Why a generous credit card limit may scupper your new mortgage

MILLIONS hoping to buy a home could be refused mortgages because banks are quietly increasing their credit card limits to encourage them to spend more.

The Mail revealed last week how banks are luring customers into a debt binge with cheap loans and easy credit, including raising card limits without being asked.

But experts say this could result in them being denied mortgages or having to wait longer while their applications are scrutinised, risking their home purchase falling through.

Lenders often refuse mortgages to those deemed to have too much other credit. The amount of credit borrowers can have available to them before it jeopardises their mortgage varies between banks, but experts said it could be as little as £30,000.

Many major lenders are understood to be taking this hardline approach towards borrowers, according to industry insiders. Those likely to be hardest hit by the policy are customers whose credit card limits have been increased by their banks without them realising – especially if a lender considers their application risky for other reasons, for instance if they are borrowing large amounts.

Firms are allowed to increase credit limits as long as they give customers 30 days’ notice. Consumers are able to stop the increases from going ahead but many fail to do so. Two thirds of credit card customers have had their limit increased without requesting it, according to a study by the comparison website uSwitch. It found the average hike was £1,300 but one in ten have had more than £2,500 added to their limits. Justin Basini, founder of the credit reference agency Clear Score, said: ‘Banks will have a figure for the amount of credit borrowers can have available to them before it raises red flags on a mortgage application.

‘For example, someone might be at their bank’s available credit limit of £30,000, but if a credit card firm then hikes their card limit by another £5,000, it could trigger the bank to look at their mortgage application again.’

Marc Gander, co-founder of the campaigning Consumer Action Group, said: ‘It is disgraceful and totally irresponsible that banks are telling people to take on more debt without paying any regard to the impact to their financial plans, for instance if they want to take out a mortgage.’

Bank of England figures show households across the country are falling a total of £61million further into debt every day.

While customers are bombarded with easy credit card offers, mortgage firms must abide by tough lending rules set down by the City watchdog. They must closely investigate the finances of potential borrowers, considering how much credit they have available, as well as their level of debt.

This information is fed into a computer to decide whether to approve the customer for a loan. If an applicant has too much credit available or is in debt, or is viewed as risky for other reasons, their case will be examined in greater detail by the bank – a process that could take weeks.

David Hollingworth, of the mortgage broker London and Country, said: ‘How much credit you have at your disposal… could be enough to mean someone is turned down for a mortgage if their application is touch and go in other areas.

‘For instance, lenders could be concerned you might use your credit card to kit out your home out with loads of 50in TVs but then not be able to afford your mortgage repayments.’

Richard Koch, of the trade body the UK Cards Association, said: ‘It is highly unlikely any mortgage lender, or indeed any other type of lender, would base a decision on a credit limit alone.’

‘Disgraceful and irresponsible’