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.

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. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

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 are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.