If you prefer to avoid borrowing money wherever possible, you may run into some trouble when it comes to buying property. Not only is a home loan almost essential when it comes to Australian real estate, but having no credit history could make your mortgage application a little bit more challenging.
What is my credit history?
In Australia’s financial system, a record is created every time you apply to borrow money. Credit reporting agencies, sometimes called credit bureaus, keep track of each Australian’s credit history, which includes information on:
- Credit products from the last two years (including credit cards, home loans, personal loans and more)
- Repayment history (including payment amounts and whether or not you paid them on time)
- Credit applications
- Bankruptcies and debt agreements
- Credit report requests (from banks, credit providers, or yourself)
How is my credit history used?
Your credit history is used to generate your credit score – a numerical value that banks and mortgage lenders use to quickly assess the risk of lending you money.
If you’ve successfully borrowed money and repaid debts in the past, you’re likely to have a good credit score. This means that a bank is more likely to accept your loan application and may even offer you lower interest rates or other features and benefits.
But if you have a history of loan defaults, bankruptcies, denied credit applications and late payments, you may have a bad credit score. This could lead to you being charged a higher interest rate on your home loan, or seeing your application denied altogether (which is also recorded in your credit history.
Why would I have no credit history?
There are two main reasons why you may have no credit history:
- You’ve never applied for a credit card, personal loan or similar credit product, and have never signed up for utilities or a phone or internet contract (such as if you’ve always used a pre-paid phone), and your home’s gas, electricity, water and internet have been in the name of your parents or spouse.
- You’ve recently arrived from overseas and are yet to organise your finances in Australia. Any financial history you had overseas doesn’t count towards your Australian credit score.
What does having no credit history mean for me?
Having no credit history means you have no credit score. Having no credit score makes you an unknown in the eyes of banks and other credit providers – they have no easy way to calculate the risk that you’ll default on your repayments if they give you a loan.
While having no credit history is generally considered to be better than having a bad credit history, banks and credit providers may assume a “worst-case scenario” when someone with no credit history applied for a loan. This may make it harder to successfully apply for a loan with a low interest rate or special features and benefits.
Can I apply for a home loan with no credit history?
Yes, you can. In fact, borrowers with no credit history may find it easier to successfully apply for home loans than for other credit products, such as personal loans or credit cards.
This is because a home loan is secured by the value of the property. Even if you were to default on your home loan repayments, the bank or mortgage lender could repossess the property and sell it to recover its money, reducing the financial risk.
Keep in mind that with no credit history, you may need to provide your lender with extra evidence that you’re a reliable borrower when you make your application. This may include extra proof of income and savings for your home loan deposit. Other terms and conditions may also apply, depending on the lender’s eligibility criteria.
Remember that even if you don’t get the lowest interest rate when you first apply for your home loan, after a few years of growing your equity and improving your credit history, you may be able to refinance to another mortgage offer.
Consider contacting a mortgage broker for more help finding a home loan for borrowers with no credit history, and assistance managing the mortgage application process.