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Your credit card spending could be reducing your loan eligibility

Buying on credit should always be done responsibly, especially if it affects your future financing plans. When assessing your home loan application, banks will evaluate your Total Debt Servicing Ratio (TDSR), taking into account factors such as monthly income and existing loan commitments.

Introduced by MAS, the TDSR framework caps your total monthly debt repayments at 55% of your gross monthly income to ensure that borrowers don't overstretch their finances. When people think about TDSR, they often associate it with existing loans such as car or personal loans. However, what many don't realise is that your credit card commitments can also affect your borrowing capacity.

Case Study

Let's take a look at a client who approached us and how our consultant helped to resolve the issue.

Client Profile

One important consideration was that the client was a business owner, and self-employed borrowers are subject to a 30% income haircut under the TDSR framework. Only 70% of her income was used to calculate her affordability.

The Math

Here's how we calculated her TDSR:

First, we need to calculate the income that was used to calculate her affordability:

Based on this, we can calculate her average monthly income:

Therefore, her TDSR would be capped at:

The Challenge

With her monthly credit card commitments at $24,000, this amount already exceeds the maximum allowable limit under the TDSR framework. Combined with her monthly car loan repayments, this made it difficult for her loan to be approved.

The obvious solution would be to improve her financial profile and reduce her credit card commitments over time. While this would be sensible as a long-term solution, it's not always practical for homeowners whose lock-in period is ending.

Once a loan's lock-in period expires, homeowners are generally moved from fixed rates to floating rates. This could mean that delaying a decision to improve one's financial profile would result in paying higher interest rates in the meantime.

In other words, refinancing is often a time-sensitive decision. Rather than waiting months in the hope of improving TDSR, it is important to understand the options available based on your current financial situation.

The Solution

In our client's case, instead of waiting months to reduce her credit card commitments or repaying all her credit card instalments at once, we worked with the bank to provide additional context on her repayment behaviour.

We provided evidence that our client consistently paid off her credit card balances in full each month. This gave the bank greater confidence in her repayment capacity and helped to strengthen her application. This allowed her home loan application to go through.

What does that mean?

These are special circumstances and appeals work on a case-by-case basis. While the situation can feel daunting, there still may be solutions that are worth exploring. However, the best approach is to plan ahead. Understanding how your existing financial commitments affect your borrowing capacity gives you more flexibility to make adjustments, rather than having to react under time pressure.

Every client profile is different. If you need assistance, our expert team will be able to help answer any questions that you might have.