Bad Credit Home loans

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Bad credit home loans otherwise known as bad credit mortgages, are home loan products for those with a bad credit history.

If you were once rejected by a bank or lending institution for a mainstream home loan, it is likely your poor or questionable credit history has played a part in that rejection.

However, if you are looking for a home loan when you have a bad credit rating, all is not lost.

There are some banks that can facilitate a bad credit home loan and that may be sympathetic to life events such as a job loss, injury or divorce.

You do need to shop around and compare deals carefully and you may need to pay a higher rate or extra fees. The good news is that rates are at their lowest in Australian history, so even with a higher interest rate than is readily available, it could still be highly affordable.

You can find home loans for bad credit scores at InfoChoice.

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*The comparison rates in this table are based on a loan amount of $150,000 and a term of 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

Monthly repayment figures are estimates only and exclude fees. Based on the advertised rate, 25 year term and loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. Interest only loans – the monthly repayment figure is applicable only for the interest only period. After the interest only period, your principal and interest repayments will be higher than these repayments. Fixed rate loans – the monthly repayment is based on an interest rate that applies for an initial period only and will change when the interest rate reverts to the applicable variable rate.

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The comparison rates are based on a secured loan amount of $150,000 and a term of 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.
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Bad credit home loans offer a way to get back into the property market

If certain banks won’t touch you, bad credit mortgages do provide potential borrowers with a way to get into (or break back into) the property market.

However, these loans do come with several major drawbacks including higher interest rates and higher fees than regular home loans. This is due to the fact that the lender sees you as a higher risk than a typical ‘good credit’ borrower.

It is also harder to qualify for a bad credit home loan, but it is still achievable.

In Australia, it’s a legal obligation for lenders to lend money responsibly. This means if you won’t be able to make the repayments on a home loan, they cannot and should not give you a loan.

A typical home loan is 25-30 years and during this time, even the slightest of interest hikes could make repayment difficult. That’s why bad credit home loans are for shorter periods of time and are seen as a short term solution.

That said, if you improve your credit rating during the term of a bad credit loan, your negative credit listing may be removed from your credit report and you can refinance with a regular home loan at a more competitive rate.

How do bad credit loans work?

If you have struggled in the past with managing other credit products, a bad credit home loan could be for you. You may have had trouble meeting your payment requirements on a previous home loan, credit cards, car loan, personal loan or even a phone plan.

The lenders understand that not all bad credit is due to money mismanagement. Credit problems also arise when someone loses a job or gets divorced. The lenders take all these factors into consideration when considering your loan application. When you apply for a bad credit home loan, your lender will look at your application on an individual basis and assess you from there.

Bad credit home loans are similar to regular home loans in that you first have to save a deposit, then borrow an amount of money from a lender and pay it back with interest. However, because you have poor credit the loan will typically have higher fees and charges.

These fees and charges are as follows:

Higher interest rates. Loans for borrowers with bad credit tend to have higher interest rates than standard home loans.

Higher fees. Fees such as ongoing monthly and annual fees in addition to upfront mortgage fees are more common with bad credit loans rather than standard loans.

Lower LVR. A deposit of greater than 20% may be required for a bad credit loan.

Who are non-conforming borrowers?

Getting a home loan when you have bad credit isn’t always easy. However, there are specialist lenders out there who offer home loans for ‘non-conforming’ borrowers.

These are people who have difficulty securing an otherwise more traditional home loan. This could be due to any number of factors such as:

  • Being Self-employed. Sometimes it’s hard to prove your income if you’ve only recently opened your business.
  • You have ATO debt. You may have an ATO debt that you need to pay.
  • You have irregular income. If you work part time or are employed on a casual basis, or you are a business owner and have an income that isn’t regular.
  • You have multiple debts. You could use the bad credit loan to consolidate your debt.
  • You are close to retirement. Many banks won’t accept your application if you are close to retirement.
  • You have unpaid bills. Make sure to always pay your bills. Outstanding bills will be recorded on your credit history.
  • You have made late payments. Always pay your bills before or on the due date.
  • You have been declined for a loan. If you recently applied for a loan and it was declined, this will be put on your credit record.
  • You have been declared bankrupt. Once declared bankrupt, you will have a bad credit rating that will remain on your file for 7 years.

Who offers bad credit home loans?

Bad credit home loans aren’t typically offered by the big banks. It’s usually specialist lenders that will offer this type of home loan.

Specialist lenders treat borrowers on a case-by-case basis.

For instance, Pepper Money offer the Pepper Advantage Bad Credit history loan at a rate of 5.14% p.a (comparison rate 5.15p.a). Pepper consider defaults, discharged bankrupts and mortgage arrears. It looks at non-standard bank criteria and uses alternative income verification methods.

