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Blending you credit score and the DSR Score (BoomScore)

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According to recent research by getcreditscore.com.au which analysed 2 million individual Veda Credit Scores, your wealth and where you live have little influence on your credit rating.

Most credit active Australians have a credit score: a single number indicating their creditworthiness based on analysis of the data on their credit file.

A high credit score can also indicate how financially savvy a person is, not so?

Well, this is what I thought too…

…and I used to work for said credit bureau.

Put another way, given all credit scores are linked to a persons location, is it safe to assume that residents of wealthier suburbs have a higher credit score?

It appears NOT!

Luke Keller, chief executive officer, of www.getcreditscore.com.au said. “In New South Wales, the rural areas of Blue Mountains and Hawkesbury with their beautiful, relaxed lifestyles have a higher average VedaScore (credit score generated by Veda Group) than those living the high-life in Sydney Inner City’s harbourside suburbs of Potts Point, Elizabeth Bay and Rushcutters Bay. These results demonstrate that your credit score is all about your personal situation, not your property location.”

But what about the BoomScore for a location?

BoomScore measures the ratio between demand and supply for units and houses at the suburb level and is therefore a powerful lead indicator of where rents and prices are likely to go.

Use Boomtown to check your suburbs BoomScore.

Given there is a link between a suburbs BoomScore and subsequent price growth (or price drop), I wondered if there might be a link between a person’s credit score and the BoomScore of where they own property.

You see, your credit score is linked to your home address…

…But what if you have multiple properties in different suburbs?

Could the BoomScore of a suburb where you invest affect your credit score?

Recently a banking insider suggested there could indeed be value in including the BoomScore data as part of the overall credit risk assessment for a mortgage application.

The argument being that the ‘boom or bust’ potential of a suburb could ultimately affect an investors ability to make repayments on their investment property loans and ultimately their creditworthiness.

So a low BoomScore could lead to a mortgage default?

Let’s say you’re about to buy a property.

Maybe you had some initial reservations but decided to proceed anyway.

Unfortunately, you fail to notice the area has a very low BoomScore which means prices and rents will most likely deteriorate soon. We have strong evidence to prove this correlation.

Drilling down into the data behind the BoomScore could reveal that properties in your area are not selling very fast as indicated by a high and worsening trend in the ‘days on market’ statistic, for example: one of the eight stats factored into the overall BoomScore calculation.

The low BoomScore might reflect fewer properties are selling at auction as indicated by the ‘auction clearance rate’ stat. So if you needed to sell before everyone else, you might find demand has dropped significantly and that it’s too late. You’d be taking a massive hit on price.

If rents dropped too due to increasing vacancy rates (indicated by another BoomScore stat)…if rents dropped to a point where you were tipping in a lot of money each month to cover the shortfall in outgoings, could this cause mortgage repayment stress?

If prices did fall and your property is worth less than than what you owe on your mortgage, could you go into default with the bank?

The answer is, of course, YES!

If you think this is an unlikely scenario then make sure you read my next email about the “Moranbah Story” where I unpack exactly how a rapid decline in the BoomScore predicted the massive losses investors incurred in Moranbah during 2012. Few saw it coming but the data was shouting loudly.

So what can we learn from this?

I can’t say for sure if there is indeed a link between the BoomScore for your suburb/s and your credit score.
What I can say is astute investors monitor and manage both. They use them as early indicators for risk and opportunity. They will both influence your ability to borrow more money to keep adding more properties to your portfolio.

It’s equally important to monitor your suburb’s BoomScore so that you can maximise the chances of building equity to buy more properties…AND…maximise rental growth to cover the mortgage repayments.

Imagine you’ve owned an investment property for a few years.

You hop on Boomtown…

You check the BoomScore for the suburb where it’s located.

You check the charts and notice the BoomScore has steadily climbed over the last 12 months.

Perhaps there’s more equity in your portfolio?

Maybe it’s time to talk to the bank.

You check your credit score … it’s also very good…

…so you negotiate hard on the interest rate.

You get your property revalued and extract the additional equity to buy your next property.

This is obviously an ideal and simplified scenario but monitoring the Boomscore for potential suburb growth and for potential equity release is better than doing nothing.

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