What is the minimum credit score I need for a home loan?
There’s no set minimum credit score you need to be accepted for a home loan in Australia. Lenders take a variety of factors into account when assessing your application, like your income, debts, and regular expenses. While they also consider your credit score, they generally don’t say publicly what they deem to be an acceptable score.
Having a lower credit score may raise a few flags for your lender though, as your credit score typically demonstrates how trustworthy you’ve been as a borrower. If you have a low score due to missing credit repayments, defaulting, or becoming bankrupt, a lender could likely be more hesitant to give you a home loan.
How does a lender figure out your credit score?
Lenders generally check your credit history using information provided by a credit reporting agency, like Equifax or Experian. These companies gather data from credit providers and use it to calculate your credit score, however they generally use different algorithms, so your score may vary depending on which provider has calculated it.
If you’ve never used a credit product, like a credit card, personal loan, or buy now pay later service, you may not have a score. If that’s the case, don’t worry. Most home loan lenders will understand if a mortgage is the first credit product you’ve applied for.
How is my credit score calculated?
Your credit score (or credit rating) is calculated based on the information in your credit report, which details how you’ve handled credit in the past, including how much money you’ve borrowed, your repayment history, and the number of applications for credit or loan products you’ve made. You’ll usually be given a number which places you in a particular range like ‘Excellent’ or ‘Good’.
For example, Equifax uses a credit score range from 0-1,200, broken down into the following bands:
- Below average (0-459)
- Average (460-660)
- Good (661-734)
- Very good (735-852)
- Excellent (853-1,200)
While lenders will generally look at your credit score, they’re likely to be more interested in your credit report and the information included within than the headline number. If you’re unsure of what your credit score currently is, you can check it for free with Canstar or via the Canstar App.
If you're considering applying for a home loan, or your score looks lower than you’d expect, it might be a good idea to glance over your credit report to check for mistakes. You can usually request a copy of your report from a credit reporting agency every three months free of charge. If you think there’s a mistake on your report, you can contact the agency directly to try to get the error fixed, also free of charge.
What else do lenders look at when assessing your application?
The most important thing a lender will consider when assessing you for a home loan is your ability to repay the debt without falling into financial hardship.
While most lenders will have their own methods, they’ll generally consider things like:
- Your income, as well as other earnings from things like investments or rental income.
- The debts and credit limits you already have on the likes of credit cards, personal loans, and buy now pay later accounts.
- How long you’ve been in your current job and how stable it is.
- Your regular expenses like groceries, rent, utility and phone bills, and transport costs.
- The number of dependants you have, like children and other family members you’re financially responsible for.
- The size of your deposit, as well as how much you have in savings and assets.
I have a low 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 you can’t get a home loan. However, it could be more difficult to get approved. You may have to rely on other aspects of your application and may only be eligible for certain home loan products from particular lenders.
Keep in mind that if you apply and are declined, the application will be recorded on your credit history. Having a large number of applications on your credit history, especially rejected ones, can damage your credit score.
Speaking with a financial advisor or counsellor may help you to understand whether applying for a home loan is a good idea for your current circumstances.
How can I improve my credit score?
Improving your credit score isn’t necessarily something you can do overnight. But assessing your current financial situation and putting together a plan to help you better your score is something you can do straight away.
This plan could include:
- Figuring out your regular expenses and what, if anything, is tripping you up financially
- Putting together a repayment schedule for your current debts
- Reducing your credit limits where possible
- Building a budget that allows you to save a regular amount every week, fortnight, or month while still making any necessary repayments
- Setting reminders to pay your regular bills
- Considering debt consolidation, if it’s beneficial for your circumstances
- Putting the brakes on further discretionary spending and large purchases that aren’t necessities
- Checking your credit report for inaccuracies
- Chatting to an independent, confidential financial counsellor, like one from the National Debt Helpline (NDH). They can assist you free of charge, and can be contacted on 1800 007 007
Changing your credit score for the better can be a challenge, but the sooner you start, the sooner your score might start creeping up.
