, or simply a loss of employment and even bankruptcy. To make sure that you do not lose the money lent, it is important that the rules around the loan are formally documented.

Parents who confuse love and devotion towards their children with financial security can find themselves loosing a lot of money with no way of recovering their losses. Prudent behavior from the outset can save everyone a lot of heartache.

 

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Risks with a House and Land Purchase

With Australian established property prices continuing to move up, more and more first home buyers are turning to House and Land as the answer to the Great Australian Dream. After all there are quite a number of advantages to purchasing this way. Not only is the price more affordable, but buyers can also save on stamp duty by buying “off-the-plan”, and design the home of their dreams instead of buying something old and “not quite right”.

So what can actually go wrong with an off-the-plan house and land purchase?

Qualifying for Finance

When making a significant purchase such as a house and land it is important to obtain a pre-approval for finance. That does not mean a high level chat with a lender, it means lodging a full application with a lender of your choice and obtaining formal finance approval.

If you fail to do that before signing a purchase contract then at the very least you will need to sign a contract “subject to finance”. This is where you will need to take care.

Many House and Land deals involve you purchasing the block of land first and some months later commencing construction on that block. The land purchase contract is only for the land component of the transaction but commits the buyer to commence construction within 6-30 months of the land purchase. It is critical that any subject to finance contract that you sign includes the value of both the land and the construction. We have seen contracts give to consumers for the land component only. Buyers who are unaware of these will obtain finance approval to purchase land but when it comes to approval for a construction loan, they may fail to qualify – creating a problem for themselves and a possible financial loss as they will need to divest themselves of the land purchased if they will be unable to qualify for a construction loan.

This is why you should never sign a purchase contract for house and land without showing it to a solicitor and obtaining legal advice on your rights and responsibilities.

Small Blocks

New house and land developments are generally built on smaller blocks than existing homes. As a buyer you really need to be aware of this and be careful in selecting your block.

Lack of infrastructure

While the new house may be everything that you are looking for  – what about its surroundings? Quite often new land subdivisions are found in outer suburbs with limited infrastructure. Before committing to a purchase its important to check for the location of local shopping, schools, transport etc.

Quality of Construction

Many new constructions lack the quality and stability of existing homes. Be careful in committing to a purchase before checking the quality of previously constructed homes by this builder. Have a look at homes completed 5-10 years previously and that will give you a likely picture of what you can expect from your home.

Inclusions/exclusions

Make sure that you understand fully what is included and what will be extra. We have seen many court cases resulting from disputes on this matter between builders and clients. Legal Advise should help you identify these matters before signing the contract.

Construction Loan

Have you considered what will happen if you are unable to qualify for the construction loan when one is required. It is not uncommon for there to be a difference of 24 months from settlement on land to commencement of construction. If your personal circumstances change due to a pregnancy, loss of work or simply a change in the property market you may be stuck with the land being unable to build the home of your dreams. Make sure that you understand all the risks before you commit to an off-the-plan house and land purchase.

 

 

 

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Do not get “snowed under” this Christmas

Its hard to believe but we are only weeks away from Christmas. The “Silly Season” that all too often finds unprepared revelers deep in debt at the commencement of the new year. If you are one of these people who leaves Christmas shopping to the last minute and buys presents “emotionally” rather than “financially” – this article is for you.

Thanks to the efforts of the Marketing Departments of retailers, Christmas has become a spending holiday rather than an opportunity to take time off work, spend it with family and friends and reflect on the “true meaning” of this holiday.

If you do not wish to fall victim to unintended Christmas debt, consider the following:

Set a realistic budget for Christmas

If you have not done so as yet, it will be very helpful to prevent out-of-control spending during the holiday season, to make a list of the presents and other expenditure you anticipate to incur over the next 6 -8 weeks. Once this list is in place, compare it to the money that you have and would like to allocate to the seasonal celebrations.

