Will bad credit affect mortgage application - 1 solution
In New Zealand, will bad credit affect mortgage application? Well, it depends on how ‘bad’ the credit is. There are different levels of severity to bad credit which I’ll touch on in the following blog post.
As someone with personal experience, I nearly fell into the consumer trap of having huge consumer debt without acknowledging the major repercussions in the future of having easy access to the short term credit
I’ll share my story with you and if I didn’t correct this change, I would have a credit note on my file which will show as bad credit and it’ll affect my mortgage application in the future.
It all started back at University, specifically at the University of Auckland, and if you studied there, just outside the common area, or known as the quad near the stairs. At O week there was always the bank stalls, showering you with bank offers such as tertiary accounts and cheap low rate credit cards.
The key is the credit card got me, as someone with no job and just study and wanted to splurge a little bit keep, I really wanted a Kathmandu puffer jacket. This jacket was so popular nearly 1 in 3 students had one and I wanted one. It was priced at $400, I didn’t have that source of money, so I got a $500 credit card and walked myself down to the Kathmandu Shop. Tried on a bunch of jackets and in different colours. I ended up buying a grey one and in the large size (it was so oversized, what was I thinking).
I go to the till, and as she scans it, the price jumps out at $400. With my newly minted card, I go and swipe and as easy as that I am a proud newly in debt owner of a Kathmandu jacket!
Without knowing that the following month I had to pay a minimum of $10 on the credit card. I thought it was cheap as just pay it off over a long period of time. Little did I know once I made the minimum repayments I realised that I was getting charged interest on it too! So I was puzzled why it asked for a minimum repayment yet charge me interest. It turns out to have no interest charged on the card I need to repay it off in full each month!
So, in reality, what happened was I got myself into trouble and without a means to pay, I was incurring interest and what was a $400 jacket become nearly $500! As a result, I ended up borrowing from a friend and repaid the credit card, once it was done I chopped it up and never had a credit card until I got married.
From that point, that lesson taught me to buy things only if I can afford it!! And to this day a lot of people that I see who struggle to get a mortgage is because of this, consumer debt!! We’ve been programmed to just buy a lot of stuff and enjoy the NOW rather than buy it later, we want instant gratification similarly to social media we are chasing the likes and the followers.
That is why you need to watch how much you spend before going into too much debt. So every time you miss repayments or not defaulting it will impact your credit score and will impact getting a pre-approval.
I want to first address one of the myths about credit scores!
Do I need to build up a credit score for a mortgage or pre approval?
The answer is NO, this is a myth, the reason why we kiwis and even Aussies think like this is because we watch a lot of American TV shoes and movies, where they talk about getting a credit score and getting into debt.
The good news is you don’t need to get into debt to have a good credit score, so please stop making this mistake!
What is a credit score of NZ?
In New Zealand, your credit score will range between 0-1000. Most of the time if you have no credit history it’ll sit between 700-800, or it won’t even show up. Weirdly not 1000, don’t know why this is. But the average Kiwi will be around 300-800 credit score.
What is a bad or good credit score in NZ?
Usually, anything up to 500, is considered ‘good’ and anything below ‘300’ is considered borderline and your mortgage broker/adviser will give you advice on how to best tackle this if you are wanting to purchase a home and getting approval.
What companies use or look into my credit score?
There is a huge range of companies that look into this, but mainly it’ll be the finance companies where you are seeking a loan, but it’s not just limited to them, for example
- Landlords - they want to know if you can reliably pay rent
- Insurance providers
- Employers
- Lenders - want to know if you can repay the loan
How does my credit score change or get impacted?
Every time you do a credit check, even a simple check yourself online itll reduce your credit rating that is why the less you check it the better. Also if you are constantly getting loans out even credit cards it will reduce your credit rating because all these providers will run a check on you.
Secondly, this is a key for people who want to get pre approved, what the banks check is your credit score, this is a way to check your account conduct. So every time you submit your application to a bank i.e. bank number 5 it will drop your credit rating. So it is prudent that you identify the right banks first before submitting your application.
Hence why it is a great way to seek out a mortgage adviser to help you with this process as they can identify which banks are best suited for your needs. It isn’t about the interest rates when you’re deciding on the bank, it comes down to the product and ultimately the bank that is most likely to give you a pre-approval.
If you want to know how you get a pre approval and want to know how to grow your deposit you can read my other blog articles in the links provided.
How do I check my credit score in NZ?
There are 2 main credit companies that give you a comprehensive credit report these being
There are a whole bunch of free credit report websites out there, but these are the main ones that will give you the best overall credit score. Note those two are for a paid report.
What happens if my credit score is low in NZ?
If you resonated with my story above, then missing payments will reduce your credit rating!! So always pay on time and avoid missing any repayments.
