Banks and other home loan lenders in Australia, almost without exception (and I stress the word “almost”, because thankfully there are a couple of lenders who don’t) use a process known as credit scoring, to weed out early on in the home loan application process, those loan applications that they consider doomed to fail, either in the later application process or worse still, after a customer has been granted a loan. Why? Because it is a sad fact that past behaviour will be predictive of future behaviour or performance. Credit scoring is a mathematical model that is used to predict future credit performance. It is in a nutshell a method of predicting credit worthiness. I do not say it is a good method or a fair or accurate method but it is one most banks and other lenders rely on. They want to lend their money only to people they are confident will be in a position to pay it back and if a few decent people slip through the net, they don’t really care: and it is pretty easy to slip through this particular net.
If you have just arrived in Australia, you will need to open an account for electricity and perhaps gas; if you initially rent, the water supply will probably remain in the property owner’s name (but moves are afoot to perhaps make this change) as will be the rates. It would be wise to avoid taking out a contract on a mobile ‘phone for the reason mentioned above plus such an application would also leave another “footprint” on your credit file. Similarly go without store and credit cards in Australia initially and if you absolutely cannot live without a card to make payments, then use a debit card. This will have no impact on your credit worthiness. Avoid taking out unnecessary store cards, interest-free consumer finance and personal loans. A number of people I have met have bought expensive cars on credit only to find it has subsequently prevented them from obtaining a home loan.
Other considerations when being credit scored.
How long have you been with your current employer? If less than twelve months, this might have a negative effect. If you have been with the same employer for over five years this would have a positive effect on your credit score.
How many credit applications have you made in the last two years? If only one, then no harm done, but anything over that and it starts to have a negative impact. If you have had multiple credit applications, even if you did not take up the offer, this could have a fatal effect on your credit score.
Do you own your existing home? If so this is a definite positive. If you are renting this will count against you and if you are living with your parents, even moreso than renting.
Do you have a bank account with the lender and for how long? If less than a year, this might lose you points with the big four banks; however if you have had an account with them for over 5 years, this might gain you points.
How many bank accounts do you have with the lender or their subsidiaries? If you don’t have even one, this will again impact negatively on your credit score. If you have more than 2 accounts this will have a positive effect on your credit score.
Your list of assets and liabilities will have an effect on your credit score. If you have a car, boat and caravan, you will score more highly as a couple if the assets are jointly owned. The greater the value of your assets the better the positive impact on your credit score. Do not forget to include your Superannuation fund when listing your assets.
If you have any credit defaults without a very good explanation, this will have a major negative impact on your credit score. Rumour has it that telephone companies are the worst for reporting a default to credit rating agencies so my advice to newcomers to Australia would be to either pay even a disputed bill on time and argue about it afterwards or use pay-as-you-go mobile ‘phones until you get on the housing ladder. Many Australians do not have a home ‘phone so it probably won’t detract too much, if at all from your credit score to not have a home ‘phone. It is infinitely preferable to not have a bad credit record than it is to have a home ‘phone. Don’t make the mistake of popping into every BMW or Toyota or whatever brand of car you one day fancy’s showroom. Sales people may not tell you as they ask you a million and one questions about your income and outgoings etc., that they aren’t just going to give you an idea of how much a car would cost on finance, they are going to apply for finance to see if you qualify. This leaves a “footprint” on your credit record that may backfire on you and give the impression you are a credit junky.
Other considerations when credit scoring will be your answers to such questions as how long have you been in your current job? How long have you been in your current home? Ideally, you will be able to give details of both for the last three years for both you and a partner if you have one. Incidentally, a couple will likely score higher than a single person on the same net income as the couple combined (taking living expenses into account). Are you working full-time, part-time or casually? Are you self-employed? Normally you will need 2 years registered with an Australian Business Number (ABN) and one year’s accounts at least. Some lenders have tougher criteria for casual employees than others. What are you going to buy with the loan? A house on a large plot of land in the middle of nowhere, or a 3 bedroomed house close to the city centre? Location does not bother one particular lender but does bother virtually all of the others. In some mining communities banks have announced that they will limit loans to 75% or thereabouts for certain postcodes deemed to now be in areas of economic decline. Have you been timely with your credit and store card payments? Have you been timely with your existing mortgage payments? Most, if not all, lenders will want to see 6 months’ worth of statements for your current home loan. It is not the end of the world if you have been late with payments but it could delay your plans as you will have to have an unblemished run of 6 months timely payments before you can try again (3 months for credit and store cards) unless you have a plausible excuse. How much do you want to borrow? Can you “service the loan”? What percentage of the property value do you need to borrow? Over 80% of the property value ( Loan to Value Ratio or LVR)? Then you will need to take out Lender’s Mortgage Insurance (LMI) and these insurers are even more fussy than the banks about who they will underwrite. The bank might say yes but the insurer might say no and no it will remain. The good news here is tat some banks have what is known as Delegated Underwriting Authority so if the insurer says no the bank (Commonwealth Bank is one that springs to mind, can overrule the insurer. Most banks (but again, thankfully, not all) now insist upon 3 months’ genuine savings as a deposit. You will normally need 5% plus another 5% for the fees and charges which the bank will not lend to you. Some banks will lend you up to 97% including the LMI premium but only if they think you can afford the repayments (which is determined by a “serviceability calculator” and each bank’s calculations are different. The above points are not “cast in stone”. If you go to an alternative lender then you could be amazed at what they are prepared to overlook but this may be reflected in their lending interest rate.
If after reading all the above you are still tempted to apply for a home loan with your existing bank because the staff seem like a friendly bunch, then think again. The mortgage broker at the bank will apply strict rules for credit scoring for a start, then a myriad of other considerations will be taken into account. Once one bank or lender says no to you, it is going to get tougher to find a second lender who will say yes, as you have left a big footprint on your credit file with the first refusal. Be smart and use a mortgage broker whose service is free and who will be able to analyse your details from asking all the right questions. Armed with this information and an expert knowledge of each lender’s criteria, he will then approach the right lender for you and get you approved first time of asking. Why take a chance when you have nothing to gain by doing it yourself but potentially so much to lose?
If you need help getting a home loan or assistance with any of the issues covered on this site, please call me, Vincent Woodall directly on 0451 596 575 or you can send me an email to firstname.lastname@example.org or alternatively please complete and submit the enquiry form below.
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