Co-author: Nicole Barratt
If you’re currently in the market for a home loan, you may have concerns about how a lender will view your application. Income, occupation and age are all factors that could potentially affect your ability to secure a home loan. However, your credit score can also be an important factor your lender may take into consideration when evaluating your loan application.
For this reason it may be a good idea to refresh your knowledge of what your current credit score is, and think about whether you could be doing more to maintain and/or improve it. Your credit score could potentially be the defining factor when it comes to your creditworthiness – in other words, how suitable you are to receive credit.
How does a lender figure out my credit score?
A lender will calculate your credit score based on several factors, including the amount of credit you accessed in your life, who you accessed it from, and how good you were at paying it back. Different lenders will use different algorithms to calculate your credit score, whether they enlist the services of credit reporting agencies or use their own in-house algorithms.
While there can be many different ways of calculating credit scores and overall creditworthiness, each lender will most likely take into account a similar list of factors, including:
- Your current financial situation
- Current income
- Spending habits
- Your borrowing history
- The number of times you’ve applied for credit
- How much credit you applied for
- Your repayment habits
- Your employment history
- Your address history
This means if you’re gearing up to start looking at home loans, you should probably be conscious of the things listed above, and of whether any of them might appear on your credit report as less than stellar. You’ll also want to make sure you’re looking at home loan products that offer you the best value possible – you can compare home loans to see if you can find the right options for you with Canstar.
I have a poor credit score – can I get a home loan?
If your credit score isn’t as high as you’d like it to be, it doesn’t necessarily mean that you can’t get a home loan. However, you may only be eligible for certain home loans, with potentially higher interest rates and less features. There are lenders out there who specialise in home loan products designed for people with less-than-perfect credit scores. Their products may not be as attractive as some other home loans, but they could be a starting point worth consideration.
If you exercise financial diligence, after a few years of being smart with your money and making all repayments on time, your credit score may improve to a point where you could refinance your home loan with a more attractive interest rate.
My home loan application got denied – now what?
If your home loan application is unsuccessful, it does not mean you are out of options. That being said, it may not be the best idea to immediately apply for a different home loan from another lender. One of the things that can affect your credit score is how many times you’ve recently applied for any sort of credit or loan, along with whether you were successful or not.
This means your credit score may actually be lower after an application for a home loan is denied. You may want to consider taking at least a few months to work on your credit score, by exercising financial prudence and keeping your head down budgeting wise. While improving your credit score may be easier said than done, it’s not impossible by any means.
Could deferring my home loan or missing a repayment affect my credit score?
Currently, a number of banks in NZ have introduced mortgage payment relief in the form of loan pauses or temporary deferrals in response to the economic fallout of COVID-19. The government worked with retail banks to offer a Mortgage Repayment Holiday scheme, allowing all people with residential mortgages affected by COVID-19 to defer repayments for up to six months.
If you weren’t in arrears when you were granted the deferral, your mortgage holiday will not negatively affect your credit rating. But during your holiday period your loan will still accrue interest, which in turn will then compound, so after the loan period has finished you’ll face a larger sum to pay off.
In normal circumstances, a default on credit can occur if you fail to pay an expected debt like a credit card repayment or loan. If your debts remain unpaid, your provider is likely to get in touch with a credit rating agency to report the default, which can then show up on your credit report.
The most important thing you need to do if you are in mortgage stress is to talk to your lender. If you tell your lender you are in financial hardship, which means you’re having trouble meeting your monthly repayments, they are obligated by law to assist you in setting up an affordable repayment plan.
How can I improve my credit score?
Improving your credit score is not something you can do overnight – but what you may be able to do in a short period of time is assess your current financial situation, and put together a plan to help guide you towards a better credit score.
This plan could include:
- Figuring out your regular expenses
- Putting together a disciplined payment schedule for any current debts
- Building a budget that allows you to save a regular amount every fortnight/month while still making any debt repayments necessary
- Setting a reminder for paying bills
- Consider consolidating your debt, if that is beneficial for your personal situation
- Putting the brakes on any further discretionary spending
Changing your credit score for the better can be a challenge, but the sooner you start, the sooner your credit score might start creeping up!
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