When looking to buy a home in Australia, one of the most important factors lenders consider is your credit score. However, if your credit score isn’t where you want it to be, don’t worry. You may still be able to secure a mortgage even if your credit score is low. Let’s explore how your credit score impacts your ability to get a mortgage in Australia and what options you have.
How Do Credit Scores Work in Australia?
In Australia, credit scores range from 0 to 1,200, depending on the credit reporting agency, with Equifax and Experian being two of the most commonly used. Lenders use your score to assess your financial reliability. A higher credit score indicates lower risk for lenders, making it easier to qualify for a mortgage and secure better interest rates.
Here’s a general breakdown of credit score ranges:
- Excellent (800-1,200)
- Very Good (700-799)
- Good (600-699)
- Average/Fair (500-599)
- Poor (Below 500)
In most cases, lenders prefer applicants with a score of 600 or higher, but even if your score is lower, you still have options.
Can You Get a Mortgage with a Low Credit Score?
While it’s more challenging to get a mortgage with a low credit score in Australia, it’s not impossible. Some lenders are more flexible than others, especially if you have other strong factors, like stable employment or a large deposit. Here are a few options to consider:
- Non-conforming or Specialist Lenders: If your credit score is too low for traditional banks, specialist lenders—often referred to as non-conforming lenders—may be willing to work with you. These lenders offer home loans to people with lower credit scores or those who have experienced credit issues like defaults, bankruptcy, or late payments. However, be aware that non-conforming loans often come with higher interest rates or fees to compensate for the increased risk to the lender.
- Larger Deposits: Offering a larger deposit (20% or more) can help offset the risk posed by a lower credit score. This reduces the loan-to-value ratio (LVR), which makes lenders more comfortable approving your loan despite the credit score.
- Mortgage Brokers: Working with a mortgage broker can be particularly helpful if you have a low credit score. Brokers have access to a wide range of lenders, including specialist lenders, and can guide you toward the best options for your situation.
Steps to Improve Your Credit Score Before Applying for a Mortgage
If you have time before applying for a mortgage, consider taking steps to improve your credit score. In Australia, credit scores can change frequently depending on your financial behaviour. Here’s what you can do to boost your score:
- Pay Off Debts: Focus on reducing your existing debts, particularly high-interest debts like credit cards and personal loans.
- Make Timely Payments: Ensure that all your bills—whether they’re loans, utilities, or credit card payments—are paid on time. Late or missed payments can significantly lower your score.
- Limit Credit Applications: Avoid making multiple applications for credit cards or loans, as too many inquiries can negatively affect your credit score.
- Review Your Credit Report: Regularly check your credit report for any errors or inconsistencies. If you spot mistakes, work with the credit reporting agency to correct them.
Conclusion: Stay Positive and Explore All Options
Getting a mortgage with a low credit score may require more effort, but it’s achievable. Consider working with a mortgage broker to explore your options and potentially secure a non-conforming loan, or even improve your credit score before applying. Also, offering a larger deposit or taking steps to clean up your financial history can make a big difference in your chances of approval.
While lenders may see a low credit score as a higher risk, by showing responsible financial behaviour, you can still find the path to homeownership. Remember, every borrower’s situation is unique, so it’s important to get personalized advice based on your circumstances.
