With bad credit, your options for home loans are limited. However, if you can demonstrate that there are reasons to look past your imperfect credit history, you can still qualify for a mortgage product that works well for you.
What Are Bad Credit Home Loans?
When you have bad credit, you probably won’t be able to get a home loan with one of Australia’s major banks. As an alternative, you can apply with one of the many specialist or non-conforming lenders.
The reality is, people run into bad credit for a variety of reasons. Sometimes it’s because of a period of financial irresponsibility but more often than not, life’s major events can throw off our financial stability. Unexpected medical bills, divorce, a move, a job change, or becoming redundant can all lead to problems like missed payments or even a default.
However, major banks tend to take a black and white approach to bad credit, automatically disqualifying a borrower who doesn’t meet their strict credit criteria.
With a bad credit home loan, a specialist lender will look at your full financial picture when assessing your application, taking a more flexible approach and offering eligible borrowers a feasible route to homeownership.
Do I Have Bad Credit?
If you have any 'black marks' on your credit file, like missed payments or excess debt, you may have trouble qualifying with a traditional bank. The more recent your black marks, the more they will stand out as red flags to lenders.
Look for the following issues on your credit file to see if you may have an issue with bad credit. You can look up your history with one of Australia’s credit bureaus – Equifax, Experian, Dun & Bradstreet, and for residents of Tasmania, Tasmanian Collection Service.
- Loan defaults
- Judgements or court writs
- Outstanding council rates
- Unpaid tax bills
- Multiple credit enquiries within a short amount of time
- Too much debt – this includes both the number of accounts you have debt on and your asset to liability ratio. If your liabilities in total are more than your assets, most banks won’t give you a loan.
One of the biggest negative credit issues you could have that will impact your eligibility for a home loan is mortgage arrears. If you have missed payments on your existing home loan in the past six months, most lenders won’t approve your application for a new loan. If you want to refinance your mortgage, it’s important to have a clean mortgage repayment history.
How Do I Get a Home Loan with Bad Credit?
You probably won’t qualify with most banks if you have any serious black marks on your recent credit history. This leaves you with two options:
- You can work to rebuild your credit for the next year or two with on-time payments, an improved net asset position, limited credit enquiries, and by making sure you pay any outstanding financial responsibilities.
- Apply with a specialist lender. When you work with a specialist lender, instead of denying your application as soon as they see your questionable credit history, they’ll let you explain what happened and will take the time to consider your full financial picture when assessing you as a borrower.
In a lot of cases, people who are looking for a bad credit home loan want to refinance their current mortgage in order to help manage their finances and improve their credit. Essentially, qualifying for a loan with bad credit can be the bridge between financial stress and a fresh start.
For example, if you are struggling to keep up with your mortgage repayments and your personal debts because of a change in your income, unexpected but essential expenses, or because rising interest rates have made your variable rate mortgage suddenly unaffordable, by refinancing to a longer term you may be able to lower your repayment amount enough to make it manageable. You may also be able to consolidate high interest credit card debt.
By using a bad credit home loan in this way, you’d ultimately put yourself in a stronger position to meet all your financial obligations and improve your credit.
But, you’ll need a lender who will look past your bad credit to help you reach a place where you can move beyond any financial stress you may have. A specialist lender will be able to offer you a bad credit mortgage that can work for your situation. Some will even approve your loan application quickly so you can take care of your other financial responsibilities on time and avoid any new credit issues.
We have mortgage specialists on our team who understand how bad credit loans work. Call us on (07) 3146 5732 today to learn more.
How Common Is Bad Credit in Australia?
If you have bad credit, you’re not alone.
Anyone can end up with bad credit. In fact, with the combination of record high housing prices and relatively modest wage growth in Australia over the past few years, a lot of people may struggle to maintain a polished credit file, including borrowers in affluent suburbs.
This is because borrowers who have a large mortgage are the hardest hit when interest rates rise. Unless you have a lot of flexibility in your budget, something as simple as rising mortgage rates could lead to big problems. When variable rates rise and monthly interest repayments increase by a few hundred dollars, missed payments, increased reliance on credit cards, and poor credit suddenly become a very real possibility.
For example, something as simple as an increase from 3.5% to 4.3% on an $850k loan with a 30-year term would cause your loan repayments to increase from $3,817 to $4206! Unless you had $400 extra income each month, you'd have to adjust your budget just to deal with higher rates.
Other factors like a business failure, an injury that forces you to take time off from work, or a family emergency can also make it easy to fall behind.
How Can I Prevent Bad Credit?
One of the best ways to prevent bad credit is to make sure you are repaying all your obligations on time. This includes your mortgage, other debts, as well as your bills.
To help prepare your household for the unexpected, you can work toward building an emergency savings fund. Deposit some money each month into a savings account until you have enough to cover at least three months’ worth of living expenses. That way, if something happens, you’ll be able to afford it rather than ending up with bad credit and an uphill battle.
If you realise you may miss a mortgage repayment or start to fall behind, you can talk to your lender. You may be able to work out something with them before you miss a payment and start creating black marks on your credit file.
If you are slipping into debt because of financial stress and are worried about bad credit, you can get free help from the National Debt Hotline. They offer free financial counselling and can help you create a plan for staying out of debt and avoiding further financial stress.
What’s on My Credit File?
When you apply for a home loan, the lender will look over your credit file. In addition to your personal information like your name, address, and date of birth, your file shows:
- Your employer
- Credit enquiries over the past five years
- Any defaults – if you have a loan or account that is more than 60 days overdue, it’s listed as a default
- Court judgements and court writs
- Your repayment history for your existing debts for the past two years
What Options Are There for Bad Credit Home Loans?
