Why cash advances hurt your mortgage approval chances
From Aaron’s YouTube: “Cash advances are the worst #newzealand #firsthome #kiwisaver ##nzfirsthome #nzmortgage #homeloan #a”
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Posted 15 June 2024
The short version
- Banks view credit card cash advances as red flags because they signal you're spending money you don't have.
- Most credit cards charge interest on cash advances immediately, often at rates around 20%.
- Multiple cash advances combined with other debts can be enough to get your mortgage application declined.
- Cutting up your credit card may be a smart move when preparing to apply for a home loan.
Why banks hate cash advances
When banks review your finances for mortgage approval, they look for signs of financial stress. Cash advances on credit cards are one of the clearest red flags. Aaron explains that banks interpret this behaviour as you spending money you don't actually have, which makes them nervous about your ability to handle mortgage repayments.
What many people don't realise is that with most credit cards, interest on cash advances starts accumulating immediately - unlike regular purchases where you often get an interest-free period. At typical credit card interest rates around 20%, a $100 cash advance starts costing you interest right away.
The compounding effect on your application
A single cash advance in isolation may not sink your mortgage application, but banks look at your wider financial picture. If you have other debts already, plus a history of cash advances or late payments, the combined effect can be enough for the bank to decline your home loan.
Aaron highlights that banks want to see financial stability - consistent income, controlled spending habits, and no signs of living beyond your means. Frequent cash advances directly contradict this ideal financial profile that lenders look for in mortgage applicants.
What to do about it now
If you're serious about getting a mortgage, Aaron suggests considering cutting up your credit card entirely. This may sound extreme, but it prevents any last-minute cash advances from derailing your application when the bank scrutinises your statements.
For those who rely on credit cards for certain expenses, the solution is simple - stop using cash advances completely. Instead, focus on building savings buffers and living within your actual income. The cleaner your bank statements are before applying, the better your approval chances.
This is general information, not personalised financial advice. For advice on your situation, talk to Aaron.
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