Borrowing for Christmas is not the answer

The emphasis above is on the word “have”. It is never a good idea, financially speaking, to borrow for a holiday or for a holiday experience. Therefore while you may wish to spend $100 per relative/friend on Christmas presents, reality may dictate that all you can afford is $10 per person. Anyone who decides to borrow the difference, is unfortunately making a financially irresponsible decision which may cost them dearly in the new year. After all Christmas was never meant to be about the money you have or spend. You can choose to enjoy the holiday and remain financially responsible at the same time.

Choose affordable activities

All around Australia there are numerous free or very affordable family activities over the holiday season. Individuals with a limited budget need to focus on such activities and not fall prey to well advertised but unaffordable events.

Do not fall victim to peer pressure

It can be difficult to avoid spending more than you can afford when you know that your family and friends usually spend a significant amount on your presents. Why not talk to the people in your life and suggest that instead of everyone incurring huge expenses during the holiday season, you set a limit on present value. This arrangement can work really well by taking the pressure off everyone.

Setting the right example for your children

Nothing is more important than teaching financial responsibility to your children. Families who fail to do this can find that their children fall into irresponsible spending habits. I is great for children of any age to see that their parents budget for large items of expenditure and do not borrow for presents or holidays. Make sure that financial responsibility is taught in the family and you are leading by example.

You can enjoy the Christmas Holidays without finding yourself financially “snowed under” in 2017.

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Not all property is acceptable security to your mortgage provider

In these days of low interest rates and high property prices, most media attention is directed towards the “unaffordability” of a home and oversupply of new apartments. It seems that the potential property buyer is ill prepared for the kinds of properties that their lender is unlikely to lend against when they go ahead and sign the purchase contract.

You may well hold a pre-approval to a dollar amount from your chosen bank, however it does not mean that any property you purchase will be acceptable security to their credit department.

Paid too much?

A mortgage pre-approval does not guarantee that your purchased property will be valued by the lenders for the same amount that you have purchased it from the vendor. Even purchases made at auctions can at times not be valued for the amount you decide to pay for them in the heat of the moment. However the risk is higher with privately negotiated purchases.

Even if a mortgage pre-approval allows you to spend up to $500,000, that is not a guarantee of approval. If you overpay for a property, and the lender’s valuer does not believe it is worth what you have paid for it, you may need to tip in some additional funds of your own to be able to settle the purchase. Obviously that is not always an option.

Very small apartments

Apartments that are under 50sqm are often unacceptable to home loan providers. This includes student accommodation and studio apartments which can be 12-25sqm only.

Buyers who want to commit to a smaller residence should confirm that their lender is prepared to consider it as security. Alternatively speak to your mortgage broker – they have access to lenders who will work with non-standard properties.

Unusual titles

Not all property titles are acceptable to your lender. For example apartments that are on a company share title instead of a strata title are often not acceptable to traditional mortgage providers.

Similarly units in a retirement village may not be acceptable to your mortgage provider.

Contaminated sites

Some sites are “geologically challenged”. They may be located next to a rubbish tip, contaminated or be located next door to a power station. When a valuer shows up to sight the property, problems may surface.

Rural postcodes

Some lenders are not prepared to lend on a 5% or 10% deposit in certain rural locations. Similarly if the property you have in mind is a large farm, the lending criteria for it may be different to that of a suburban unit.

Land only

Do not assume that you can borrow up to 95% on a property that has no house – land only. The borrowing lvr is generally different for land only that it is for an established property.

Serviced Apartments

Serviced apartments operate like a hotel. They are a commercial operation that is generally under a long lease. If you decide to invest in one of these be aware that a larger deposit may be required and your loan will be of a commercial rather than a residential nature.

Ultimately even property buyers who have already obtained a pre-approval from their chosen lender should still sign a purchase contract “subject to finance”. If buying at an auction, make sure you show your intended property and its title to the lender before committing to a purchase.

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Are you borrowing too much?