Depending on what type of credit issues you have had in the past, there are different types of bad credit home loans you may want to apply for:
If you have several small debts that have become difficult to manage but don’t have any defaults, one option you have is a debt consolidation home loan. When you consolidate your unsecured debts like your credit cards into your home loan, you’ll be left with one easy payment.
You’ll also be able to save on interest if your mortgage rate is lower than your credit card interest rates.
If you have had loans or other accounts overdue for more than 60 days, you’ll have to get a home loan that allows for paid or unpaid defaults. In this case, you’ll need to work with a flexible lender – most banks will view a default as a sign of instability and will automatically decline your application.
Discharged from Bankruptcy
You won’t qualify for a home loan with any lender during bankruptcy because you aren’t permitted to acquire large assets. However, once you are discharged, which happens automatically three years from the day you are declared bankrupt, you can apply for a mortgage. You’ll want to look for a lender that specialises in discharged bankruptcy loans.
Fill out our online enquiry form or call us on (07) 3146 5732 to learn more. We even know lenders who will accept your application as soon as you are discharged.
Part IX Agreements
If you entered into a Part IX Agreement – an arrangement between you and your creditors that a debt agreement administrator oversees – you can apply for a home loan once the debt agreement is fulfilled. Your credit file will list the Part IX for up to seven years, so you’ll need to find a lender who is willing to consider your mortgage application with this black mark on your file.
What if you are paying back a debt owed to the Australian Taxation Office – can you still qualify for a home loan? You can apply for a bad credit home loan that specifically addresses tax debt.
Here’s how it works:
- You apply with a specialist lender who has experience with tax debt home loans.
- Your ATO debt is added to the mortgage.
- You’re then cleared of your tax debt and only have your mortgage repayments to handle.
Is a Bad Credit Home Loan a Smart Financial Strategy?
A bad credit home loan is an option that may help you keep your existing home. It’s also a way to create a fresh start for yourself so you can rebuild a strong financial position.
If you are considering selling your home because you are falling behind on your mortgage, make sure you talk to a financial professional about refinancing to a bad credit loan first. You may lose a lot of money by selling – as well as the equity you’ve built up – making it even harder to get ahead and purchase a new home later on. It can easily cost about 8% of your property’s value just to sell it.
If you refinance to a bad credit home loan, you’ll end up with a higher interest rate but you can also free up your finances so you can pay down other debts, save money, and start building an excellent credit history with on-time payments. When you refinance to a loan with a longer term, you’ll end up with lower monthly repayments, even with a higher rate.
Then, once you’ve spent a couple of years demonstrating that you are financially responsible, you can refinance to a loan with a lower interest rate.
Can I Qualify with Serious Defaults on My Credit File?
In order for your loan application to be approved, your bad credit will need to fall within certain boundaries. For example, if you have too many liabilities or have a long history of defaults, it may be difficult to get a loan.
Here are some general guidelines to give you an idea of what may be acceptable for bad credit home loans:
- With any unpaid defaults, you’ll have to pay back what you owe before getting approved. There are non-conforming lenders who will, however, let you borrow up to 90% of the Loan to Value Ratio (LVR).
- With a minor paid default – anything below $500 and that was paid more than 6 months ago – you’ll be able to choose between different lenders if you are a strong borrower for other reasons.
- With multiple paid defaults up to a total of $1,500, you can still usually borrow up to 85% LVR.
- Once your paid default amount goes beyond $1,500, you’ll be limited to borrowing with a specialist lender.
- With large paid defaults – anything over $3,000 – whether you can qualify with any type of lender depends on how strong the rest of your case is and the explanation for the default.
Applying with Non-Conforming Lenders
Non-conforming lenders like Pepper Money, Bluestone Mortgages, Resimac, and Adelaide Bank will have more flexible lending criteria. This makes it easier for borrowers who don’t fit into the traditional mould to qualify.
Because a bad credit loan comes with more risk, you’ll have to pay higher interest rates no matter which lender you apply with. There may also be more fees involved when you compare bad credit home loans with non-conforming lenders to loans from traditional banks.
Can you get a competitive rate when you have bad credit?
The interest rate you qualify for will depend on how severe your bad credit is and on how much of the property value you expect to borrow. If you have only had a small paid default and you are borrowing less than 80% of the property value, you’ll be more likely to qualify for a cheaper rate.
How Can I Qualify with Bad Credit?
If your bad credit is due to a minor issue, such as a couple of late payments or a small paid default that was taken care of months ago, you may still be able to qualify with a major bank. Depending on the LVR you intend to borrow and other factors, like a high income and a favourable net asset position, you may qualify even with a more noteworthy black mark on your credit file.
To help determine what type of home loan you are likely to qualify for when you have bad credit, it’s a good idea to speak with a specialist mortgage broker who understands what different lenders are looking for when evaluating your ability to repay a mortgage.
For any help figuring out when listings will be removed from your credit file and deciding between waiting and applying with bad credit, you can get free help from services like Credit Repair Australia, or talk to a financial advisor.
You also want to maintain a clean record moving forward. Making your repayments on time and paying off any existing defaults will help to show lenders that your credit problems are in the past and are likely to stay in the past.
The bottom line is, there are options. Bad credit is more common than most people realise and many borrowers end up with a not-so-great credit file at some point in their lives. A lot of lenders understand that and know how to recognise a qualified borrower, despite what your credit file looks like.
If you have bad credit and want to apply for a home loan, take the time to explore your options. You can talk to a financial advisor and get help from credit repair services if you’re still figuring out how to manage your finances and improve your credit.
You can also call us on (07) 3146 5732 or contact us here to speak with one of our mortgage brokers who specialise in bad credit loans.