Scoring a mortgage takes more than just having the deposit. And it’s not just the CCCFA (Credit Contracts and Consumer Finance Act) and/or the LVR (loan to value ratio) limits for banks that are holding back some first-home buyers and those wanting to trade up from getting a mortgage. A less than clean credit record can as well.
When OneRoof contacted Loan Market mortgage adviser Lisa Meredith, she had just finished a call placing a mortgage with a non-bank lender because the clients had black marks on their credit record and the bank had said no. Mortgage advisers can sometimes negotiate with banks, but not having defaults and other black marks in the first place is a better starting point for applicants.
Virtually every New Zealander has credit files. These are held by three companies, Equifax, Centrix and illion, and they include entries for loans, overdraft, credit cards, buy now pay later deals, payday advances, court-imposed fines and judgements and utility accounts.
Banks and other organisations such as employers, electricity providers and landlords get to see the number of loans, credit cards and other accounts a home buyer has, how often they have defaulted, and also positive information such as regular payments.
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The information held in a credit file reflects whether consumers are a good credit risk or not, says Angus Luffman, managing director of Equifax. “Lenders use credit files to make better credit decisions. By being a good credit risk, you have more options when you need them.”
Luffman says credit reports have four layers of information:
1. The person’s identity and address;
2. The total number of applications for credit, defaults, and public adverse information such as court judgments or bankruptcies;
3. The number of credit accounts held including types of accounts, when they were opened and the credit limits on each;
4. Repayment history for the past 24 months.
All of this put together forms a score, which can be the difference between a yes or a no on a loan application. A good score means a good credit record, and a better chance of getting the mortgage.
Borrowers can and should be checking their credit scores regularly, especially in the months and preferably years leading up to getting a mortgage. They can do that using the Yonda app for Equifax, CreditSimple.co.nz for illion, or Centrix. Each company may hold a slightly different set of information so it’s important to get all three reports.
Meredith says some clients find their credit file stands in the way of them getting loans from the main banks.
Credit card debts that are not managed or undeclared can be a problem for applicants. Photo / Getty Images
Even a few missed payments on a phone or electricity account can spell trouble. “I had one client who had no defaults. They had been late paying their bills and the bank [refused],” says Meredith. In that case she was able to find another bank that would lend, but it was an eye-opener for both the client and adviser.
When consumers become aware of their credit files they can be indignant that credit agencies hold private information about them such as how quickly they pay their electricity bill and how many buy now pay later deals they have.
“Unless you interact with it you may not know a lot about it,” says Luffman. But whenever businesses decide to lend money to consumers, their terms and conditions allow them to pass information onto the credit agencies. In return they get to check if borrowers are a good risk.
Consumers who find they have impaired credit are able to clean up their files. But it can take time. The agencies are required by law to remove any inaccurate information. Most other information held by the agencies drops off between two and five years.
Positive steps that can be taken in the meantime. “Get a copy of your credit file. Know what's on it,” says Luffman. “If you see something you're not clear on, contact the lender or contact us.”
She advises clients to close down unnecessary credit facilities they don’t use and to avoid
applying for credit because this adds entries to the credit file. Borrowers who are shopping around can ask the company to do a quotation inquiry, rather than a full credit check.
A good credit score can boost your chances of securing a mortgage, and ultimately a home. Photo / Getty Images
Luffman says that a credit file will benefit from consumers getting themselves in financial shape. “Have a budget and stick to it. Know what you spend, and know those commitments. Banks, particularly with the CCCFA, are now looking at that expenditure more closely.”
It’s not unusual for clients to have ignored their credit in the past, says Meredith. “A lot of people ignore [their debts]. They go, ‘Oh, I had no idea I owed $7000 on that credit card, or to such and such bank.’ Don't ignore it because it won't go away.”
If borrowers are aware of the contents of their credit file and are honest with themselves, mortgage advisers can put their case in the best possible light to the banks, says Meredith. A debt not declared to the bank looks bad. One where the adviser can show a plan to pay it off is less of a problem.
Where borrowers do fail the bank test, advisers sometimes recommend they spend a few months tidying up their credit file to increase their credit score, says Meredith. The other options may be to get a loan from a non-bank lender such as a finance company instead. That can cost 8% to 9% per annum, compared to around 5.5% on a two-year fixed rate with a bank.
