Home ownership is hard enough without adding obstacles.
The home ownership dream is evaporating for many Australians, with one particular habit putting it further out of reach than ever.
New Money.com.au research has revealed an alarming level of credit card spending on non-essential items, with Aussies splurging an average of $1200 a month on lifestyle purchases, such as entertainment, dining out, shopping and travel.
That works out to be $14,400 a year, which is about one-third of a 5 per cent deposit on a median-priced Australian home, worth $858,000 according to PropTrack.
The numbers also show more than 40 per cent of monthly credit card transactions are going toward non-essentials rather than bills or necessities, based on the average transaction value of $2961 per active card.
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Money.com.au’s finance expert, Sean Callery, says many Australians underestimate how much of their credit card bill goes toward funding their lifestyle.
“It’s striking given the ongoing cost-of-living pressures,” he said.
“The challenge is that discretionary spending changes from month to month, so it’s harder to keep track of than essentials like rent or bills. Before you know it, you’re paying over 20 per cent interest, depending on the card, on last month’s little luxuries, and that’s how people can easily fall into a lifestyle debt trap.”
Credit cards can be a ‘double whammy’ for would-be homebuyers. Picture: Getty Images
The research revealed that Generation X were the biggest spenders, averaging $1400 a month on lifestyle purchases; followed by millennials ($1200 a month) and Boomers ($1160). Members of Gen Z were spending the lowest amount ($735 a month), but were the most likely to carry a balance and therefore accrue monthly interest costs.
Lifestyle spending isn’t the only way credit cards can hurt would-be homebuyers, according to Money.com.au mortgage expert Alex Dore.
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“Credit cards are a double whammy,” he said. “You’re not only spending thousands on lifestyle extras that could be growing your deposit, but you may also raise red flags when lenders assess your serviceability. Banks will scrutinise your transactions to see how sustainable your spending habits are, particularly your discretionary spending. It’s never a good sign to have large sums going to a credit card each month.”
And then there’s the effect on your borrowing power.
“Lenders also factor in your entire credit card limit as potential debt, regardless of what’s owing on the card,” Dore said. “So even if you’ve got a $10,000 credit card you only keep for emergencies, the bank will still assume you’re making around $380 in repayments each month.
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All those credit cards will severely damage your borrowing power.
“That figure comes from a simple formula: they take your credit limit and multiply it by 3.8 per cent. That’s why first home buyers are generally advised to close credit card accounts at least three months before applying for a mortgage.
“For a couple earning a combined income of $160,000, a $10,000 credit card limit can reduce their borrowing capacity by around $50,000 with most lenders.”
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