How your credit rating can impact buying a house in NZ

• Why your credit rating can impact your ability to buy a house
• What is a good or bad credit rating
• How to improve your credit rating

There’s a lot to think about when you’re wanting to buy a home in New Zealand and, in particular, the world of homebuying finance can be a particularly tricky one to navigate.

Among the most important things to get to grips with early on are how you’re going to save for a deposit, and how much of a loan from the banks you’ll be looking to get. These two things are linked together, and are also tied to the price bracket you’re looking at.

Did you know that your credit rating is one of the things that will likely impact how much you can borrow to buy a house? If not, it’s time to understand how this works, and what you can do if your current rating isn’t where you’d like it to be.

In Aotearoa New Zealand, credit scores are measured between zero and one thousand. Without getting too far into unnecessary details, your credit score is part of a bigger picture that details your history for borrowing and repayment. It will include how you’ve fared with things like overdrafts, personal loans, mortgages, credit cards, utility contracts and even your cell phone contract.

So, why does this matter when you’re looking to purchase property? A good credit score matters most when you approach banks to ask for pre-approval for a home loan. Unsurprisingly, when a lender loans you a relatively large amount of money, they want to be confident they’re going to see that cash again at some point. So, they look at a number of factors to predict how much risk they’re exposing themselves to by lending to you. And one of these factors is your credit score. Essentially, they’re working off the principle that your past financial record is a good indicator of how you’ll behave in the future. So, if your credit history is riddled with missed and late payments on things like credit card debt or utility bills, they will likely be concerned that you’re going to be similarly unreliable in making regular mortgage repayments.

Ultimately, having a bad credit rating will probably make it harder for you to get a home loan. In particular the interest rates that you will pay on any loan will likely be higher the worse your credit score is. This simply reflects the lenders’ increased concern about lending to you, meaning that they hike up the interest rates to help ensure they get their money back.

There’s no single figure cutoff that marks a good credit score from a bad one. In part, this is because your credit rating is just one factor among several that lenders will investigate prior to deciding whether to loan to you.

However, broadly speaking, it can be broken down like this:

• Between 700 - 1000: this is considered a good credit rating, and will please lenders. Of course, the higher you get, the better.
• Between 500 - 700: anywhere in here is considered average. As long as the other factors lenders look into appear okay, you will most likely be okay in getting a home loan.
• Between 300 - 500: if you’re in this bracket, most lenders will probably see some risk in loaning to you. This could manifest itself by the lender charging a higher interest rate or loaning you a smaller amount.
• Under 300: if your credit rating is below 300, you’ll struggle to find lenders who are willing to loan to you. That said, it’s still possible to get a home loan with a bad credit score, and we’ll talk more about this below.

There are three main agencies that will allow you to find out what your current credit score is. These are:

• Equifax: their My Credit File tool will provide you with a free online credit report within 10 days.
• Ilion: using their Credit Simple tool will instantly show you your credit score, but you do need to sign up first.
• Centrix: as long as you have a NZ passport or driver licence, Centrix will provide you with a free credit report the next working day. It can take a bit longer (5 - 10 days) if you’re using another type of ID.

Credit scores are based on several factors and events (e.g. a missed payment). It’s important to understand that the effect an individual event has on your credit score will diminish overtime. For example, if you were late paying a mobile phone bill in your teens, it’s unlikely to have a significant effect on your current credit score.

Below are the types of things that agencies such as Centrix, Equifax and Ilion will consider when providing you with your credit score:

• When your credit history started: usually, the longer the history, the better. However, if you have a short history, you can still get a high score if its contents are positive.
• Late or non-payments: these are the things to really avoid, as they will have the greatest negative impact on your credit score. Again, events further in the past will have less of an impact than those more recent.
• Bankruptcy: insolvency, whether current or past, can be a major red flag. Some agencies won’t publish a score at all if you have bankruptcy on your file.
• Applications for credit: your score might be impacted by the types of credit you’ve applied for previously, how often you’ve applied and when this happened.
• Changes of address: staying in the same place for longer will likely benefit your credit score. Lenders may ask why you’ve moved around a lot, if this is true for you.

If your credit score isn’t where you want it to be, there are a few things we’d suggest:

• Talk to a mortgage broker: discussing your credit score with a mortgage broker can be a good way to sound out your options and look for a route forward. Take some time to find a mortgage broker who you feel will really listen to you, and also be totally transparent about your position. This will allow them to present you with realistic options..
• Look at non-bank lenders: one option for buying a home with a poor credit score is to go with non-bank lenders. These lenders have a bit more flexibility by not being banks. For example, they aren’t subject to the Reserve Bank’s loan-to-value ratio (LVR) restrictions. Be aware that non-bank lenders usually charge higher interest rates and fees than traditional banks.
• Delay your timeline: this can be hard to do, if you’ve got your heart set on buying a home ASAP. However, if you have a bad credit rating, the best course of action may be to spend some time improving it (using the tips below) and come back to the table when you’re in a better position.

Make sure you make payments on time, or even early. Consistent on-time payments of bills will be a big help in improving your credit score.

Pay off any debts or loan repayments ASAP. This won’t only help your credit score, it will also save you money, by reducing your interest payments, that you can put towards your home deposit.

Maxing out your credit card isn’t good when it comes to your credit score, and the smaller your outstanding balance, the better. This isn’t a case of all or nothing. Paying off a bit of the balance is better than paying off none of it, if you can’t afford to clear it entirely right away.