Your credit rating is an important part of the way that home loan lenders will assess your application and ultimately determine your ability to repay your home loan. It’s essentially a scorecard that results in a number that will tell the bank what kind of borrower you are.
While it can seem like a fairly straightforward thing, it’s really important to consider your credit rating before you make a home loan application and understand the various things that can impact it.
We have seen clients have their application for a home loan declined solely because of a low credit score, regardless of their current circumstances or income. It serves as a good reminder to all of us to be aware of our ongoing commitments and responsibilities to avoid getting caught out with any nasty surprises on our credit file.
This article will tell you everything you need to know about credit ratings and how they work, as well as some of the factors that can impact your credit score.
What is a credit rating or credit score?
A credit score is a measurement of your credit worthiness. It allows lenders to assess how risky or how safe it would be to lend money to you. Based on your financial history and your ability to repay debt, your credit score represents all the information on your credit report.
Why is Your Credit Rating Important for Home Loans?
1. Loan Approval – Lenders use your credit rating as a key factor in determining whether to approve your home loan application. A higher credit score increases your chances of approval.
2. Interest Rates – A better credit rating can help you secure lower interest rates on your home loan. This can result in substantial savings over the life of the loan.
3. Loan Amount and Terms – Lenders may be more willing to offer larger loan amounts and favorable terms (such as a lower deposit requirement) to borrowers with high credit ratings.
4. Lenders Mortgage Insurance (LMI) – If you have a low credit score and a deposit less than 20%, you may be required to pay LMI, which adds to your overall loan costs.
How is my credit rating calculated?
Payment History: credit card payments, loan repayments and the payment of other debts will impact your score.
Utilisation of credit: This refers to the ratio of your current debt to your total credit limit. Keeping your utilisation below 30% is generally seen as favorable.
Length of credit history
Types of Credit Accounts: credit cards, mortgages, personal loans, car loans etc.
Recent Credit Inquiries: Each time you apply for credit, a hard enquiry is made, which can temporarily lower your score. Multiple inquiries in a short period may raise red flags for lenders. This is a huge selling point for using a mortgage broker to help you apply for a loan, as you will be able to bypass the need to make your own enquiries and avoid potentially unknowingly doing damage to your credit score.
Does everyone have a credit rating?
No, some people may not have a credit file at all depending on their age and circumstances.
Do I need a credit rating to get approved for a home loan?
It’s not essential and we have definitely helped clients get approved for a loan without credit history. In this case, a mortgage broker can help you navigate the market and find lenders that are more likely to approve your application without a credit rating.
How can I check my credit score?
Contact these credit reporting agencies for your free credit report:
Experian 1300 783 684
illion 132 333
Equifax 138 332
Usually, you will get access to your report online within a day or two. Worst case, you could have to wait up to 10 days to get your report by email or mail. Again, a mortgage broker can help you to navigate this process. Get in touch if you would like us to help you access your credit file.
What is considered a “good” credit Rating? What does mine need to be to get a loan?
In Australia, credit scores typically range from 0 to 1,200, and different credit reporting agencies may use slightly different scoring ranges. Here’s a general breakdown of credit score categories:
1. Excellent (800 – 1,200): Borrowers in this range are considered very low risk. They are likely to receive the best interest rates and credit offers.
2. Very Good (700 – 799): This score indicates a low risk. Individuals in this range can still access favorable lending terms.
3. Good (600 – 699): Borrowers are considered a moderate risk. While they may still qualify for credit, the terms might not be as favorable.
4. Fair (500 – 599): This score suggests a higher risk to lenders. Individuals may face higher interest rates and limited credit options.
5. Poor (0 – 499): Borrowers in this category are seen as high risk. They may struggle to obtain credit and, if approved, could face significantly higher interest rates.
Each credit reporting agency, such as Equifax, Experian, and illion, may have variations in scoring models, so it’s a good idea to check your score with multiple agencies for a comprehensive view of your credit health.
Can I get a home loan if I have a bad credit rating?
Yes, it is possible to get a home loan with a bad credit rating, but it may be more challenging. Here are some options and considerations:
1. Specialist Lenders: Some lenders specialise in offering loans to individuals with bad credit. They may have more flexible criteria than traditional banks.
2. Higher Deposit: Providing a larger deposit (often 20% or more) can increase your chances of approval, as it reduces the lender’s risk.
3. Guarantor Loans: If you have a family member or friend with a good credit history who is willing to act as a guarantor, this can improve your chances of securing a loan. Read more about Guarantor Loans here.
4. Improve Your Credit First: If possible, take time to improve your credit score before applying. This can lead to better loan terms.
5. Loan Terms: Be prepared for potentially higher interest rates and fees, as lenders may see you as a higher risk.
6. Consult a Mortgage Broker: A mortgage broker can help you navigate options available for those with bad credit and find a suitable lender.
7. Consider Government Programs: Check if you qualify for any government assistance programs that may help first-time homebuyers or those with financial difficulties.
While getting a loan is possible, it’s essential to be cautious about your financial situation and ensure you can manage repayments to avoid further credit issues.
How can i improve my credit rating?
If you are still struggling to obtain finance after trying all of the above, you may need to wait until your credit rating improves and then try again. Improving your credit rating involves a combination of good financial habits and monitoring your credit history. Here are some effective steps you can take:
1. Make sure you understand the issues affecting your rating: Regularly obtain your credit report from agencies like Equifax or Experian to understand what’s affecting your score and why.
2. Correct Errors: Dispute any inaccuracies or outdated information in your credit report to ensure it reflects your true financial situation.
3. Pay Bills on Time: Always pay your bills, including credit cards and utilities, by their due dates to avoid late payment marks.
4. Reduce Debt: Focus on paying down existing debts, particularly high-interest loans. Lowering your overall debt can positively impact your credit utilisation ratio.
5. Limit Credit Applications: Avoid applying for multiple credit accounts at once, as each application can lower your score.
6. Use Credit Responsibly: If you have credit cards, keep your balances low relative to your credit limit (ideally under 30%).
7. Stay on Top of Finances: Create a budget to manage your expenses and ensure you can make all payments on time.
8. Avoid Defaulting on Loans: If you’re facing financial difficulties, communicate with your lenders to explore options like hardship programs.
9. Monitor Your Progress: Keep an eye on your credit score over time to track improvements and stay informed about your credit status.
Improving your credit rating takes time, so be patient and consistent with these practices.
Understanding how credit ratings work and their impact on home loans in Australia is essential for any prospective homebuyer. By actively managing your credit and maintaining a healthy credit score, you can improve your chances of securing a home loan. If you need personalised guidance, consider consulting with a mortgage broker who can help navigate the lending landscape.
Are you ready to take the next step toward homeownership? Contact one of Perth best mortgage brokers today to learn more about your options and how we can assist you in securing the best home loan for your needs!
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
