Can You Get a Home Loan with a Low Credit Score?

When it comes to purchasing a home in Australia, one of the most significant factors lenders consider is your credit score.

Understanding Credit Scores

Credit scores range from 0 to 1200, and they reflect your creditworthiness based on your repayment history. The higher the score, the better your credit health.

The Impact of a Low Credit Score

A low credit score typically tells the lenders that you may have had difficulty managing credit in the past. This could result from late payments, defaults, bankruptcy, or other financial missteps. As a result, lenders may view you as a higher risk and therefore decline your application.

However, a low credit score doesn't automatically disqualify you from getting a home loan. Below are a few of options:

Options for Home Loans with a Low Credit Score

1. Specialist Lenders: Specialist or non-conforming lenders cater to borrowers who may not meet the standard criteria of traditional banks. These lenders are more flexible with their lending criteria and may offer home loans to those with low credit scores. However, be prepared for higher interest rates and fees, as these loans are considered higher risk.
2. Credit Repair and Financial Coaching: Some business offer credit repair services that can help you address financial issues on your credit report. They can also provide financial coaching to improve your credit score moving forward.
3. Alternative Documentation Loans: For self-employed individuals or those with irregular income, alternative documentation loans (alt-doc loans) can be an option. These loans consider different forms of income verification, such as business activity statements or accountant declarations, rather than relying solely on credit scores.

Final Thoughts

Securing a home loan with a low credit score is challenging but not impossible.

Remember, it's crucial to seek professional advice tailored to determine your specific needs and objectives.

What is an Offset Account?

An offset account is a transaction account linked to your mortgage, which offsets the balance against your home loan. Essentially, the money in your offset account reduces the amount of interest charged on your mortgage.

How Does It Work?

The offset account functions like a regular savings or transaction account that comes with a debit card. You can deposit and withdraw money as needed. The main difference is that the balance in the offset account directly impacts the interest you pay on your home loan.

Interest is calculated daily, so the more money you have in your offset account, the less interest you’ll pay on your mortgage.

For example:

• Mortgage Balance: $400,000
• Offset Account Balance: $50,000
• Interest Charged On: $350,000

Advantages of Having an Offset Account

1. Interest Savings

The primary advantage of an offset account is the potential for significant interest savings. By reducing the amount on which interest is calculated, you can save thousands over the life of your loan.

2. Reducing Loan Term

With lower interest payments, more of your repayments go towards the principal balance, helping you pay off your loan faster.

3. Financial Flexibility

An offset account offers financial flexibility, allowing you to access your funds whenever needed. It operates like a regular transaction account, providing liquidity while still benefiting your mortgage.

Considerations Before Opening an Offset Account

• Offset accounts usually come with an annual fee or slightly higher interest rate.
• Multiple debits from the offset account will impact on interest saved due to interest being calculated daily.   

Using an offset account effectively will help you save on interest and reduce the term of your loan.

Navigating the world of finance can be daunting, but the right resources can provide invaluable guidance. Here are 3 of my favourite reads:

1. "Money School" by Lacey Filipich

"Money School" by Lacey Filipich is a fantastic resource for those looking to achieve financial independence and freedom. Filipich, an experienced financial educator, shares her journey to financial independence and provides practical tips on how to save, invest, and build wealth.

2. "The Psychology of Money” by Morgan Housel

“The Psychology of Money” explores the complex relationship between people and money, delving into the psychological factors that influence financial decisions. Housel emphasizes that financial success is more about behaviour than knowledge, highlighting how emotions and personal experiences shape our financial habits.

3. "Unf*ck Your Finances" by Melissa Browne

Melissa Browne’s "Unf*ck Your Finances" is a no-nonsense guide to personal finance. Browne, an accountant and financial adviser, breaks down financial jargon and provides straightforward advice on how to manage money effectively.

Self-education can provide you with the knowledge and tools needed to manage your finances effectively. Whether you're just starting on your financial journey or looking to refine your existing strategies, these books offer valuable insights and practical advice to help you achieve your financial goals and objectives.

Happy reading!

What is a credit score?

Your credit score is a numerical representation of your creditworthiness, used by lenders to assess the risk of lending you money. In Australia, credit scores range from 0 to 1,200, with a higher score indicating better creditworthiness. This score is influenced by various factors, including your borrowing history, repayment behaviour, and the types of credit you've used.

If your credit score is low, below are steps to improve it:

Steps to Improve Your Credit Score

1. Check Your Credit Report Regularly
   • Reviewing your report helps you identify any inaccuracies or fraudulent activities that could negatively impact your score.
2. Pay Bills on Time
   • Consistently paying your bills on time is crucial. Late payments can significantly harm your credit score. Setting up automatic payments or reminders can help ensure you don’t miss due dates.
3. Reduce Outstanding Debt
   • High levels of debt relative to your income can lower your credit score. Aim to pay down existing debts and avoid taking on new debt unless absolutely necessary.
4. Limit Credit Applications
   • Each time you apply for credit, it leaves a mark on your credit report. Frequent applications can suggest financial distress and lower your credit score. Only apply for credit when you really need it.