These are the most common things that reduce your credit rating, in no particular order
- Your current/past partner is using your name to get a loan out and missed repayments
- Balance transfer such as moving from one credit card to another credit card (personally if it make sense to do some and reduce your interest rate to 0%, then it would be wise)
- Bad debt
- Apply for hardship loans
- Missed payments
- Applied too many short term debts such as personal loans, car loans, Hire purchases
- Afterpay/layby type purchases
- Defaulting on loan payments
- bankruptcy/insolvency
- Debt consolidation
There are a lot, that is why I always say to people only buy things that you can afford this would help you avoid getting into the debt trap. Because going in easy, coming out is very very hard, when interest rates are so HIGH!
So having a bad credit score will impact your ability to get a pre-approval for your home ultimately reducing the change of a mortgage for a property. Because the banks or lenders want to know how well is your account conduct. If it isn’t good, why should they lend you the money when you A) taken so much short term debt and B) missed repayments?
As the saying goes, anyone can lend money, but the hardest is getting the money back!
How do I increase my credit score in New Zealand?
First, get a credit report completed, then go through it and identify if it is correct because if there is something wrong that shouldn’t be on the file, you should go get it rectified.
Following that, avoid taking any short term debt out at all and just buying everything that you can afford or save until you can purchase it.
Reduce loans as quickly as possible and so this can improve your credit score to buy a home and ultimately get pre approval from the bank in New Zealand.
Will bad credit affect mortgage application?
The short answer is yes, any bad credit will affect your mortgage application in New Zealand. This the credit hurdle they look at your application, there are 3 components when they look at your application, these being
- LVR (deposit)
- Serviceability (Income)
- Account conduct (credit check)
However in saying that, it doesn’t mean a no or a decline from the bank there are many factors that the bank looks at when assessing your account conduct. For example
- How large is your short term debt
- How long ago was the default or bad debt
- What was the reason for getting into this bad debt
- What is the solution moving forward with the bad debt
So understanding this and presenting it to the bank will greatly improve your chances of getting approval. However, if you’ve got a short term debt of $50,000 then unfortunately not many lenders or banks will pre-approve you for a mortgage, because the debt is too high, unless you’re on super high income!
What happens if my bank declines my mortgage application due to bad credit?
It’s not all doom and gloom if the main tier banks don’t approve your loan, because you had a bad debt that was 2-3 years ago!
There are other lenders out there such as non banks and 2nd tier who help customers who have credit impairments. Your mortgage adviser will help guide you through the process and help you identify these solutions.
These other lenders help customers bridge the gap to get them into the main bank criteria, so for example if you have both the deposit and servicing capability, just the credit hurdle to pass. Then a non bank will help you, the downsides are that the interest rates are typically higher and depending on which lender you take, it can vary between 3-10%, it depends on multiple factors on where you sit on the interest rate scale.
Disclose your bad debt to your mortgage adviser!
Mortgage advisers are here to help you achieve your goal and find solutions for you, so it is imperative that you disclose everything that you know about your credit history to the adviser, that way they can help you get a mortgage approved with bad credit.
By doing so, the mortgage adviser will have a better chance of getting an approval for you. Non only will have a mortgage adviser be beneficial to you, it will give you a more confident and informed answer when getting a pre approval for your first home or investment property in New Zealand.
What happens if i’ve defaulted on my payment, will i get pre approved?
It depends on how long the default was ago, how much debt it was and the reason why you defaulted on your debt.
The only way to get rid of this default is to wait 5 years and it should be off your record. I would say that credit hurdle is one of the hardest ones to clear. Time will need to be on your side with defaults unless we have a very good explanation for the lender!
Again, similar to the point above, we can look at alternative banks/lenders who will be less strict on ‘credit’
What happens if i was bankrupt, will i get pre approved?
Bankruptcy is a very serious bad debt that the banks will look into and again it will be time that will help with your application. Usually around 5 - 7 years once you’ve been discharged from your bankruptcy. This will then give you a clean slate and apply to the banks, however, banks are very picky when lending to previous bankrupt clients.
Again, similar to the point above, we can look at alternative banks/lenders who will be less strict on ‘credit’
How long does bad credit last NZ?
It’s about 5 years before the credit files get cleared on the bad debt, therefore it’s imperative to not get into debt in the first place!
Summary - Will bad credit affect mortgage application
Will bad credit affect mortgage application, yes it will and it can have a drastic effect, and in some cases can hold you back many years before getting a mortgage. However, if you seek a mortgage adviser who can understand your situation it could be much quicker and easier than you think.
If you have a lot of short term debt, personally I’d recommend you look at consolidating your entire debt under one roof and then tackle it at once. That way you have a better chance of fighting the debt and get onto the property ladder sooner.
But the easiest solution to this as mentioned is just not getting into any debt at all!
It isn’t your fault too, we just weren’t taught this either from parents or at school, such as how does a credit card work or even how to buy your first home!
I’ve helped many clients who were in this position and ultimately getting them into homeownership. It can be done you just need to stay laser focus on reducing the debt.
If you got any questions, feel free to drop a comment below or you can contact me on will@simplyfinance.co.nz
Or you can book a time with me below for a free 10 min consultation.