Watch your credit habits, Tougher lending on the way

Watch your credit habits - Tougher lending on the way

New credit and privacy laws could make it harder and more expensive to get a home loan so get your credit habits in order now, writes Jackie Pearson.

October 27, 2009

A new national scheme for regulating credit is to be phased in between now and July 2011. It is designed to give consumers more protection from dodgy lenders by ensuring all credit providers adhere to responsible lending practices.

This sounds like good medicine for parts of the credit industry, but watch out for the side effects and make sure you’re ready for lenders to find out much more about your past and current credit habits next time you apply for a home loan.

What will the new rules do?
The new credit laws include a national licensing scheme for credit providers and brokers and will transfer responsibility for credit away from state governments to the Commonwealth.

For the first time mortgage brokers, reverse mortgages and margin loans will be properly regulated. You’ll also be protected by the new laws if you borrow to buy a residential investment property, not just a home to live in. And it should be easier to get a change to your credit contract on the grounds of hardship.

The Federal Government has indicated it will also change the Privacy Act in 2010 to give lenders more access to information about the number of loans you have, how much you’ve borrowed, your credit limits and repayment history.

Will the new rules make it easier to get a home loan?

Both the Australian Bankers Association (ABA) and Abacus (representing mutual credit unions and building societies) have criticised the new National Credit Code for being too “heavy handed”, forcing credit providers to go through more red tape when approving home loans. They say this could push out the amount of time it takes to approve home loans.

There’s also debate about whether the changes to the Privacy Act will make it easier or more difficult to get credit.

Will home loans cost more?

There’s also a range of views about whether the new laws will make credit products, including home loans, more expensive.

Consumer advocates fear some lenders will take advantage of having more information about your credit habits as an opportunity to persuade you to move credit cards and loans from other providers to them as part of your approval process for a home loan.

Abacus and ABA have also argued that loans may end up costing more because of the additional administrative requirements under the new national system.

How should you prepare for the new rules?

  • Get your credit habits and history in order. If you haven’t done so for a while, contact organisations like Veda Advantage to find out your credit file.
  • Always try to pay your bills on time and don’t make too many applications for credit. Keep records of what you earn and spend and do your homework about the approval process before applying for a home loan.
  • It also pays to shop around and look for the loans that provide the best flexibility, features and price. That way if you have the best products in the market you’ll know when a new lender with access to your credit habits is offering you a better deal.

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Learn more about home loans

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

Mortgage Calculator, Deposit

The proportion you have already saved to go towards your home. 

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How much information is required to get a rating?

You don’t need to input any information to see the default ratings. But the more you tell us, the more relevant the ratings will become to you. We take your personal privacy seriously. If you are concerned about inputting your information, please read our privacy policy.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow.