How does mortgage affect credit score, and credit score affect mortgages?

In Australia, credit reporting bureaus collect a variety of information about your borrowing history from banks and other financial institutions.

As part of Australia’s Comprehensive Credit Reporting, both your positive and negative repayment history information is reported and included in your credit report. Thanks to this more in-depth reporting, your credit score is impacted in more nuanced ways.

To keep track of how your mortgage affects your credit score, get a copy of your credit report from a credit reporting bureau, perhaps even for free.

Does applying for a mortgage affect your credit score?

Taking on debt always comes with some risk, and you need to make sure you can afford to repay the amount you owe, whether to a credit card company or a lender. Not repaying your debts or bills on time is reflected in your credit score and can make it difficult for you to borrow money later. This is why even applying for a new source of debt, such as a mortgage, can affect your credit score. For most lenders, your credit score is one of the ways they can understand your level of responsibility when dealing with money, whether through a large mortgage or an average utility bill.

When you submit a mortgage application, the lender will ask one of the three credit reporting bureaus - Equifax, Experian, or Illion - for your credit report. This contains the details of all reported credit transactions involving you, including credit enquiries, debts, repayments, late payments, and defaults. The lender can then use all this information to estimate the risk of you failing to repay the loan, which helps them decide whether to approve your mortgage application.

You may want to check your credit score before applying for a home loan. This will help give you an idea beforehand whether a lender will consider your application favourably. Remember that your credit score is unlikely to change if you check it, but mortgage inquiries can affect credit score.

Do I need a credit score to get a mortgage?

Having a credit score, especially a high score, can certainly improve the chances of getting your mortgage application approved. What’s more, if your credit score is in the excellent range, you may even qualify for lower interest rates. Consider asking the lender how credit score affects the mortgage rate when you discuss the loan with them.

Each credit reporting agency follows a different credit scoring policy and has different score categories, which are still quite similar. The below range is the one adopted by Equifax and may help you understand the rating:

Tier 1: Your credit score is between 833 and 1,200 and rated excellent.

Tier 2: Your credit score is between 726 and 832 and rated very good.

Tier 3: Your credit score is between 622 - 725 and rated good.

Tier 4: Your credit score is between 510 and 621 and rated average.

Tier 5: Your credit score is between 300-509 and rated below average.

You should remember that your credit score is a moving indicator of your financial health, which means it can increase and decrease based on your transactions. Accessing your credit report is one way of learning about the positive or negative impact of each of your financial obligations. Credit reporting agencies are required to give you access to your report for free once every 12 months.

A low credit score simply means you may need to work on improving your score. Some ways you can do this are ensuring you don’t have too much outstanding debt and repaying your bills on time. You may find you don’t have a credit score if you haven’t ever taken on debt or if none of your transactions has been reported.

How to get a mortgage with bad credit score

Most lenders may be wary of approving loans for borrowers with low credit scores. Some lenders may be open to having a discussion and trying to understand the reasons for the low score. If you have errors on your credit file like a wrongly included negative incident or the same incident included more than once, you can have them corrected by contacting the credit reporting agency.

Sometimes a lower score may be caused by a fairly old repayment issue that is still included in your file. This can occur because of the reporting bureau’s policy on how long incidents stay on your file. You may want to discuss these issues with the lender to ensure they don’t affect your mortgage application. For instance, you can show that you’ve consistently tried to improve your score.

Even if your credit score is genuinely low, some lenders may offer you a mortgage. They may just not let you borrow as much, may ask you to pay a larger deposit, higher fees and possibly a higher interest rate. However, if you can pay off the loan in time, it can help to improve your credit score.