Independent finance company Liberty Financial also consider bad credit mortgages. Liberty offer the Liberty Financial Sharp Home Loan LVR >75% and ≤ 80% (Owner Occupier) – Low-Doc plus Bad Credit Considered – defaults & mortgage arrears.

Other non-conforming lenders include:

  • AusWide Bank (Formerly Widebay Australia)
  • Adelaide Bank
  • Bluestone Mortgages
  • La Trobe Financial
  • MKM Capital
  • RedZed Lending Solutions
  • Resimac

How to apply for a bad credit home loan?

In order to apply for a bad credit home loan, you will need to approach a specialist lender to discuss your options. Alternatively, you could use the services of a mortgage broker. They are well trained in what is required and will be able to negotiate on your behalf.

When dealing with a specialist lender, you will be required to present your case. This is when you need to convince them that you are able to repay your new mortgage even though your credit history is tarnished. You’ll need to be specific on the reasons why you ended up with bad credit in the first place and then your plan on how to not be in that position again.

Your entire financial position will be examined so you will need to present all financial documents from bank statements, tax returns, payment slips, rental agreements and a comprehensive list of your regular monthly expenses.

Proof of a stable job will hold you in good stead as well.

Types of bad credit mortgages

Bad credit home loans, don’t just come in a one size fits all product.

Here are the types of bad credit home loans, you should be aware of before choosing a lender.

Paid and unpaid defaults home loan

Paid and unpaid defaults home loans are offered to borrowers who have defaults on their credit file. These fall into two categories:

  • Paid defaults: Defaults that you’ve paid in full.
  • Unpaid defaults: Defaults that you haven’t paid in full.

A default on your credit file usually illustrates you have an overdue account: personal loan, credit card bill, utility bill or phone bill fall into this category.

If a payment is 60 days overdue, or if the lender has been unable to contact you, this will show up on your credit report.

Defaults are warning signs for lenders and most will knock your application back based on your inability to pay your debts.

Discharged bankrupt home loan

Borrowers who were bankrupt and are now discharged can apply for a discharged bankrupt home loan.

There are several Australian lenders willing to lend money to discharged (an automatic process of the law which releases the bankrupt person from bankruptcy) bankrupts who are looking to buy a property.

Discharged bankrupts are no longer required to have limited assets and can travel overseas, meaning they pose less of a financial risk to the lender and are free to apply for credit.

Part 9 debt agreement

Part 9 debt agreements are given to borrowers who entered a Part IX Agreement and have completed the agreement.

This agreement is a legally binding agreement between you and your creditors and can be a flexible way to come to an arrangement to settle debts without becoming bankrupt.

Once the debt agreement is fulfilled, you’ll be discharged from the agreement, however a Part 9 does remain on your credit file for up to seven years.

There are Australian lenders who will consider your mortgage application if you have a completed Part IX Agreements on a credit file.

Tax debt home loan

If you have a large debt with the Australian Taxation Office (ATO), this type of bad credit home loan could be for you. In this case, the ATO debt is added to the mortgage, leaving the borrower clear from any ATO debt.

Debt consolidation home loan

If you have unmanageable small debts that have mounted up, a debt consolidation home loan is a type of bad credit home loan that could well suit your needs.

It is common practice in Australia for people to roll multiple forms of unsecured debt into their mortgage, creating one monthly repayment.

Should I apply for a home loan if I have bad credit?

If you have a bad credit history, you should take all aspects of your history into consideration before deciding whether or not to take out a home loan.

By not considering your history, you may be at risk of mortgage stress and unable to make repayments.

However, if you do decide to take out a loan, be mindful that bad credit home loans usually come with higher interest rates making your repayments automatically higher than they would be for a standard home loan.

A better option might be waiting until you have improved your credit history, or have had the opportunity to build up your savings. In doing so, you will be in a better position to apply for a standard home loan.

Each time you apply for any type of loan, it is marked on your credit report, so it’s advisable to only apply for ones you think you will be approved for. Applying for a number of loans in a short period of time may have a negative effect on your credit score.

How can I improve my credit score?

If you have a low credit score, there are steps you can take to improve it. It won’t increase your score immediately, but you need to start somewhere.

Some examples of how to improve your credit score are:

  • Check you credit report regularly to make sure the information is correct. It doesn’t cost anything to update it or to remove an incorrect listing.
  • Don’t be late with any bills or loan repayments. To make sure that you never miss a payment, you could set up direct debit from your account or put reminder on your calendar.
  • Limit your loan and credit card applications. The more you have listed, the less your credit score will be.
  • Look into reducing your credit limit where possible on any credit cards.

How to get a bad debt home loan approved

When applying for a home loan with bad credit, keep the following in mind to help you get approved:

1. Get access to a copy of your credit file

If you have a copy of your credit file, you will know exactly what information the lender can see about your credit history. If you are aware of what is in that file, you can discuss why you have the negative marks on your file. You are permitted one free copy of your credit file each year.

