Top Gun, Roger Federer, Beyonce — the common thing binding these 3 is that they are the Best of the Best. They have all worked their arses off to be at the top of their game and are deservedly recognised and rewarded.
What the heck does this have to do with a home loan?
Well if you’ve slugged away at getting that promotion and raise, sacrificed that weekend avo toast or waited for those heels to be on sale so that you can keep to that budget to save a bigger deposit or pay down those debts quicker — then chances are you’re a Credit Unicorn.
A Credit Unicorn is the Grand Poobah of home loan borrowing.
Banks love Credit Unicorns because they have always paid on time and are very likely to pay on time in the future. However unlike the insurance industry, where great drivers are rewarded with lower premiums on car insurance, banks don’t do a great job at rewarding Credit Unicorns in a similar way. Banks are like a math course at school that only hands out Passes and Fails. You score 90%, your mate scores 50%, and you both just get a Pass, even though you are so much better at maths than your mate!
I bet right now you’re wondering, “Am I a Credit Unicorn?”
Well, lucky for you, I’ve got 4 steps you can take that will help uncover if you are one of these legendary credit creatures.
Step 1: Know your credit character
How great have you been at making repayments in the past?
If you have made all your repayments on time over the last 2 yearsand have a credit score between 833 and 1200, then you are in Credit Unicorn territory. To get your free credit score, and learn how to take control of it, check out this article.
If you are doing this as a couple, take the worst credit score as the benchmark.
Step 2: Know your credit capacity
How easy is it for you to make your repayments?
This is all about cashflow, and can get quite messy, but a very easy gauge for this is a metric called the Debt to Income (DTI) ratio.
DTI = Total Household Debt (Home Loan, Personal Loan, CreditCards)/Total Gross Income (before tax)
If you have a DTI ratio less than 4, you are in the Credit Unicorn territory.
Doing this as a couple? Use total couple debt and total couple income in the calculation.
Step 3: Know your collateral
How marketable is your home if it needs to be sold?
A house on a block of land is the most desirable real estate for Aussies (and banks for that matter). Preferably not in a small and one industry town (e.g. mining). So if you tick both of these boxes, count yourselves lucky, as you are in Credit Unicorn territory.
Step 4: Know your capital
How much skin do you have in the game?
That is, how much equity do you have in your home? A simple measure for this is the Loan to Value (LVR) ratio on your property.
LVR = Total Home Loan Amount/Value of your Home
If your LVR is under 60% then you are in Credit Unicorn territory. You can get a free estimation on the value of your home by visiting realestate.com.au.
So how did you go? Did you make it to the promised land of unicorns? To recap, just take note of the 4Cs.
- Character: All repayments on time over the past 2 years and credit score between 833 and 1200 👍
- Capacity: Debt to Income ratio less than 4 👍
- Collateral: House on a block of land in a town that has more than one industry 👍
- Capital: Loan to Value ratio of less than 60% 👍
- 4 x 👍 = 🦄
Bet they didn’t teach you that in math class.
Next week in Part 2, we’ll explore how Credit Unicorns can go about getting a better deal from their bank. If you’re not a Credit Unicorn right now, in Part 3 we’ll explore what action you can take to level up.