Navigating the mortgage process can be both exciting and overwhelming. You’re preparing to buy your dream home, but you might be unsure about how to improve your chances of getting the loan you need.
Whether you’re a first-time buyer or looking to refinance, there are key steps you can take to increase your borrowing power.
Let’s explore what lenders look for and how you can make sure your finances are in good shape.
By making a few smart moves, you’ll be in a stronger position when it’s time to apply for your mortgage.
Start with Your Credit Score
In Australia, lenders check your credit score first, and it heavily influences the mortgage terms you’ll get. Think of it like a financial report card: a better score gives you more mortgage options, usually with lower interest rates.
Australia’s major credit reporting agencies—Equifax, Experian, and illion—assign credit scores based on your financial behaviour. These scores range from 0 to 1,200. A score above 700 is considered “good,” and above 800 is “excellent.” A strong score shows lenders you’re a reliable borrower, giving you better loan conditions and more borrowing power.
Lenders in Australia also look at your credit history, which typically covers two years of repayment behaviour. They’ll check for any defaults or serious infringements, which can stay on your file for five to seven years, depending on how severe they are.
Here’s how you can improve your credit score and increase your chances of getting approved for a mortgage in Australia.
Never Miss a Payment
Paying your bills on time is one of the easiest ways to maintain or improve your credit score in Australia. This includes everything from utility bills and credit card payments to personal loans.
Missed payments can stick around on your credit file for up to five years, and even one or two late payments can make you look less reliable to potential lenders.
A good idea is to set up direct debits or automatic payments for recurring bills to ensure nothing slips through the cracks. Your payment history is a major factor in determining your credit score, and keeping it clean is crucial.
Keep Your Credit Utilisation Low
Credit utilisation refers to how much of your available credit you’re using at any given time. In Australia, like many other countries, high credit utilisation can negatively impact your score.
Lenders see high credit utilisation as a potential red flag, indicating you might be over-reliant on credit. By keeping your balances low, you’re showing lenders that you can manage your finances responsibly.
Limit Credit Enquiries
Every time you apply for a new credit card, loan, or even store credit, it leaves a “hard enquiry” on your credit file.
Multiple credit enquiries in a short period can signal to lenders that you’re either desperate for credit or taking on too much debt, which can lower your credit score.
In Australia, each enquiry stays on your file for five years, and too many in quick succession can hurt your chances of getting a mortgage. Before applying for any new credit, ask yourself if it’s really necessary.
Manage Your Debt Wisely
When you’re applying for a mortgage in Australia, one of the first things lenders will look at is how much of your income is already going towards debt.
In simple terms: if too much of your income is being used to pay off things like credit cards or personal loans, it makes lenders nervous about giving you a big home loan.
Focus on Paying Off Expensive Debts First
Not all debts are created equal. If you’ve got multiple debts, like a credit card, personal loan, or car loan, some of them are more expensive than others because they charge higher interest rates.
If you can’t pay off all your debt right away, focus on the ones with the highest interest rates first (credit cards are usually the worst offenders).
Credit cards in Australia can charge interest rates of 18-22%, which is a lot! By paying those off first, you’re not only freeing up more money each month, but you’ll also look better to lenders when it’s time to apply for a mortgage.
Be Careful About Taking On More Debt
In the months leading up to applying for a mortgage, try to avoid taking on any new debts. If you open a new credit card, car loan, or personal loan, it can make it harder to get approved for a mortgage.
Lenders in Australia also consider something called mortgage stress—basically, they want to make sure you can afford your mortgage even if interest rates go up. So, if you already have a lot of debt and then you add a mortgage to the mix, they might worry you’ll struggle to keep up with your repayments.
Small Changes, Big Results
Your spending habits are just as important as your credit score and debt levels. Lenders want to see that you’re in control of your finances, which is where a solid budget comes in. Plus, having more disposable income available when you apply for a mortgage can increase your borrowing potential.
Track Every Dollar
Take a close look at where your money goes each month. You might be surprised at how much you’re spending on things like takeout or subscriptions. Tracking your expenses can help you find areas to cut back.
Cut Unnecessary Costs
Tightening up your budget doesn’t mean giving up everything you enjoy. But cutting back on non-essentials before applying for a mortgage can free up cash flow and help meet lender requirements.
Be Prepared and Boost Your Borrowing Power
Getting ready to apply for a mortgage doesn’t have to be stressful if you take the right steps. Improving your credit score, paying down debt, and sticking to a budget can go a long way toward getting you the best possible loan terms.
By making these smart financial moves, you’ll set yourself up for success and be in a strong position when it’s time to approach lenders.
Every Financial Situation is Different
One thing to keep in mind: no two financial situations are exactly alike.
What works for one person might not work for someone else. Lenders have different criteria, and things like your employment history, savings, and even how much you’re putting down as a deposit all play a part in their decision-making process. That’s why it’s important to have a tailored strategy that fits your unique circumstances.
Need help fine-tuning your financial strategy before applying? I’ve got you covered.
Let’s have a chat about where you’re at right now and how we can get you mortgage-ready
Cheering you on!
Certified Financial Planner®, Director
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Important:
This is not tax advice. Your personal objectives, needs or financial situation have not been considered when preparing this information.
The information contained in this update has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs.
You should seek advice before making any decision regarding any information, strategies or products mentioned to consider whether that is appropriate to your own objectives, financial situation and needs.
Current as of 12th June 2024.