Home loans for people with a fair/average credit score

• Learn what is considered a ‘fair/average’ score in Australia.
• Understand how credit scores are calculated.
• Discover home loan options for a fair credit score and their pros and cons.

Our credit scores influence the type of home loans — and other types of credit — available to us. Most of the population will fall into the category of having a ‘fair’ credit score.

If you know you have a fair or average score, this guide is intended to help prepare you for what lies ahead in the application process.

What is a fair/average credit score in Australia?

The organisations that assign you a credit score are known as credit reporting bodies (CRBs). To do this they use your personal financial records1. Australia has three main CRBs:

• Equifax
• Illion
• Experian

Experian and Illion score between 0 and 1,000, while Equifax Australia scores with an upper limit of 1,200.

Since they score slightly differently they will have a different range for what is considered fair and average. However, all three CRBs work on a tier system. To clarify, ’fair’ is the tier below ‘average’.

It is worth mentioning that the Australian average lies between 500-700, and anything under 500 is viewed as bad credit. As a result of these differences, there is no unanimous answer to this question but rather a guide.

Why do you have a fair/average credit score?

To know what may result in a fair or average score, we need to look at the inputs. That is, what financial records are used to calculate a credit score. Secondly, it’s important to know what is labelled ‘high risk’ according to CRBs and lenders. Some high-risk indications are:

• Having a short credit history or being very young. If you’ve taken out very little credit or have not made any big purchases, CRBs cannot draw conclusions about your habits. Additionally, many young people exhibit more risk statistically than older individuals.
• Filing for bankruptcy or serious credit infringements. A serious credit infringement is when an individual (with overdue debt) has left their last known address but has not informed the credit provider5. These both indicate that someone may struggle to make repayments if they take out credit.
• Too many credit inquiries. If you apply for credit too often, it can reflect poorly. Additionally, applying to less reputable lenders can count more heavily against you.
• Repayment history. If you make late/inconsistent repayments or miss them entirely, your score will drop significantly.
• Changing jobs or addresses too often. This can show income instability.

What is the minimum credit score for home loans in Australia?

Every lender has a different set of criteria they look for in a candidate. Unfortunately, that means there is no one answer to this question. Some mortgage providers will value a credit report, while others may see their internal credit analysis as more important.

That being said, there is an average score that lenders look for. In Australia, that average lies between 500 to 700. From this conclusion, we can say that the minimum credit score is 500. However, not every lender will have the same attitude and may reject an applicant with this score.

How to check your credit score

The three main CRBs – Experian, Illion, Equifax – are a traditional choice for most people. You can get a once-off report from them for free once every six months. However, consider how beneficial it is to track your credit score over time. In this way, you can be notified of changes (for better or worse) on a monthly basis.

This can be motivating if you are putting in the effort and then slowly see your score climbing up. At the very least you should check your credit score at least once a year. It will help you know where you stand. It’s totally free and just requires you to provide proof of identification.

How is my home loan application assessed?

Your credit score will play a single role in your application. The lender will look at your finances as a whole. They need to know that you can pay back the loan. To determine this they will look at your income, expenses, assets and liabilities.

They will look specifically at your non-essential spending habits. Consider cutting down on these and increasing your savings. You will also need some type of collateral. Most of the time this is the property itself.

If the applicant can’t pay back the loan, the property can be repossessed and auctioned off by the lender. That is why they will inspect the property before supplying the loan. If the property is not in demand/easy to sell, they may reject the application.

Lastly, the deposit you are willing to provide can help your application. The larger the deposit, the better your odds.

Can you get a home loan with a fair/average credit score?

Fair and average credit scores lie on two different tiers. The ‘average’ score will look much better to lenders, since these candidates may not struggle to get a home loan from banks. It does, after all, fall under the Australian average.

For those with a ‘fair’ credit score, it can prove more difficult. However, there are still options available, they just may lie with a niche lender. One such option is a non-conforming home loan.

What are non-conforming home loans?

Non-conforming home loans don’t conform to the major lender’s loan criteria. It is an option for applicants with below-average credit scores. It is also better suited to the unconventionally employed.

These loans usually come with a higher interest rate. They also often require a larger deposit to be made to mitigate risk.

What lenders offer non-conforming home loans?

Across the board, the major banks and loan providers will not offer non-conforming home loans. They have a large enough client portfolio of individuals that have a high enough credit score.

Of the 150 home loan providers in Australia, a fraction of them offers non-conforming home loans. They are referred to as specialist lenders. Some of them include:

• Pepper Money
• HomeStart Finance
• HSBC

Pros and cons of non-conforming home loans

The verdict

It can be disheartening to not have an ideal credit score. On the other hand, it can be empowering to take charge of your finances and actively improve your score. If you cannot wait to do so, then rest assured that there are still home loan options available to you.

Just keep in mind that whatever loan type you decide on, you still need to shop around for the best rate. Keep applications to a minimum and always compare what's available.