The Impact of Credit Scores on Switching Home Loans | SA Home Loans

17 June 2024

The Impact Of Credit Scores On Switching Home Loans: What You Need to Know

As a homeowner, you'll know that your financial history and credit score played a role in any credit you applied for in the past, including the application for your current home loan. Part of your preparation for such an application may have involved examining your credit score. By assessing your credit score before applying for a home loan, you were able to anticipate its influence on the terms and conditions you qualified for.

Now that you've had your home loan for a few years, you may not have considered the benefits of reassessing your credit score. Determining your updated credit score could prove beneficial if you’re seeking a better deal by switching to another home loan provider. Here's what you need to know about the relationship between your credit score and the home loan switching process.

The significance of credit scores in home loans

A credit score is a number that benchmarks your credit status and is based on a number of factors, such as payment history, types of credit accounts, and credit inquiries. Financial lenders use your credit details to develop a unique formula for calculating your score. Positive financial decisions can boost your credit score, while negative ones can lower it. There's no such thing as a single perfect score, and most people's credit scores typically fall into a range – ranging from poor to excellent.

Your credit score doesn't obligate lenders to give you credit. However, it can still influence the outcome of your credit application. It’s important to remember that your financial choices can impact your credit score, causing it to fluctuate over time. There's a good chance your current credit score is very different to what it was when you first applied for a home loan. Assessing and enhancing your score can significantly help you qualify for a more favorable home loan, potentially resulting in lower interest rates and better repayment terms.

Factors influencing credit scores

It's important to remember that each home loan provider uses unique calculations to determine a person's credit score, so your current home loan provider could score you differently from the ones you want to switch to. Here are some factors that home loan providers tend to consider when calculating people's scores:

  • Payment history: This includes whether you make credit repayments on time, or it could warn lenders that you are an habitual late payer.
  • Credit owed and used: The amount you owe (including interest) impacts your credit score. The percentage of credit you use in proportion to what's available to you also matters.
  • Credit history length: Your credit score may benefit positively from a longer credit history, provided you’ve demonstrated good conduct and i.e. have been low risk
  • Your credit mix: A combination of short;and long-term, revolving and non-revolving credit products such as store accounts and vehicle finance, can indicate that you understand that different credit products suit different needs and use them appropriately.
  • Financial habits: These can be positive or negative. For example, paying more than your minimum monthly repayments or constantly applying for new short-term credit products.

Effects of credit scores on home loan switching

You may want to switch home loan providers for many reasons, including dissatisfaction with poor customer service, the belief that you are paying too much interest or the desire to have a home loan with more favourable or flexible repayment terms. Whatever it is, having an optimised credit score can positively impact your application outcomes.

In the time since you first applied for and were granted a home loan, you may have paid off accounts in arrears and refrained from applying for new ones. You may have established a history of repaying your credit obligations in full and on time. You could also have moved to a higher-paying job, resulting in your total debt obligations comprising less of your take-home salary after deductions than before. These factors can improve your credit score, suggesting to a home loan provider that your risk of defaulting on your payments will be low and that they should consider offering a better interest rate than what you're paying now.

It means you could effectively end up paying less per month (or over your entire repayment period), saving you money or shortening your repayment period.

Strategies for improving your credit score

It's important to remember that improving your credit score isn't an exact science and also not something that you can change overnight. Here are some ways you can do this over time:

  • Cultivate positive debt: If you haven't applied for finance before, your credit score can be low because you don't have enough financial history for score calculations to draw one. You can improve your score even if you don't need credit by applying for a credit card or store card and using these to make small purchases that you pay off in full every month.
  • Communicate with your credit providers: Your circumstances can change in a way that could negatively impact your ability to honour your debts. Communicating any financial difficulty to creditors could help you qualify for a repayment plan that keeps your accounts from defaulting, which can appear on your credit record.
  • Set limits: Using a large percentage of the credit available to you can suggest you're financially stretched or heading there. As a rule of thumb, avoid using more than 50% of a credit product available to you.
  • Monitor your score: It's an unfortunate reality that people can commit fraud using your details, logging transactions that lower your credit score. Additionally, credit lenders can sometimes (although rarely) make mistakes. Checking your credit report regularly will help you pick up any unfamiliar or fraudulent transactions being made in your name.

If you feel like you need more guidance about the home loan switching process or how your credit score impacts it, SA Home Loans has a team of expert mortgage specialists who can help you. Contact our team on 0860 2 4 6 8 10 or request a call me back to help you troubleshoot your credit score and get a better idea of what you could qualify for by switching your home loan provider.

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