Even with property prices reaching something of a plateau in many regions across Australia, cautious home buyers will want to have a thorough understanding of their finances before applying for a home loan. However, many fail to realise that the banks are similarly diligent about doing their homework, and have a number of checks in place to protect themselves against bad debtors.
How do they achieve this? Most credit providers will take a wide range of items into account before approving a home loan, including your employment history, income, expenses and a slew of other influencing factors. While all of these will affect your mortgage application to some degree, perhaps none are as impactful as your credit rating. Click here to understand more about credit rating.
It can be frustrating to find out that your home loan application has been denied due to some financial oversights you made years ago. Thankfully, there are a number of ways you can do to improve your rating and increase your chances of a mortgage approval:
1. Pay your utility bills on time
Your ability to pay the power bill on time can affect your credit rating.
It might seem as though your phone and power bills have little to do with the home loan approval process, but as Veda pointed out, failing to pay for your utilities can negatively affect your credit rating. A debt totalling more $150 or more, which is at least 60 days overdue, can impact your rating under the Privacy Act 1988.
What's the key takeaway here? Simply put, pay your utility bills when they're due. Set aside time each month to settle your outstanding debts and leverage technologies such as internet banking and automatic payment systems to ensure your accounts are paid off before they harm your credit report.
2. Always keep on top of your loan repayments
A proven ability to make loan repayments on time can boost your credit rating.
Defaulting on a loan or missing a payment are perhaps the two things that will have the largest impact on your credit rating and discourage banks from approving your home loan. Many people struggle to consistently meet their financial obligations, with Veda finding that around 2.1 million Australians will be at risk of defaulting on their credit at some stage in the next year.
Fluctuations in your personal finances are inevitable and sudden changes can put pressure on your ability to make loan repayments. However, for the sake of your credit rating, it's vital that you do so. Establish a budget that allows for moments of hardship and set yourself payment due date reminders on digital and physical calendars to ensure you always make your loan repayments on time. Our home loan calculator can help you find out the minimum repayment of your loan.
3. Limit your number of credit applications
Credit cards are useful tools, but only apply for a new one when you absolutely need it.
Provided that you always pay it off on time, regularly using a credit card is a great way to start building a positive credit rating. However, applying for multiple lines of credit can actually harm your rating and make you less attractive to lending institutes.
Demonstrate your reliability as a debtor by only signing up for new avenues of credit when it's absolutely necessary.
4. Consolidate your debt
Consolidating your debt into a single loan can help you manage your finances more effectively.
If you've got yourself into a position where you have multiple loans to pay off at high interest rates, Veda suggested that you can simplify things by consolidating your debt into a single loan. Doing so could help cut the amount of interest you pay while also reducing the amount of admin time necessary to keep track of the repayments.
If consolidation isn't an option, you may need a different approach. It's usually a good idea to tackle the loan with the highest interest rate first, though this will depend on the size of your debt, late fee penalties and other factors specific to your circumstances.
5. Think about your spending patterns
Reshaping your spending habits is the ultimate way to take control of your credit rating.
The most effective way of improving your credit rating is to reconsider your relationship with debt. While making a complete overhaul of your spending patterns overnight is impossible, there are incremental steps you can take towards achieving healthier financial behaviour.
A combination of living within your means, reducing the number of luxury purchases you make and sticking to a strict budget can help you stay on top of your loans, improve your credit rating and ultimately increase your chances of receiving a mortgage approval.
In summary, your credit rating is an assessment of your debt history over the last five years and helps the banks determine whether they should approve your home loan application. If your credit report is looking weak, take solace in the fact that there are ways to increase your rating. Paying your utility bills, effectively managing your loans and reconsidering your spending patterns can all boost your rating and help you along the path to purchasing the home of your dreams.