Improving your credit score is a proactive step towards better financial health, providing you with more favourable borrowing options and lower interest rates. A high credit score can also open doors to significant opportunities.

If you want to create wealth, having a savings plan is critical. Savings not only provide a safety net for unexpected expenses but also provides significant opportunities.

Advantages of Having Savings

1. Emergency Fund: Life is unpredictable, and unforeseen expenses can arise at any moment. Whether it’s a medical emergency, car repair, or job loss, having savings can help you navigate these challenges without incurring debt.
2. Financial Independence: Savings empower you to make decisions without relying on credit.
3. Future Planning: Whether it’s buying a home, planning a wedding, or securing your retirement, savings allow you to set and achieve long-term goals.
4. Peace of Mind: Knowing that you have a financial cushion can significantly reduce anxiety and stress. This peace of mind allows you to focus on your personal and professional life without constantly worrying about money.

Tips to get started

1. Create a Budget: This will help you identify expenses. If you don’t know what your expenses are, how can you reduce your spending?
2. Set Savings Goals: Whether it’s a specific amount or a percentage of your income, having clear goals can motivate you to save consistently.
3. Automate Savings: Set up automatic transfers to your savings account to ensure you save regularly without having to think about it.
4. Reduce Unnecessary Expenses: Identify and eliminate non-essential spending. This might include dining out less frequently or cancelling unused subscriptions.
5. Increase Income: Look for ways to boost your income, such as freelancing, part-time work, or selling unused items.

The importance of savings cannot be overstated. It provides financial security, peace of mind, and the ability to achieve your goals. Make savings your #1 priority!

Do you know what the number one skill is to help you earn more money?

Invest in yourself.

A lot of people do not invest in themselves. Once they finish school, Tafe or university their learning stops.

When was the last time you read a self-improvement book? I have asked a lot of friends this question and the answer is generally never.

Your success is determined by how much you invest in yourself.

One thing that I am passionate about is self-learning. I have never stopped learning even after university. I set a goal every month to read 3 self-improvement books. Books on goal setting, people skills, finance, communication.  I attend courses, I watch webinars. Anything that I can get my hands on.

I suggest try and read at least 1 book a month. Below is a list of some of my favourite books

• How to change – Katy Milkman
• The 5 love languages – Gary Chapman
• Limitless – Jim Kwik

Invest in yourself and I promise, your wealth will grow as well.

I was asked a great question last week from a client. “What financial advice would you give my 18 year who has just started his first full time job?”

It really got me thinking. What would I tell my 18-year-old self about money.

Below are my 3 money lessons:

1. Start investing now.

Don't wait until you're in your 20s or 30s or 40s or 50s. Start now because the longer your money is invested the better it is for you. It’s time in the market not timing the market that will make you wealthy.

2. Buy as many assets as you can.

My first major purchase was a car just like most 18-year-olds. Unfortunately a car costs you money, it's a liability. A car will never make you money. Focus on buying assets that generate money such as shares and property. Then allow your investment returns to buy the car for you.

3. Take more risk.

Most 18-year-olds live with their parents which means they can save a lot. The money is sitting in the bank account not earning a lot. Sitting there until they figure out what to do with it. Figuring out what to do may take months if not years. All that time, your money is not earning anything for you. Take risks and do something with the money. Always ask yourself how can I grow my $1. If it doesn’t work out, you have time on your hands. Take the risk.

By following the above I promise your future self will thank you.

If you want to create wealth this year then stop this one habit.

Stop increasing your spending when your income increases.

The above habit will make you broke!

When people receive a raise or a bonus they automatically go out and buy that expensive item they have always wanted. Whether that’s a new car, a new watch, new clothes, a bigger house. By doing this you will always live paycheck to paycheck.  

Just because you now earn a higher income does not mean you have to increase your expenses. Just because you can now afford to buy a bigger house does not mean you have to buy that house!

To create wealth always look for ways to reduce your expenses. Make sure your income is always greater than your expenses.

When was the last time you did a budget? A budget is a great way to help you reduce your expenses.

A budget can be a daunting process even embarrassing at times because you will finally know where all your money is going. When I talk budgets to clients I get them to do the following:

1. Make a list of all their expenses. Categorise as many expense items as possible. Be very descriptive.
2. Go through the list and write down how much you have spent on that item last month. If you don’t know look at your bank statements.
3. Look at each expense item and determine how you can reduce that expense.
4. Stick to the new budget

I personally like daily budgets. Where everyday you look at how much you spent and compare it to your monthly budget. I highly recommend!

By sticking to your budget, you will soon notice your bank account increasing. How exciting!