How to shop for a mortgage without hurting your credit

Buying a house is likely the biggest financial commitment you’ll make in life. So, it’s important to ensure you’ve got all your ducks in a row before applying for home loan pre-approval, to avoid negatively impacting your credit score.

After all, the most competitive credit products are typically reserved for excellent credit borrowers, so it makes sense to prioritise your credit file as you reach this significant financial milestone.

Rushing the process and submitting a home loan application before your financial health is in its optimal state could increase your risk of being knocked back, leaving you without a home loan, and with a recent enquiry on your file.

With this in mind, consider the following tips to avoid hurting your credit when shopping for a mortgage:

1. Boost your credit score 

First things first, it’s important to have an understanding of how your credit score is currently tracking.

Whether you need to improve your credit score or simply work towards retaining an already excellent one, there are certain behaviours you can implement to help you achieve this. Some of these include:

• Regularly checking your credit score – Credit reporting bureaus such as Experian and Equifax are required to grant you access to a free copy of your credit file once every 12 months. Taking advantage of this will allow you to ensure there are no discrepancies on your file, and to have them corrected if there are.
• Making your repayments on time – If you have existing debts, such as a credit card or personal loan, making sure you meet your regular repayments on time can be beneficial to your credit file. Consider setting up automatic payments through your internet banking to take the guesswork out of it.
• Paying down existing debts – If you have the ability to make extra repayments on your loans or pay more than the minimum amount due on your credit card, this can be advantageous in multiple ways, including reducing the amount of interest you’ll pay and demonstrating responsible credit behaviours.

Consider visiting RateCity’s credit score hub for more information on credit scores and to check your credit score for free.

2. Practise good spending and saving behaviours

To ensure they are following responsible lending obligations, mortgage lenders will thoroughly assess your finances – and this typically includes going through your bank statements.

Lenders ultimately need to determine whether they are confident you will be able to service the home loan you are applying for, and your bank statements can provide important insights into this. They may look at the kinds of purchases you make, your saving habits, and your overall living expenses.

Lenders typically require you to submit two to three months’ worth of bank statements, which means the sooner you start fine-tuning your spending and saving behaviours, the sooner you’ll be prepared to apply for a home loan. 

3. Set aside money for additional expenses

Mortgage lenders may also take into consideration whether you have enough money saved to not only cover the deposit, but also any additional costs such as applicable government charges, legal fees, property valuation fees, and lenders mortgage insurance (LMI).

If you don’t have enough set aside to cover these expenses when you submit your home loan application, you may risk having it rejected.

4. Apply for a realistic amount

It should go without saying that a lender will only approve you for a loan that they have reason to believe you can afford. So, it’s important to understand exactly how much you can realistically afford to borrow before you apply.

Lenders determine your borrowing power by comparing your total assessable income to your total living expenses, including existing debts. Some lenders will also factor in a buffer of around 15 per cent of your income (to cover any unforeseen circumstances) before they calculate the amount you can afford to borrow.

Additionally, the Australian Prudential Regulation Authority (APRA) requires lenders to ensure borrowers can repay their loan at 2.5 per cent more than the current ongoing interest rate – or the ‘serviceability floor’ rate set by the bank (whichever is higher). This is to allow for the fluctuation of variable interest rates.

To make it easier for you to calculate how much you may be able to borrow, RateCity’s borrowing power calculator can provide you with an estimate in a few simple steps.

5. Consult a mortgage broker

Implementing all of these tips should help you strengthen your home loan application, limiting the risk of having it knocked back and hurting your credit score.

However, if you feel that you could benefit from having the help of a professional to guide you through the home loan application process, it might be worth considering consulting a mortgage broker.

A broker can assist you by assessing your finances, reviewing your documentation, helping you with your application, and finding loans that suit your requirements.

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