Our friends at finder.com.au have written an excellent article for us on the impact of Comprehensive Credit Reporting, authored by Richard Whitten*. It highlights the changes afoot, and the impact on home buyers. Well worth reading!
Comprehensive credit reporting is coming, Australia. The new credit system has big implications for Australian borrowers and lenders and could make it easier to apply for a home loan and get a better interest rate.
So what is comprehensive credit reporting?
Unlike most leading economies, Australia still uses a purely negative credit reporting system.
This means that an individual’s credit report only contains negative events: defaults, debts, overdue payments, applications for credit, bankruptcies and court judgements. It doesn’t cover any positive actions and it doesn’t mention whether a credit application was successful (at the moment, applying for credit results in a negative mark on your credit report regardless of whether you get approved or not).
Comprehensive credit reporting (CCR) rounds out the picture of a borrower’s credit history by including information such as the state of your accounts, when you’ve paid back debts and how reliable you are in meeting your financial commitments.
It gives lenders access to more data about you, which some might find troubling, especially in light of recent scandals with data leaks in the credit reporting industry. But it could help you establish to lenders how credit-worthy you are with much less effort.
What does comprehensive credit reporting mean for home loan customers?
CCR could be very good news for responsible borrowers applying for a home loan. After all, it’s often easier to prove a positive than it is to disprove a negative. If there are a few red marks on your credit report, you’ll be able to offset these by showing a lender that you’ve made regular repayments on debt, saved a regular amount of your income and set low limits on your credit cards.
If you’re applying for a home loan and you can prove that you have a very good credit report (rather than a lack of negatives), you could get a better home loan rate. As lenders start to implement CCR, it’s likely they’ll offer lower mortgage rates to good credit borrowers.
If you’re a borrower with few details in your credit report, CCR means that you can build positive credit far more easily. This is great for younger borrowers, people who don’t have credit cards or people who live with their parents and may not have taken on many financial commitments yet.
Comprehensive credit reporting is good for lenders too, which could help home loan customers
With a greater understanding of the credit-worthiness of potential customers, banks can determine ahead of time which customers are likely to fall behind on their repayments and which aren’t.
With greater certainty, lenders may offer entirely new rates or products to home loan customers with good credit. We’re already seeing lenders offer a dizzying array of product variants with different interest rates determined by the loan-to-value ratio (the amount you borrow relative to the value of the property).
It’s easy to envision lenders doing the same with their applicants’ credit history, assigning grades based on reporting, with lower rates for customers with excellent reports.
There’s also the likelihood that CCR will increase competition in the home loan market. CCR requires more customer data and more systems to process it. The industry is already seeing new fintech players entering the home loan market with online-only, data-savvy platforms. They promise faster application approvals and lower costs.
Leveraging CCR is another method by which lenders can stand out in a crowded market, and greater competition and transparency will almost certainly lead to better rates.
At the moment, the federal government requires the big banks to have at least half of their credit data available for comprehensive credit reporting by July 2018. It remains to be seen whether the government will extend this requirement to all lending institutions. But in the words of the federal treasurer, the new credit reporting system represents “a game changer for both consumers and lenders”.
*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.
