What is the minimum credit score for home loans in Australia?

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Credit scores— are just a three-digit number, right!? It sounds very simple but are they? Speaking of truth, understanding the ins and outs of maintaining a good credit score, especially for home loans, can be a complex undertaking. Yes, and you might wonder why is that? Well, because society is becoming increasingly dependent on credit scores for almost every financial decision they make. For instance, when buying a car or a house! Plus, it is lender’s number #1 pick when it comes to assessing your ability to repay a loan on time. Not trying to scare you, but did you know that nowadays, credit health and debt history can even impact non-financial life, such as selecting your dating partners!? So it's an obvious fact that a good credit score is crucial for the best of both worlds in determining your financial health, borrowing power, relationships, and whatnot.

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Don’t worry! We’re here to help. In this article, we will dig deep into the most commonly asked question, what is a good credit score for home loans in Australia? Why does it matter, and what could you do to improve your score?

Let's get to the business, shall we?

What is the lowest credit score to buy a house?

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Before we dive into the average credit scores for recent homebuyers, the logical step would be to check the minimum credit score for a mortgage in 2021 and how it can impact you buying a house.

If you are wondering exactly that, then there are two key things to note! - First is, it depends on the type of mortgage. For example, not everyone is looking to buy a house or an investment property. Perhaps you’re looking to renovate your home and wish to borrow money for this reason. In this case, you can either apply for a home equity loan or a home equity line of credit to finance the money you need to complete your renovation.

The next thing is the uncertainty associated with minimum credit score to get a home loan in Australia, as most lenders don’t publish their credit criteria externally. As a result, the minimum credit score required for a home loan can differ depending on who you apply with. For example, every bank have their own scoring systems. Commonwealth Bank, for instance, has a five-tier credit scoring system:

• 1 or 2 means you’re a great customer.
• 3 means your loan will be assessed normally, based on its merits.
• 4 or 5 means it’s very likely your loan will be declined.

Other major banks like NAB or Westpac have their own scoring models, meaning there is no one magic number that 100% secures a home loan. As a result, it’s quite impossible to say with confidence that if you pass with one lender, you will definitely pass with all others!

Now that you are aware of the above two key factors, you can start preparing yourself for the next step, which is the most common conditions lenders look for to determine whether you even qualify for a loan.

• The minimum scores required to secure a home loan typically hovers between 650 and 700 (refer to the next section for a detail breakdown), and
  

• Lenders consider beyond just your credit score. For example, the type of borrower you are (age & residency), your current income, savings, expenses, how much assets you currently have, your employment history, and your debt-to-income (DTI) ratio. Plus, they also have their own internal credit evaluation yardsticks.
  

Wait! Wondering what does DTI ratio mean and how can it benefit your credit rating? Well, in general, the DTI ratio tells how much of your monthly gross income goes toward paying debts, which indicates how much you spend on your recurring debts and liabilities. These include credit cards, existing loans, tax debt, etc. That is why the lower the DTI ratio, the better it is. Plus, the lenders usually look for no more than 40 to 43% of your monthly gross earnings in Australia. This is because they often believe these borrowers with a small debt-to-income ratio are more likely to manage monthly payments successfully. Therefore, if you have a low credit score, then a low DTI can work in your favour and give the lender more confidence to offer you the loan.

What credit score do I need to get a home loan?

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Again, always remember your credit score represents your ability to repay a loan on time and as for in Australia, your scores will be somewhere on the scale between Zero and 1,000 or 1,200. Zero means poor, 1,000, or 1,200 (also known as perfect score) means excellent.

But that’s just the tip of the iceberg! You must be obviously eager to find out whether your score can get you your dream home, isn't it?

As such, there are three major types of credit bureaus in Australia, and each of them calculates their scores differently. Take a look at these benchmarks below, and then compare them to your own credit score to find out where you stand.

Illion: The overall range is 0-1000 where 0-299 is low, 300-499 is fair, 500-699 is average, 700-799 is very good, and 800-1000 is excellent.

Experian: The overall range is 0-1000 where 0-509 is low, 510-621 is fair, 622-725 is average, 726-832 is very good, and 833-1200 is excellent.

Equifax: The overall range is 0-1200 where 0-549 is low, 550-624 is fair, 625-699 is average, 700-799 is very good, and 800-1000 is excellent.

