Understanding the effect your credit score has on your mortgage application is super important when you’re planning to buy a property and need a mortgage.
Regardless of whether you’re a First Home Buyer, or considering an investment property purchase, credit scores are considered very seriously as is shows your financial reliability and so can have a major influence on what terms and approval of your mortgage are offered.
What Is a Credit Score?
A credit score measures how well you handle your money.
In New Zealand, scores go from 0 to 1000, with the higher your score, the better your ability to borrow looks to lenders.
You can view it as being like a financial report card that shows how good you are at paying back the money you’ve borrowed, how much you currently owe and if you’ve had any hiccups managing debt in the past.
Credit bureaus like Equifax and others put together the information on your financial report card for lenders to consider.
Lenders then use this score to judge how risky it might be to lend you money.
A higher score indicates lower risk, making you more likely to be approved for a mortgage with favourable terms.
Whereas a lower score suggests higher risk, which might make borrowing tougher and more expensive.
Understanding your credit score is the first step in managing your financial health and improving your chances of getting a mortgage.
Why Your Credit Score Matters
Your credit score matters because it directly impacts your ability to obtain a mortgage and the terms you’ll be offered.
Lenders use your credit score to assess your financial reliability and the likelihood that you’ll repay your loan. If you have a high credit score, you are more likely to be offered more favourable mortgage terms, which could save you thousands of dollars over the life of your mortgage.
If you have a low credit score, this can result in higher interest rates or even a decline of your mortgage application.
Your credit score can also affect your chances of getting a credit card, renting a place to live, or sometimes even landing a job. So, knowing your score and how it works, you can make smart moves to improve it if needed.
How Credit Scores Are Calculated
Credit scores are calculated using various factors from your credit history.
These factors include your payment history, which accounts for whether you’ve paid past credit accounts on time.
Your current debt levels also play a significant role, showing how much you owe, compared to your credit limits.
The length of your credit history is considered, rewarding longer credit histories with more points.
Additionally, the types of credit you have, such as credit cards, car loans, or mortgages, and your recent credit inquiries are also factored in.
Each of these elements is assessed differently, and credit bureaus like Equifax, use proprietary algorithms to generate your final score.
Good versus Bad Credit Scores
A good credit score typically falls between 700 and 1000.
This range indicates strong financial responsibility and a low risk of defaulting on loans. It provides a signal to lenders that you’re on top of your finances.
A score between 500 and 699 is middle-of-the-road, not terrible, but not great, either. You might still get a mortgage, but it might not be as attractive with the terms offered.
A bad credit score, below 500, signals high risk. If so, then lenders may either deny your mortgage application or offer terms with high interest rates and stringent conditions.
Knowing where your credit score falls can help you take the necessary steps to improve it, if need be, thus increasing your chances of securing a better mortgage deal.
How to Improve Your Credit Score
This can take time and consistent effort, but it can significantly enhance your mortgage options.
To start you will need to see your credit report from bureaus like Equifax, to identify any errors or inaccuracies, so you can dispute them if necessary.
Always paying your bills on time, every time, is also a big win for your credit score.
Wherever possible try to lower what you owe, especially on high-interest debts.
Avoid applying for new credit frequently, as each credit score enquiry can lower your score.
By following these steps, you can gradually improve your credit score, leading to better mortgage terms and greater financial stability.
Alternative Lending Options for Low Credit Scores.
If traditional banks are hesitant to approve your mortgage due to a low credit score, alternative lending options can be worth considering.
Non-bank lenders often have more flexible criteria and can be willing to work with borrowers who have less-than-perfect credit.
These lenders might offer specialised loan products designed for people with lower credit scores, though they often come with higher interest rates and stricter terms to offset the increased risk perceived by the lender due to the lower credit score.
By working with iLender this is where we can help you to make an informed decision that’s right for you by helping you to weigh up the pros and cons carefully to ensure it’s the right choice for your financial situation.
So, feel free to reach out if you need a hand, or just to have a chat about this, pick up the phone and call 0800 LENDER (536337) or email to [email protected]