We are very lucky these days to have access to cheap money. Some of us will remember home loans priced at 18% p.a. and car loans at 20% plus. That said, it is important to maintain your wits about you when deciding to take on any additional debt. It does not matter that rates are low, you still need to be able to afford loan principal repayments and can not make affordability decisions on rate alone. Those who over stretch their family budget, too often find that a small unexpected event can bring on their undoing.

Personal Loans

When it comes to personal loans we always say ‘why’?

Personal loans are generally taken for reasons that help the borrower obtain access to lifestyle advantages that they are otherwise unable to obtain because of a lack of savings. The funds borrowed are often applied to a holiday, a wedding, new furniture, or anything else wants to have now and pay-off later. We do not support this type of borrowing as it does not make financial sense to borrow and pay interest on lifestyle expenses. It does not matter if the debt is small or large, it is best to be avoided.

The only exception here, is personal loans for essential medical procedures, or possibly consolidation of otherwise unaffordable debts.

Car Loans

Cars are an essential asset for most of us but they are a depreciating asset.  That means that the longer you own a car, the more value it drops.

Cars allow us to get to our place of employment, bring home food, and drive our children to school as well as other family activities. However they can also be a financial drain on the family budget especially if the vehicle we buy is unreliable and requires constant repair or is a beautiful new car the repayments for which the borrower can barely afford.

Some of you may only be able to afford a vehicle that costs $3000 while others can easily purchase a luxury car. What is important is to remember that your car is a depreciating asset. That means it looses value every year that you own it. While a vehicle bought in the range of $3000 – $10,000 will have very little to loose, and may only drop a few hundred dollars a year, a car that was bought for $65,000 can easily loose $15,000 a year in value and so on.

It always saddens us to see people overstretch to purchase a car of their dreams to only find at the end of the finance period, that the vehicle is not even worth the money that is still owed on it to the finance company.

Be very careful with new car loans. Do not focus on the interest rate alone. Ask yourself if you can afford to lose thousands, or tens of thousands of dollars annually, before buying a new vehicle. Make sure that you are happy to own the vehicle and the debt that remains on it after several years of new car ownership.

Credit Cards

There is nothing wrong with credit cards as long as they are used for short term borrowing only – ie. no more than the interest free 55 day period which is offered with most credit cards. It does not matter what interest your card provider charges if you never intend to carry forward any debt and pay off all purchases in the first 55 days.

Credit cards are not a personal loan and should not be used to accumulate personal debt.

Property Loans

Property can be a growth asset and that is why it is deemed acceptable to borrow large sums of money when purchasing a home or an investment property. However not all property is an equally good investment. Therefore it is crucial to find a low cost lender who offers a flexible mortgage. Do try to save a good deposit as this will allow you to borrow less and make the loan repayments more affordable.

Many people make the mistake of borrowing more than they can afford just to enable them to purchase in a suburb of their choice. Do not overextend. It can be a smarter choice to rent for some time where you prefer to live, and buy an investment in a more affordable suburb. This will offer you the best of both worlds and assist in keeping borrowings at a manageable level.

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The positive side of credit reporting

If you are over 18 and have ever applied for any form of credit then you have a credit record. This can occur seamlessly and without you realizing it. Your credit record may be of little interest to you until you decide to apply for some form of finance. Worse still, you may be in the process of purchasing a property blissfully unaware of your credit history containing some late payments or defaults. It is not uncommon for people to have a bad credit history without having any awareness of this. They make a purchase and pay their deposit and only then learn the bad news form their chosen lender – they do not lend to bad credit borrowers and you appear to be one of those.

Who would have thought?  After all you are employed in a stable job, have no other debt and a good deposit saved, making you a perfect candidate for a home loan, right?  Well it is not that simple. Understanding how credit reporting works and how it is used by lenders can save you a lot of heartache as well as help you avoid loosing a home deposit on a purchase that you commit to but cannot settle.