Nevertheless, it’s extremely rare to see scores higher than 900 or lower than 200, not saying it’s impossible to get over 900. Still, if you manage to get a score as high as 900, our award winning partner, NOW FINANCE, Australia's leading go-to personal loan provider to help our members improve their financial wellness. Yes, you can get a range of Australia's leading loan products such as:

• Car Loans

• Debt Consolidation (roll all your debts into one)

• Wedding Loans

• Home Renovation Loans

• Boat & Caravan Loan

• Medical Loans

• Travel Loan

• A range of other purposes

Not only do they have loans with attractive interest rates but also flexible payment plans starting from 18 months up to 7 years. Guess what? There is no fees attached + getting a quote won't hurt your credit score too! How cool is that? WeMoney eligible members can also get a free rate quote and enjoy rates as low as low as 6.95% (6.95% Comparison Rate*) for excellent credit. If you are keen to explore, get your personalised quote now.

Nevertheless, if your credit rating falls below 500 for Experian & Equifax and below 300 for Illion, you are considered a high risk to get approved for a home loan. And there is no way you can guarantee a loan at this minimum point. You can still keep hoe on some credit providers because they may still consider granting a home loan with this score (read the next section for more info), but usually, it comes with a price, which in this context I mean at a significantly higher interest rate.

Thus, good scores show lenders your capacity to repay a credit card, business loans, or home loans. In contrast, bad ones can demonstrate you might be a higher risk and could result in extra interest charges, getting knocked back, or, worst case, your loan application being rejected.

Can I get a home loan with a bad credit let’s say with a 550 credit score or lower in Australia?

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Yes– it is possible to get a loan with a bad credit score, but again this will come at a cost! The first thing to be mindful is that the big banks are unlikely to consider your application – even if you have a strong legitimate reason. However, as gloomy as it may sound, there is still room for hope. Even with bad credit that is as low as between the 450-550 range (or refer to the above section on poor credit score on each credit type), you can still root for an alternative option known as the bad credit mortgage. It’s basically a financial instrument offered by more than 150 home loan lenders in Australia, both: non-conforming or specialist lenders specifically for consumers who don’t quite meet the threshold for a standard home mortgage.

This brings us to the next question! What is the difference between a traditional mortgage and a bad credit mortgage?

Similarities are their application procedures! You make a down payment, obtain a mortgage, and then make regular repayments on the loan’s principal and interest.

There are a few differences, though - With the traditional method per se, it is almost impossible to get a loan if you have late payments on a credit card, a credit default, bankruptcy, or more. Because lenders use a potential borrower’s current credit score for evaluation. So, any black marks a lender finds on a credit history report indicate that the borrower is at a higher risk of missing a payment or defaulting on the mortgage.

On the other hand, just because a potential homebuyer has a low credit score, that doesn’t immediately disqualify them for a mortgage. Lenders still want to ensure that people can achieve homeownership, even despite bad credit history. This is where a bad credit home loan comes to the rescue.

Take a look at some of the typical features of what a bad credit home loan includes:

• Lower loan-to-value ratio: The LVR determines how much of a deposit you’ll need as a down  payment for a mortgage. A bad credit home loan means borrowers will need to make a deposit larger than the typical 20% of the home’s value.

• Higher fees: A variety of up-front and on-going fees accompany any sort of mortgage, but a bad credit home loan will typically have even higher fees than normal. This may cover application fees, valuation fees, conveyancing fees, or even legal fees.

• Higher interest rate: In addition to having to pay larger fees, borrowers with poor credit scores may also have to incur larger interest rates.
  

By receiving a bad credit mortgage and then making regular on-time payments, borrowers with poor credit can even boost their credit scores over time. Likewise, if you manage this loan well for a few years, you can refinance and move over to a big bank.

Note: while all of them are happy to offer ‘prime’ mortgages, only a small minority are willing to provide bad credit mortgages.

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How is the credit score calculated for a home loan? And, can I improve my credit score using this information?

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Understanding your credit score and how it affects home buying contains a huge amount of the following data that the lenders use to assess your financial situation objectively. Moreover, the information provided in this section will also serve as a checklist to help you keep your credit report healthy. For example,  you can make amendments wherever it is needed to restore, maintain and/or improve your credit score. Let’s check it out!

1. Your Credit (Repayment) History

According to Australia's comprehensive credit reporting requirements, here are 10 pieces of information that will be recorded on your credit file and, thus, try avoiding these harmful habits that can negatively hurt your credit rating.

• Missing your credit or loan repayments

• Paying your bills late, missing payments or unpaid bills

• Making too many loan applications for credit

• Missing your Afterpay or other ‘Buy Now, Pay Later’ payments

• Payday loans

• Applying for balance transfers frequently

• Bankruptcy listing or court judgments

• Forgetting to update your contact details

• Not fixing errors on your credit report

• Not regularly checking your credit report
  

So if you are currently facing a bad credit situation, you can overcome the adverse event by offsetting unhealthy accounts for your credit rating. For example, if you pay bills late, start making sure all of your next repayments are on time or figure out a way to ensure you do not repeat the mistakes you made in the past.

2. Your relationship with the bank

If you even miss one or two payments let’s say in the last 12 months, this alone is enough to result in your loan being declined.

3. Stable living

If you have been living less than six months at your current address, or working in the current job for less than six months, then you are most likely to end up with a poor credit score.

4. Asset & liabilities position

Either you should be someone who has a large sum of money in your saving accounts or a high income earner with a considerable amount of assets. Otherwise, again you will have a poor credit score.

Likewise, if you owe more debts than assets, you most certainly will fail the banking scoring system.

5. Loan to value ratio (LVR)

The Loan to Value ratio (LVR) is the amount of your loan compared to the value of your property.

LVR is calculated by dividing the amount of the loan by the value of the property. For example, if the property is worth $250,000 and you have a deposit of $50,000, the LVR will be 80%. ($250,000-$50,000)÷$250,000 = 80%.

Therefore, if you’re borrowing more than 90% LVR then you will need to be in a strong financial position to pass the bank’s credit score.

6. Loan size & loan purpose

Larger loan sizes are typically higher risk than smaller loan sizes. For example, having a high loan amount may not hurt your credit, but it could raise your debt-to-income ratio and lead to denied loan applications. For this reason, if you’re borrowing over $1,000,000, then it will be more difficult to get a loan as lenders will be highly skeptical about granting you one.

In addition, the most common loan purposes ranked from the lowest to the highest risk are purchasing a home, purchasing an investment property, refinancing, business purposes, consolidating debt and undisclosed purposes.

7. Borrowing power

Mortgage brokers view people who can easily afford the loan as being a much lower risk. As a result, use Commonwealth bank’s  borrowing power calculator here to see if this will be a problem for you. Otherwise, you can use another mortgage calculator by any bank of Australia.

Considering the above, if you're in any financial trouble regarding a home loan approval, without further ado, talk to a credible financial advisor to help you out.

Are you struggling with mortgage repayments due to COVID-19?

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The Australian Banking Association (ABA), which represents 22 member banks, confirmed on July 31 2020 that six-month home loan deferrals wouldn't affect customers' credit scores. Yes, customers can seek financial difficulty help through this COVID deferrals initiative. For example, customers who have lost their jobs or significantly lost income due to pandemics do not need to worry about their credit rating throughout this applied period. Also, banks during this time will not report the repayment history. However, after the hardship period ends, banks will "determine how to report the repayment history information" according to the ABA.

At the same time, ABA members and other players are communicating these financial assistance packages independently, with many announcing changed circumstances for personal and business financial products. They include waiving fees on early term deposit withdrawals, interest rate freezes on loans, options to defer or restructure home loan repayments, and emergency credit card limit increases.

So if you want to save your credit rating, avoid failing the lender's credit criteria, or need any support on home loan repayments, check out the site here! You can also select your bank to find out what hardship support options are available.

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End of story: Monitor your credit score and improve your financial health

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Download our app

Banks and lenders know your credit score, so why shouldn’t you? Try WeMoney app to find out your credit score for free online anytime any day at your convenience. It also provides you with constant updates each month where you can track and monitor any changes with extra features like credit accounts/relationships, easy to understand insights, repayment on time, credit inquiries, and negative events. You can also add important repayment dates to our calendar to avoid late payments and dues. Plus we've recently partnered with Now Finance and Loans.com.au to offer you a fuss free flexible personal loan with no fees attached, or impact on your credit file.

Listen to our Podcast

To learn more about credit scores, take a listen to Episode 3 of We Talk Cents. Your hosts Dan & Blaize dive into what a credit score is, why it’s important and what factors impact your score for better or for worse. To take a listen check out the link here.

Read our latest featured articles

Watch Our Founder Dan Javevski On Channel9 News Busting Myths About Credit Scores here. Plus WeMoney was recently featured in 6PR 882 News Talk, check out the full podcast on how you can revive your credit score here.

Outside resource

You’re also entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus in Australia, visit Moneysmart.gov.au for more information.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

Things you should know

Applications for finance are subject to Now Finance’s lending and approval criteria. Terms and conditions may apply. No establishment, account keeping or early repayment fees will apply to all new personal loans. Charges such as default or enforcement costs may apply if you do not comply with the terms of your loan. Settlement times may vary depending on individual circumstances. Loan repayment terms range between 18 months to 7 years with interest rates ranging from 6.95% p.a. (6.95% p.a. comparison rate*) to 17.95% p.a. (17.95% p.a. comparison rate*).

About Comparison Rates

The Comparison Rate is designed to help you understand the overall cost of the personal loan. It combines the amount of the loan, loan term, repayment frequency, interest rate, fees and charges into a single rate to show the total true cost of the loan. The comparison rates for the Now Finance loans are based on a loan of $30,000 over 5 years.