What is a Good Credit Score in Australia for a Home Loan Approval?

What is a good credit score? Does it have any bearing on a home loan approval? What can you do if you have a bad credit score but want to buy a house? This article will show you what relevance your credit score has on your chances of getting a mortgage and what you can do to boost your credit score.

To begin with, you should know that there is a definite link between a good credit score and mortgage approvals. A good credit score will play a significant role in your ability to secure a competitive home loan. Despite this, a recent survey by Finder showed an alarming 73% of Australians (around 14.6 million people) don’t know their credit score. In fact, almost 1 in 2 Australians confess to never having checked their credit score, and 6% of those surveyed admitted they didn’t even know what a credit score was.

So, what exactly is your credit score? What is the role of a credit score in home loan applications? What is a good credit score in Australia? And how can you go about improving your credit score for a mortgage application?

What is a Credit Score?

Your credit score (also known as your credit rating) is a number calculated by credit agencies within Australia. These calculations are based on your credit report, which is a written record of your credit history. This report is used by lenders to establish how likely you are to repay a loan. Your credit report includes information about any current credit products in your name (such as credit cards, personal loans, car loans, etc.), your history of repayments, any credit defaults, bankruptcy/debt agreements and financial hardship claims.

How is a Credit Score Calculated?

Depending on the credit agency compiling the report, your credit score will usually be between zero and 1,000-1,200. Credit agencies will give you a credit score based on:  

• The amount of money you owe.
• The number of different credit applications you’ve made recently.
• Whether or not you pay your bills on time.

You’re entitled to a free copy of your credit report every three months. It’s a good idea to check your credit score at least once a year to ensure all the information is correct and gauge whether any areas need improvement.

What is a Good Credit Score to Get a Mortgage Approval?

So, what is a good credit score and what credit score do I need for a home loan approval? Before we get to that, let’s first check the connection between your credit score and mortgage approval. Note that lenders use your credit score to assess risk. The higher your credit score, the lower your perceived risk. The lower your credit score, the riskier your application will seem. Your credit score will ultimately influence:

• Approvals: How likely you are to be approved for a loan.
•  Interest rates: What kind of interest rate you can expect to be offered (the better your score, the better your interest rate).
•  Amounts: How much you’ll be allowed to borrow (a poor credit score will likely decrease the amount of your loan).
• Terms: Your mortgage terms and conditions. This includes how flexible the loan structure will be, what kind of fees are associated with the loan and whether it will include any features (such as a redraw facility).

If you have a very low credit score, you may struggle to find a lender who is willing to offer you a competitive loan product. So, improving your credit score for a mortgage application is an important step to take before you start applying.

But what constitutes a “good” or “bad” credit score in the context of mortgage approvals? While scores will vary slightly depending on the credit reporting agency, most lenders put credit scores in the following categories:

• Excellent: If you have a credit score of 800 or higher, then this is considered ‘excellent’ by most lenders. An excellent credit score will give you access to the best interest rates and loan terms.
• Good: Most lenders will view a credit score as ‘good’ if it’s over 700. A good credit score will make it easier for you to get approved for a home loan with a competitive interest rate because you’re assessed as being low-risk.
• Bad: If your credit score is below 550-500, you’re classified as “higher risk” and are in danger of being knocked back for a mortgage. While certain lenders may still be willing to approve you for a home loan, it will likely come with higher interest rates.

If you’re worried about your credit score, then don’t give up just yet. There are things you can do that will help with boosting your credit score for mortgage approval. Additionally, different lenders will have their own specific criteria. For example, some lenders may be willing to overlook a lower credit score for certain borrowers (such as first home buyers). 

The best thing you can do at this stage is talk to an experienced broker about improving your credit score for a mortgage application. What is a good credit score? Your mortgage broker will know and can guide you through the process of boosting your credit rating.

To further help you, here’s a video that explains the relationship between credit scores and home loans:

Common Misconceptions About Credit Scores and Mortgage Approvals

Now that you understand the role of a credit score for home loan approval, let’s look at a few common misconceptions:

1. Checking your credit score will lower it: Too many lender checks (known as “hard enquiries”) in a short space of time can lower your credit score. However, if you check your own credit score, then this counts as a “soft enquiry”. Soft enquiries won’t have any effect on your credit score – it’s actually good financial practice to routinely check your credit score.
2. You and your partner share a joint credit score: Your credit score is specific to you as an individual. While it might be affected by activity on a joint account or a joint loan, you and your partner will still have separate credit scores.
3. A high income guarantees a good credit score: Your income is not a contributing factor when it comes to calculating your credit score. Your credit score will ultimately be based on your credit history and whether or not you pay your bills on time.
4. You can improve your credit score by closing credit accounts: Funnily enough, closing an older account can be counterproductive to improving your credit score. A better option would be to maintain accounts that are well-managed and show a history of regular payments.
5. There’s nothing you can do about a bad credit score: Credit scores will change over time in response to how you manage credit. If you currently have a bad credit score, there are steps you can take to start improving it.

It doesn’t matter if you pay your bills late: Paying your bills late definitely does matter! To maintain a good credit score, make sure you pay all your bills on time. This includes credit cards, loan repayments and utility or phone bills.

Boost Your Credit Score for Mortgage Approval

Improving a credit score for mortgage purposes can be easier than you might think. If you’re planning on boosting your credit score for mortgage approval, try incorporating the following tips:

1. Review your credit report: Believe it or not, credit reports can at times contain errors. Regularly checking your credit report will help you to identify and correct any inaccuracies as soon as possible.
2. Always pay your bills on time: It doesn’t matter whether this is rent, utilities, phone bills, credit cards, personal loans or car loans – make a plan to always pay your bills on time. Set up payment reminders or automatic direct debits, if you can. If you’re struggling to manage your debt, it could be worth talking to a professional about a debt consolidation plan.
3. Keep your older credit accounts open: An older credit account adds length to your credit history. It helps prove to credit agencies that you’ve been successfully managing credit for a long time.
4. Keep your credit card balance low: You may be in the habit of maxing your credit card and then paying it off in full each month. However, high credit utilisation can hurt your credit score. Instead, try to avoid using over 30% of your available credit each month.  
5. Limit credit applications: Multiple “hard enquiries” in a short space of time will lower your credit score (since it makes it look like you’re desperately searching for credit). If you’re planning to apply for a home loan then try to hold off on applying for a new credit card or a car loan.
6. Try to diversify your credit: Credit reporting agencies look favourably on a mix of different kinds of credit (so long as they’re managed responsibly). If you have a credit card or two, a car loan and a mortgage (and you’re regularly paying all of them on time), this could help to improve your credit score.

Credit Scores and Mortgage Approvals – How a Broker Can Help

One of the best things to do if you’re concerned about credit scores and mortgage approvals is to talk to an experienced mortgage broker. A broker can not only provide tailored advice on boosting a credit score for mortgage approval, but they can also access a wide panel of lenders. Why is this significant? Because different lenders will look at your mortgage application differently. 

For some lenders, the role of credit scores in home loan applications will be extremely important. For others, this may just be one of several factors they consider. By consulting with a mortgage broker and comparing multiple lenders, you’re far more likely to get approved for a competitive home loan that suits your needs.

Get Started on Improving Your Credit Score for a Mortgage Application

Credit scores and mortgage approvals go hand-in-hand. So, don’t be like the 14.6 million Australians who don’t know their credit score. By being proactive and seeking expert guidance, you can work at successfully improving your credit score for a mortgage application.

To find out more about how you can check or improve your credit score, contact the team at ZEP Finance today. We’ll happily answer all your questions and provide tailored advice to help you improve your financial situation.