Your Credit Score and How it Affects Your Mortgage Rate
It is natural to want to get the best mortgage rates. To get a good rate, there is a lot that you can do which involves getting referrals or saving for the deposit. But these will not be enough.
Your credit score will actually lend a hand in you getting a good mortgage rate. This does not exactly mean that you won’t be paying a lot in interest fees over the lifespan of the mortgage. A good credit score can make your repayment manageable in the long term.
As such, it is important that you must understand how your credit score affects your ability to secure loans like a mortgage.
Credit Scores and Loaning
Your credit score is a critical factor in determining the range of mortgage rates that are available to you. To understand why your score is important, it is best to look at things from the lender’s perspective.
To you, a loan is just a huge sum of money that you can use for a lot of purposes. For the bank, however, that loan is their investment on you.
Depending on the terms of the loan, that mortgage will be payable by a decade or three. Over that time, a lot of things can happen like you changing jobs, you losing money, the neighborhood you live in changing, the market fluctuating, and other considerable yet critical changes.
Why Does Your Score Matter?
There is no exact way of determining if you are a safe investment just by an interview. This is where your credit score comes into play as it tells a lender whether or not you are trustworthy. This is because a credit score will be reflection of your financial habits.
A lot could happen in the duration of your loan. Your assets could depreciate and you could lose your high-paying job or lucrative business. The ability to make sound financial judgements is a far more consistent criterion.
The Problems of a Low Score
Actually, low credit score applicants are not the only ones to find a mortgage difficult. The best mortgage deals is actually the difference between a good score and a great one.
Here is an example. Two people apply for the same mortgage. One person has a 760 credit score and the other has a score of 660. If their applications are approved, the person with a better score gets a 0.4% better mortgage deal.
The 0.4% difference might look insignificant but it does add up. The mortgage with a 0.4% better deal will save money by the hundreds to thousands.
How Scoring Works
It is important to review how the credit scoring system works as far as your mortgage rates are concerned. For this example, let’s use Experian which uses a range from 0 to 999 . Obviously, your risk to the lender inversely proportional to the range of your current score.
In essence, 0 to 560 I very poor, 561 to 720 is poor, 721 to 880 is fair, 781 to 960 is very good, and 961 to 999 is exceptional.
What is a Good Score for Buying a House?
Lowering your interest rate is actually still to the lender’s discretion. On the other hand, a difference of a few points in your credit score can affect your monthly payments substantially.
If you have a score at the Very Poor range, your mortgage application will be declined by lenders ASAP or, alternatively, you will find it harder to get a good rate with a manageable interest rate.
The poor range allows for basic mortgage deals with high interest rates. As such, careful selection and contemplation is needed before you sign off on a deal if your score is in this range.
At the Fair level, you can start getting good deals for your mortgage. The prices might be lower and the terms longer and the interest rates are more reasonable, giving you enough of a time to clear off your debt without paying essentially more on a monthly or annual basis.
The Best Range
If you hit the Good range, you start getting quite a lot of good mortgage deals. Offers at this range are more manageable on the long term with pricing options more favorable to you.
Conversely, a credit score at the Excellent range allows you to be first in line for rather good mortgage deals with interest rates that are the lowest in the market.
As such, it is best that you aim to get a score by the 721 to 880 range at the very least. The point is that a higher credit score means that you will only have to pay a minor fraction of the loan’s value in interest for the duration of your indebtitude to the lender.
Improving the Odds
As was implied, getting a low credit score does not immediately make you a bad investment option. It only means that anyone who is willing to lend you money is going to put you through the task of clearing your debts as quickly as possible and deal with a high interest rate.
By locking you to a rate that you would find difficult, they are at the very least putting a “security” over their investment on you and, in the end, make money off it.
Here is the problem: a low credit score is all too common in the UK these days. As a matter of fact, those who relatively young credit lives or are new to the country tend to get low scores.
Only keep in mind that lenders want to know that you can be relied on to fulfill your financial obligations on a regular basis. As such, your best remedy here is to improve your score by making some important lifestyle changes.
Frequent Payments
Paying your dues is one of the best methods to improving your score. This will include every debt, subscription, service, and membership you have entered and requires a regular payment. Even how often you pay your utility bills and even your landlord (if you are renting space) will matter here.
Timing
If it can be helped, try to give enough time in between your credit applications. The reason for this is because an inquiry is always made when you apply for new credit.
A hard search on your credit information done every 6 months is harmless. On the other hand, multiple ones done in a space of a few months can give the impression that you are becoming too reliant on credit. If mortgage providers see this, they are given the impression that you will barely manage one other obligation your already considerable list of debts.
Registering to Vote
Becoming registered on the local electoral register does give the impression to lenders that you intend to stay in one place for a considerable period of time.
By registering in one, you give the signal to lenders that you are there to stay and will not flee from creditors if your debts are due.
Staying within the Limit
This piece of advice is often misunderstood by many credit holders. Staying within the limit does not exactly mean cashing out on 99% only on a regular basis. Credit activity at that range is quite high which can negatively impact your score if done regularly.
There is no hard and fast rule as to how below the limits you should keep your spending with your credit. If you are aiming for the 800 to 999 range, it is best to keep your spending limits within the 25% mark. This, combined with other sound financial habits, should leave you with a score good enough for a good mortgage deal.
One other strategy you could use is making sure that your information contained in your report is accurate. Sites like https://creditscoreonline.co.uk can help you get a copy of your score from any of the major reporting agencies in the UK as a reference. You can use their services to check if the information being presented to lenders is correct or use it yourself and get an idea on how you could improve your score.
To Summarise
What a low score only means is that the lender will be more careful with you and make sure that you will uphold your end of the bargain by introducing some constricting terms in the contract.
A good score, as a matter of fact, gives the impression to lenders that you are a safe investment. If you have a score within the good to excellent ranges, you might even have an easier application process.
To summarise everything, your credit score will determine how good of a mortgage deal you can get from lenders. As such, it is recommended that you make a good impression when you present that application.