Mind over Mortgage: Credit scores and Your Mortgage

8 December 2019

How your credit score affects getting your first mortgage.

On last week’s Portify blog post, we talked about the fundamentals on everything to do with mortgages. This week, we’ll be talking about how your credit score affects your mortgage rates, as well as practical steps you can take to build your credit score. Essentially, your A credit score is a tool used by lenders to help determine your eligibility for certain credit cards, loans and mortgages. A mathematical model to calculate a numerical score that represents your credit history and your profile as a borrower.

So what exactly does my credit score affect when it comes to mortgages?

Mortgages are based on risk-based pricing. Lenders can increase the cost of your mortgage for every risk associated with your credit profile. The higher your credit score is, the better your terms will be. Your credit score can affect the following:

Repayment rates:

When you take out a mortgage, a monthly repayment rate is the amount you pay towards your loan per month. Lenders want to know that you’re reliable and they’ll get their money back when they loan you money for the remainder of the cost of your property. If you have a lower credit score, your repayment rates may be higher to account for this.

Interest rate:

A mortgage interest rate is the annual cost of borrowing money from your lender. The average rate is based on the mortgage bond market, the loan to value ratio, and your credit score. The LTV is the difference between the value of the loan you take out and the value of the property as a whole, expressed as a percentage. Similarly to repayment rates, lenders may increase or decrease the interest you pay on your mortgage based on the likelihood of you defaulting on the loan.

Homeowners insurance:

Although not compulsory, credit scores can affect how much you’ll pay for private homeowners insurance. Generally, the better your credit score, the easier and cheaper it will be to secure homeowners insurance.

Interested in how this will translate to real-time payments? Check out the Loan payoff calculator here. by moneyunder30 to test out how different interest rates will affect your monthly repayments.

How can I build my credit score?

Make a commitment to review and build your credit history:

It’s much harder to get a mortgage with no credit history - interest rates may be higher or less competitive. You can check your credit score for free using Experian, and credit checks have no impact on your score.

Make payments on loans, credit cards and bills on time each month:

It may go without saying, but it’s important to keep in mind the importance of timely repayments of bills, loans and credit cards. This sends a strong statement to lenders and brokers about your trustworthiness.

Close unused accounts with large credit limits:

If you aren’t using an account that has a large credit limit, the amount could send a negative message to lenders about your creditworthiness. For more on credit scores, check out our blog here.

Lastly, sign-up to Portify to access our upcoming credit-building features - we’re currently working on a few changes to make sure you’re in tip-top shape for getting the keys to your new house. Sign up here.

Extra Resources:

How to build your credit score:

https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/improve-credit-score-for-mortgage/

How registering to vote increases your credit score:

https://www.experian.co.uk/consumer/guides/electoral-roll.html

Mortgage repayment calculator:

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/