5 debts that can reduce your loan limit.
When planning to take out a house loan, the first step is to calculate your income to determine how much you can borrow. However, a step often overlooked is subtracting existing debts that will reduce your loan amount. Many times, loan applications are rejected due to underestimating existing debt burdens, also known as "monthly payment obligations."
Here's a checklist of loan obligations you should assess before applying for a house loan to prevent reduced loan amounts or even loan rejection.
Formula: 1 million baht loan amount = 7,000 baht/month monthly payment
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1. Car Loan
Many people choose to buy a car before a house due to Thailand's limited public transportation infrastructure. However, when it comes time to buy a house, car payments become a significant burden, eroding their financial capacity.
For example, if you have a car payment of 7,000 baht per month, this roughly reduces your ability to afford a house by 1 million baht. For instance:
Ms. A has an income of 50,000 baht per month.
Generally, banks will grant a maximum loan amount of 60 times her monthly income.
1. Ms. A can borrow 50,000 x 60 = 3 million baht to buy a house.
However, because she already has a car loan payment of 7,000 baht per month, the loan amount she can borrow is reduced by 1 million baht.
The loan amount reduced from 3 million baht – 1 million baht = only 2 million baht remains.
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2. house
Similar to car loans, Ms. A is currently paying off a detached house but wants to buy a condominium. The monthly payment for a house is relatively high and takes many years.
For example, Ms. A has an income of 50,000 baht per month.
Generally, banks will provide a maximum loan amount of 60 times her monthly income.
This means Ms. A can borrow 50,000 x 60 = 3 million baht to buy a house.
However, because she already has a house loan payment of 14,000 baht per month, the loan amount she can borrow is reduced by 2 million baht.
The loan amount reduced from 3 million baht – 2 million baht = only 1 million baht remains.
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3. Credit Cards
Credit cards are another significant debt burden that can reduce your house loan limit. Banks calculate your monthly payment on credit card debt using a formula of 10% of the outstanding balance.
Since most credit cards require a minimum payment of 10% each month, this is considered your monthly debt burden in the bank's eyes.
For example, Ms. A has a total outstanding credit card balance of 35,000 baht.
The minimum monthly payment is 10% of 35,000 baht = 3,500 baht.
Roughly calculated, a payment of 3,500 baht per month = a reduction of 500,000 baht in the house loan limit.
Therefore, while credit card debt may seem like a small amount, it significantly reduces your house loan limit. If you are interested in applying for a house loan, you should prioritize "clearing your credit card debt" to ensure there are no outstanding balances left.
Furthermore, even if you don't have any outstanding credit card debt, holding multiple credit cards increases the risk of having your house loan limit reduced or being rejected. Because banks view credit cards as tools that can lead to future debt, impacting mortgage repayment discipline,
they often recommend "closing cards," meaning canceling unused credit cards and keeping only the necessary 1-2 cards.
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4. Cash Advance Cards
Similar to credit cards, but cash advance cards are for emergency cash withdrawals, unlike credit cards which are mostly used for direct purchases. The minimum payment for cash advance cards is typically 3-5% of the outstanding balance. Let's assume a minimum payment of 5%.
For example, Ms. A has an outstanding cash advance card debt of 20,000 baht.
The minimum monthly payment is 5% of 20,000 baht = 1,000 baht.
Roughly calculated, a 1,000 baht monthly payment reduces the mortgage loan amount by approximately 143,000 baht.
The advice is the same as for credit cards: prioritize paying off all cash advance card debt before applying for a house loan.
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5. Electrical appliances, mobile phones, electronic devices, furniture, etc.
These items are often expensive, costing tens of thousands of baht. Many people choose to buy them on installment plans, both with and without interest (due to promotional deals with banks). Most people who buy on installment use credit cards, resulting in the debt being consolidated with their credit card debt (see point 3).
However, some retailers now offer their own loans to customers without credit cards. Therefore, it's crucial to remember to include these installment payments as part of your mortgage balance calculation.
For example, Ms. A pays 2,000 baht per month for a mobile phone.
Roughly calculated, a 2,000 baht monthly payment would reduce her mortgage limit by approximately 286,000 baht.
Similarly, for other debts that are manageable, it's best to pay the full amount for the item to settle all outstanding debt and avoid complicated debt settlement procedures. Prepare in advance by avoiding installment purchases that you anticipate won't be fully paid off before applying for a house loan with the bank.
In summary, from the 5-point checklist, large debts like existing mortgages and car loans are not easy to clear. If your remaining repayment capacity is insufficient, it's advisable to postpone buying a house.
As for the remaining 3 points – credit cards, cash advances, and installment loans for various goods – if they aren't too significant, you can prioritize clearing these debts before applying for a house loan. It's best to carefully manage your spending habits for these systems for a year before applying for the house loan.
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Thanks for the helpful information from DD-Property.