What is a credit record

Your credit record is like an identity record that is attached to each and every Australian resident. It is stored by credit reporting agencies and is accessed by lenders whenever they receive a credit application from you as a borrower or a guarantor. The credit record includes information such as the individual’s age, address, occupation, current debts and repayment records. It also includes negative events such as defaults, late payments, arrears, judgments, bankruptcy etc.

How to find out what is on your credit record

It is simple enough to find out what is on your credit report. Credit reporting agencies can provide this information to the record owner for the asking. Veda Advantage is one such agency. Simply for to www.mycreditfile.com.au and request a copy of your report. They will charge for an instant report. If you are prepared to wait for 10 days – the information is available for free. It is essential to sight a copy of your report before making any purchases or applications for finance.

Identifying and addressing problems

Credit report can and do regularly have errors and out of date information.If you identify an error or an item that you believe is not your debt/responsibility, contact the credit provider and challenge them. Ask for proof of their claim otherwise you are entitled to insist that the bad credit entry is removed. Correcting errors can take some time. However if an item is not an error but simply an omission on your part, try to get it fully paid before making applications for finance. Make sure that you only apply to lenders who will accept your credit history(warts and all). It is pointless withholding information as your credit report will set the record straight, so honesty is definitely the best policy.

Why Positive Credit Reporting?

Up until recently, Australia only had negative credit reporting. That means that lenders had no visibility of timely loan payments but were only made aware of omissions, defaults and arrears. Consequently a small missed payment could preclude an individual from borrowing  through a bank for a long time. Positive Credit reporting was introduced in Australia in 2013. This means that our credit agencies are capturing both good and bad credit behavior of each and every adult resident. Borrowers who always pay on time and are very diligent but have had a small mishap/omission should still be able to qualify for finance with a mainstream lender. Positive Credit reporting enables lenders to build an accurate picture of the credit activity of an applicant (good and bad). It also gives generally diligent borrowers a better chance of qualifying for finance than they had under the previous credit reporting system – and that is a good thing!

 

 

 

 

 

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The wisdom of being Frugal

We have come to think that being Frugal is the domain of little old ladies who have led a hard life and have simply gotten used to making a dollar go a very long way. However in today’s challenging economic environment, being Frugal is the answer to financial uncertainty and instability. It is not uncommon to be running a strong business today and be forced to close your doors tomorrow. Likewise even those in a good job can have no certainty that their current level of income will remain for the duration of their working career. Being able to budget and spend wisely is a skill that is held by few.

Setting Financial Goals

It is unfortunate that most people only think about saving money and defining financial goals when money is scarce. In reality everyone should think about where they would like to be in financially, 10, 20 and 30 years from today and set in place a plan to help get you there. One of the best strategies is to live frugally, waste nothing and stop accumulating things you do no need simply because that is what your friends are doing.

Aged pension will become a thing of the past by the time those in their 20s today come to consider retirement. Anyone who does not consider this in their 20s will come to their 70s with little savings and inability to ever retire. Therefore saving and investment for the future should be a part of everyone’s financial goals.

If you spend your money on living a “cool” lifestyle when you are young, you are guaranteed a miserable existence when you reach old age.

How many shoes do you really need?

You are probably thinking…”I only buy things on sale” – but how many shoes, bags or jeans does one person need? The marketing machine designed to push us into spending everything we have has done an excellent job convincing many that it is a criminal offence to wear last year’s shoes or jeans – this is a strategy to keep you spending today but who is going to take care of your tomorrow?

Money wasted is an opportunity lost

Even $50 a week spent on an outing or on coffee can help you hold an investment that will appreciate over time. If you put same money away into any appreciating asset you will find that when others are worried about their future – yours is set.  If your income has doubled over time, it does not mean that you now have twice as much money to blow on lifestyle and entertainment. There is no need to spend much more than you did before – invest to help you achieve financial stability first.

