Comprehensive credit reporting and home loans
Comprehensive credit reporting will make your mortgage approval easier if you have disciplined financial behaviour. If not, there are steps you can take.
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The way Australian lenders assess borrowers' risk levels is changing. Comprehensive credit reporting (CCR) allows banks and other lenders to get a much deeper picture of your finances. This means more accurate credit reports and fairer credit scores.
If you have good credit history this is good news. If you don't, it could limit your ability to get a mortgage. Here's what you need to know about CCR.
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How will CCR affect my mortgage application?
When lenders adopt CCR they can access a lot more information about your financial position and behaviour. This gives them more context around your finances, such as:
- The nature of your debts and credits, including credit limits on your cards.
- When your accounts were opened and closed.
- Your repayment history, including whether you made minimum repayments only, and whether repayments were made on time or not.
Theoretically, more data means more accurate decisions. Comprehensive credit reporting will let you establish a good credit rating faster. It lets good borrowers prove they're reliable enough to get a mortgage.
If you're a diligent saver with few debts CCR will make it easier for you to get a loan. But if you have a troubled credit past it's much harder to hide it. This could result in your mortgage application getting rejected, or your lender charging you a higher rate instead.
Can comprehensive credit reporting help me get a lower interest rate on my home loan?
It's hard to say for the moment. Comprehensive credit reporting hasn't been widely adopted by the mortgage industry. But the theory is that CCR allows for risk-based pricing, which means higher rates or penalties for borrowers with poor credit and possible rate discounts for good borrowers.
Given how competitive the mortgage market is now it's highly likely that some lenders will innovate in terms of risk-base pricing. It's already a common practice in the personal loans market.
How do lenders currently assess my credit?
The current system only records negative actions on your credit history. This includes your outstanding debts, defaults and credit cards, plus past bankruptcies, court judgements and credit enquiries.
This system makes it harder for people with good credit to establish themselves as trustworthy borrowers. If you've never borrowed a cent in your life and saved 80% of your income diligently for years you won't have any credit history at all. Comprehensive credit reporting aims to change this.
As the system is currently opt-in for most lenders some may already have access to your positive credit information. And the credit reporting agency Equifax is already using the system, meaning your report could already be influenced by the new system.
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How should I prepare for CCR?
The fundamental principles of credit reporting haven't changed. You still need to limit your debts, keep up with repayments, and avoid making too many credit enquiries. Court judgements and bankruptcies will still count against you.
The main thing is to make timely repayments on your debts. CCR scores you based on overdue repayments. The longer you take to repay a debt the worse it is. For borrowers with plenty of savings (or help from a parental guarantor) but poor repayment history, you might be in a worse position if your lender is using CCR.
You should also check your credit score for free through finder. This is important because there may be incorrect information in your report. You can challenge inaccuracies and tighten up your score before you apply, increasing your chances of getting approved for a loan. And finder's credit score if a soft enquiry, meaning it won't show up on your score or hurt your credit in any way.
When is CCR coming into effect?
This is a harder question to answer. CCR is now compulsory for Australia's Big Four banks (NAB, Commonwealth Bank, Westpac and ANZ). These banks currently have to share 50% of their data with credit bureaus. By 1 July 2019 they will need to have 100% of data available.
No doubt many smaller lenders will follow. The current barriers are related to time, energy and the cost of updating systems to enable CCR. This will be challenging but the benefits of CCR for lenders are clear.
For borrowers it's a little more complicated. But with diligent financial habits and preparation comprehensive credit reporting could well be beneficial for everyone.
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