Will a limited credit history affect my home loan application?

Will a limited credit history affect my home loan application?

If you’re approaching a bank for a home loan, then odds are you’re asking for an amount of money that has six figures or more. It’s a significant sum, and before banks deposit it into your account, they want to know they’ll receive their investment back -- with interest too.

A credit history brings some method to this process by allowing them to evaluate the risks posed in both issuing a loan and how much money should be issued.

There’s some criteria banks will ask for from the get go. And it’s the kind of foundational stuff found in a credit history.

Show us the income you’ll use to make repayments

Commonwealth Bank, Westpac, NAB and ANZ all require payslips as part of their home loan applications. Nor are they alone in asking for some record you’re regularly earning money, as most financial institutions will require proof of an income.

If you hold a savings account with one of these banks -- and your income is deposited into it -- then you’re already on your way to building up your credit history. Otherwise, they’re going to request about two or three payslips to establish a pattern that your income is recurring.

A bank may ask if there’s any bills in your name too, such as an internet bill or a utility, as they can be used to establish your credit history, but not having any isn’t necessarily a deal breaker.

I just turned 18. Or I’ve just come from overseas.

There’s a few reasons why you might not have a credit history. You may have just turned 18 -- the legal age to sign a contract in Australia -- or might be new to the country.

But they’re not the only reasons. Many credit histories are built on relatively small bills and utilities, such as an electricity or phone bill, and then grow as you sign up for bank accounts, credit cards and loans.

If you haven’t held any of these in the past, then it’s possible your credit history could be a blank slate, and this could make it harder for you to both secure credit and secure it on the cheap.

The credit you’re hoping to secure will take into account the scope of your credit history. The bar for a credit card with a modest balance is a lot easier to clear than that of a mortgage, for instance.

Why do you need to have a credit history?

We’d like to think our word is our bond, but in the finance world, that’s simply not enough. It’s for this reason we use credit histories to calculate credit scores.

A credit history documents all of your finances, your transactions and your defaults. This information is summarised into a credit score businesses can use to evaluate whether they’ll lend you money or provide a service.

What benefits are there in beefing up my credit history before securing a loan?

Businesses want customers who have a track record of reliably repaying their debt. It’s for this reason they’re more likely to offer customers with a better history more competitive deals that could save them money.

Depending on the credit reporting agency, your credit score will vary between zero and either 1000 or 1200, according to the government’s MoneySmart website. The score correlates to a five point rating system: excellent, very good, good, average and below average.

Lenders will use this scale to calculate the risk involved in lending you money, and price the credit they issue you accordingly.

What can I do to improve my chances of securing credit?

Banks, credit agencies and service providers may take inventory of your assets and liabilities before they decide they want to do business with you.

Take stock of what you own that’s of value, including your car, furniture and electronics. These assets demonstrate you can stash money away to make a decent purchase, and perhaps more importantly, that you have assets that potentially could be used as security if you default on the loan.

If you have any outstanding debts for services, like rental repayment or a phone bill, tend to them. It’s best to let some time pass before lodging any applications too to demonstrate you’ve found your financial footing again.

Do I need to have savings?

Yes, because in almost all cases, you’ll need a down payment to secure the mortgage. This is generally from 5 to 20 per cent of the property’s value.

And if you live in a state that charges stamp duty, you’ll likely need thousands of dollars in savings on top of your deposit.

Think of these as property goals. Saving a deposit and the cost of stamp duty are two good indicators that you can afford home ownership.

It’s likely the banks think of it this way, too.

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Learn more about home loans

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.

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.

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.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.



Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002