Develop a budget and stick to it

It is difficult to achieve financial goals without setting a budget. A budget should be a realistic estimate of your day-to-day living expenses as well as the irregular commitments to insurance, car registration, mortgages, credit cards etc. Review your spending with respect to the budget regularly to ensure that you are on track to achieving your goals.

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A loan guarantor will not solve all borrowing problems

It is true that often borrowers are able to breach the gap between their borrowing needs and the loan qualification criteria of lenders, by using a loan guarantor. However guarantors can only be helpful in some borrowing situations, while in others they can either add nothing to a transaction, or perhaps not even be allowed to offer guarantee.

Lack of deposit/savings

First Home Buyers who are unable to save the required home deposit can seek assistance from parents/family. While some parents will offer a cash loan/gift to make up the lack of deposit. Parents who do not have sufficient cash available to offer a dollar payment, can offer their child’s home loan lender an equity guarantee. This is where they go on the child’s mortgage as a partial guarantor applying the equity in their own home towards the deposit requirements of their child’s purchase.

In this scenario, an equity guarantor can actually help the borrower to get the mortgage application over-the-line.

Low income

Where a home buyer is unable to qualify for a mortgage to purchase the house of their choice, an income guarantee from a parent or a family member can make a difference. Lets say the borrower needs to be earning $80,000 to qualify for a mortgage, but they are only earning $65,000 – a family member can offer an income guarantee of $15,000 to make up the difference in order to achieve mortgage approval.

Bad Credit

Where a borrower has had their loan application declined because they have a bad credit history, having an income or an equity guarantor will be of no assistance. This is true even where the loan sought is a mortgage. To qualify for a mortgage approval in such circumstances, the potential borrower needs to possibly wait until their credit history improves, or approach a lender that specializes in Bad Credit Home Loans.

Personal and Payday Loans

When it comes to personal loans or payday loans, as the name suggests – these are personal borrowing products. These loans are assessed on a range of information including the applicant’s credit history, income, stability of employment,level of current debt and assets held. You will either qualify or you will not. Lenders will not accept income or equity guarantors to assist borrowers with a low income to qualify for such loans.

If you are having trouble qualifying for these type of loans, it may be a good idea to review your budget. Lenders who offer Personal Loans and Short Term Loans have significant experience and statistical data on income buffers needed to afford these loans. Chances are that you are indeed unable to afford the loans you are applying for, and if anything at all goes a little outside of plan, you are likely default on these loans.

 

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Making yourself more attractive to your lender

When it comes to qualifying for finance, it is important to understand what lenders are looking for in assessing your loan application. This is not about getting a haircut or buying a new suit for a meeting with your bank manager, rather it is about understanding what lenders look for in qualifying loan applications.

Not all lenders use the same criteria nor the same “affordability calculator”, however irrespective of what loan you are looking for or which lender you are considering the following are some basic steps you can take to make your loan application more attractive to a potential lender:

Up to date financials

To get the best possible deal it is important to ensure that your financials are up to date. If you are PAYG, that means that you must be able to provide your lender copies of your recent payslips, Group Certificate and sometimes extracts of your bank statements or your credit card statements. If you are Self Employed, more documentation will be required including the past 2 tax returns, as well as possibly other financial information such as bank account statements, BAS statements, budgets etc. Some lenders will only want to see limited documentation while others want the lot. As a rule, the more documents you are able to offer a lender in support of your application, to evidence your income and obligations, the better are your chances of approval and a good deal.

Close unused credit cards

Many of us have “just in case” credit cards that we do not use. A potential lender will take into account all your credit cards including those that you do not use. In doing so you may find that they are unable to qualify you for the loan you wish to have. Closing as many credit cards as possible before making a loan application will greatly improve your affordability and therefore chances of approval.

Employment stability is important

Do not move between jobs or between industries if you are looking to apply for a loan, unless your new job is better paying, in same industry and you are not on probation. The worst thing that you can do is apply for a loan while between jobs or when you have just decided to set up a new business. Lenders main consideration is how will you  be able to afford to repay the loan you are seeking. Unfortunately as a rule lenders are far less optimistic about the businesses chances of success that are the business owners. This is especially true if you have gone into a new industry one that you do not have much experience in.

A strong deposit is helpful

If the loan is to purchase an asset such as a property, equipment or motor vehicles – the larger is your deposit the better are your chances of approval (assuming all else is in order).

Check your credit history

Having a clean credit history at the time of your loan application will make qualifying for finance much easier, giving the borrower a much broader choice of lenders. Individuals whose credit history is blemished may need to pay more for their loan and have a narrower choice of lenders.

Credit history is not always accurate. We always recommend for borrowers to get a copy of their credit report before lodging any applications for finance. If they find any errors or anomalies, these should be followed up to ensure that the report is updated and correctly reflects your credit history before applying for finance.

 

 

 

 

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Understanding the basics of borrowing

Like it or not DEBT is a four letter word. We all borrow but some of us do it better than others. Before deciding to apply for any form of credit you really should stop and ask yourself the following questions. The answers to these will help you distinguish between essential debt and debt which is likely to become troublesome and costly.

What is the loan purpose?

Why do you wish to borrow? Is it in order to gain access to some goods or services that you can not afford to pay for in full now? How essential are these goods or services to you? Are they simply something that you want to have now, or are they part of your long term financial plan.

For example, if you are borrowing to cover the cost of your education which will eventually allow you to qualify for a better paying job and earn more money in order to repay this education debt – the loan has a valid purpose.

On the other hand if you are borrowing money to go on a holiday or pay for a wedding, this is what is seen as a lifestyle debt which will accumulate in cost over time without being able to add to your long term financial well being. I am a strong believer in avoiding lifestyle debt whenever possible. If you have been unable to accumulate enough money to go on a holiday through working and saving then you can not afford such a holiday. How will you be able to afford to pay off the holiday debt together with the interest cost levied on that debt ?

Can I comfortably afford the repayments if something goes wrong?

Even where the debt has a reasonable purpose like a car or a home, do not rely on your lender to assess your loan affordability. Your lender may not know that you are planning to have a baby or change careers. Make sure you can comfortably afford to repay the debt taken even if something goes wrong, or at worst you have an exit strategy.

What is my exit strategy?

You cant always predict the future, however you can take the time to think what you will do in the event you lose your job, get sick, or some other unforeseen event occurs. Some borrowers take out loan insurance to protect themselves from such an eventuality. The main thing is to decide what your exit strategy may be if you can not afford the loan taken. Some people may decide to sell the asset and repay the debt. However in the case of a car loan quite often the car is worth less at a point of time in the future than the monies owed on it. This is where planning to borrow just enough but not too much is important. Just because you can afford the repayments on a $60,000 car loan is not necessarily a good reason to take one.

With unaffordable mortgages an exit strategy may be to move out and rent the property out for a while or perhaps sell up and buy something cheaper.

Am I getting the best deal?

Have you done comparisons on the form of finance you are looking to commit to and similar products offered by other lenders.  Just because the CBA is where you have your savings account and their branch is right next to your place of work, does not mean that they are necessarily the best place for you to take out a car loan or a home loan. They may well be of-course – but it pays to compare and check.

What is the opportunity cost of this form of finance ?

Have you considered the opportunity cost of your new credit card? Probably not, but in signing up for that shiny peace of plastic you may have reduced your home loan affordability by as much as $100,000 or more. It does not matter that you owe nothing on the card. The mere fact that you can go out tomorrow and spend up big, will limit your potential home loan by a lot more than the credit card limit.

Similarly if you sign up for a holiday club or a time share – while the amount itself may not be huge, the fact of that debt being present on your credit report will restrict the amount that you will qualify for when it comes to car finance or a mortgage.

Remember no loan stands alone. Any debt you take on will limit your borrowing capacity going forward – so choose wisely.

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