With the Royal Commission and recent changes to lending practices it’s more important than ever to understand your credit score and borrowing capacity.
Understand your credit score
Some of the nation’s largest financial institutions have all started collecting customers’ positive credit information, including how many open credit accounts you have, how much debt you are in, and whether you pay your bills on time.
Positive credit reporting came into force on 1 July 2018 and requires licensed credit providers to have at least 50 per cent of positive consumer credit data ready for reporting.
You should check your credit score to see if you’re in good shape to apply for a mortgage.
Under the new changes we will see the open date, the close date, the credit limit, credit type and 24 months of repayment history. This information will help lenders make more informed decisions regarding loan approvals.
The types of credit that will come under lenders’ microscope including credit cards, personal loans, home loans, car loans, bankruptcies and defaults.
Take control of your credit file by checking what is on there and knowing what your score is.
The single most important thing you can do
Stay on top of your repayments and make sure you always pay on time, you’ll get a tick every month you pay on time.
To find out where you can access your credit file visit creditsmart.org.au.
What is loan pre-approval and why is it so important?
Pre-approval is confirmation that you’re eligible to apply for a home loan up to a certain amount. You go through the entire loan application process, the lender will check your financial circumstances, and decide if you meet their lending criteria and can afford to repay a mortgage. At pre-approval they do not call employers to verify income, but they will look very closely at your spending habits and check your credit history to determine whether you are the type of customer they would like to lend money to.
A pre-approval usually lasts between three to six months and gives you clarity around your affordability, so you can refine your property search and act quickly when you find the property you want to buy.
There is heightened scrutiny around spending patterns
Lenders are now looking closely at spending patterns and will raise a query if your stated living expenses are different from your bank statements.
A client of mine was questioned over her last credit card statement showing a higher spend than her stated living expenses. We explained that most of her expenses were work related.
Another client was denied a loan because she had a default of $500 on a Vodafone account, which had been paid four years ago, again a work-related expense. She couldn’t even recall having a Vodafone account, but when she thought about the year she realised that her employer at the time had changed telecom providers and had missed a payment during the transfer. She applied to have the default removed from her credit file.
And how about a lender, when looking through bank statements saw a purchase at Baby Bunting on a credit card statement and questioned whether the applicants were being truthful about not having a dependant. The purchase was a christening gift for their god child.
This level of scrutiny was unheard of six months ago and has blown out processing times with lenders across the board.
Clean up your banking for six months before applying for a loan
Avoid unnecessary discretionary spending and big purchases in the six months leading up to applying for pre-approval.
If your statements show you’ve been overspending, you could consider reigning in your spending for six months to make sure you can present your best case six months’ worth of bank statements to the lenders.
If your credit score is low, you may find it difficult to get a loan, or you may be charged more for the pleasure. Do whatever you can to improve your score.
Apply for pre-approval today
Spring is here and it’s the busiest time of year in our property markets. If you’re ready to start your hunt for a new home or investment property, talk with me about pre-approval now. I’ll explain the process and lodge all the paperwork for you, then once you’ve got your loan pre-approved you can start looking for the right property for you.
Nicole Heales is an Authorised Representative No 312479 of Capstone Financial Planning Pty Ltd Australian Financial Services Licence No 223135 and a Credit Representative No 408933 of Crown Lending Pty Ltd Australian Credit Licence No 388279
Disclaimer
This article dated 16th September 2018 is given in good faith and is derived from sources believed to be reliable and accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such.
Information contained in this article is of a general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances.
We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this article.
Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives:
- gives any representation or warranty as to the reliability, accuracy or completeness of the information; or
- accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document.