2. Settle any outstanding debts

Your new lender will want to know what steps you are taking to make sure you don’t slip back into having a bad credit rating. By settling any outstanding debts, you are showing that you can manage your money from here on.

3. Could a credit repair service help you?

Incorrect negative credit listings can be removed from your file. A credit repair specialist can help you with this. Once these negative listings are removed, you may be able to apply for a regular home loan.

4. Apply for a loan with a specialist lender

Certain specialist lenders can help you with a bad debt home loan. They will assess your credit history and determine if you are capable of repaying a new loan.

5. Don’t apply for too many loans in a short amount of time

All your loan applications are recorded on your file, so don’t put in too many applications or make numerous enquiries in a short period of time.

Too many applications and enquiries can present a red flag to prospective lenders.

6. Discuss your bad credit history in honest terms

All non-conforming lenders will look at all the red flags in your credit history. If you are able to discuss with them in an honest way how you ended up in each situation, it may work to your advantage. Trying to hide facts and being dishonest will probably lead to your application being declined.

7. Avoid applying with a spouse who has bad credit if possible

Even though applying on your own may mean your borrowing capacity is less, it is sometimes a better option to have a standard loan with a regular bank rather than having to go through a bad credit lender simply because your partner has bad credit history.

8. Eliminate all other debts

If you have no debt elsewhere, your chances of being approved will be a lot higher.

Can mortgage brokers help you find a bad credit home loan?

Mortgage brokers can be very helpful when trying to find a bad credit home loan.

They are qualified experts who specialise in helping borrowers in individual circumstances who have difficulty being approved for regular home loans.

Brokers can help you find lenders that will work with your circumstances. They also help organise your application giving you a higher chance of approval.

Brokers usually receive a commission from the lender, so it doesn’t cost you to use their service.

What are the advantages and disadvantages of Bad credit loans?

Advantages

  • You could get a home loan even after the big bank declines your application.
  • Specialist lenders may overlook low credit rating.
  • If repayments are made on time, you may be able to negotiate a lower rate.

Disadvantages

  • Higher interest rate than standard loans.
  • A larger deposit is usually required in comparison to a standard loan.
  • There may be stricter repayment conditions.

Bad Credit Home Loan

Bad credit home loans give self-employed borrowers an alternative way to certify their income. These loans can carry extra costs, so it’s important to review and understand the criteria, features and rates of several products before making your choice.

Here you’ll find all the relevant information about different bad credit home loans from a wide range of banks and lenders. It’s never been easier to compare and save.

Bad Credit Loans FAQ

What is bad credit?

Bad credit is a term that relates to your credit file situation. You may have bad credit if you have defaulted on any loans or have a number of credit inquires and applications. Lenders can and will access your credit file when you apply for a bad credit loan. This information is used to determine whether you are eligible for finance. Majority of the big banks will usually not approve a loan if you have bad credit as you are considered to be a high risk applicants.

What is a bad credit loan?

A bad credit loan is a loan that is available if you have a low or bad credit score. Many of the big banks won’t approve your application and you may need to approach a specialist lender to be approved. These bad credit loans typically have higher interest rates compared with standard home loans as you are considered a high risk borrower.

Do I have a bad credit score?

If you have put in a few home loan applications and keep getting rejected, it’s possible you may have a bad credit score. You can find your credit score online so you can see what the lenders are seeing.

How can I access my credit score?

You can access your credit score from an online credit score provider and it shouldn’t cost you any money. You must agree to their privacy policy when you sign up. This allows them to use your personal information for marketing. You can usually opt out of this after you sign up.
This is a free service, so stay away from any provider that asks for payment.

How do you get bad credit?

It’s not hard to fall into the bad credit trap. It could happen to anyone and is as simple as missing a payment, defaulting on a loan and bankruptcy just to name a few bad credit pitfalls.

Will I have bad credit forever?

No. Your bad credit can be rectified. It’s as simple as taking responsibility for your finances and making sure you start paying all your bills and monthly repayments on time. It won’t increase your credit score immediately, but it will help get it on track.

I have been rejected for a loan in the past. Will these applications impact my credit score?

Yes. Every time you apply for a loan it is recorded on your credit file. This information is available for lenders to see. For this reason, it is important to check your credit score before you think about applying for finance. It’s best to not make more than one application per six month period.

Why should I choose a bad credit home loan?

If you have a bad credit score and the major banks won’t approve your application, you may have no choice but to apply for a bad credit loan. These typically have a higher interest rate than a standard loan but the good news is, once your credit score has improved, you can refinance to a standard home loan.

How do I apply for a bad credit loan?

Applying for a bad credit loan isn’t too difficult. You need to find a specialist lender who offers these types of loans and then you can usually apply online or over the phone. If you find it too difficult finding a specialist lender, you could use the service of a broker. They specialise in helping with situations such as these.

What is a credit report?

A credit report is a document which contains all of your financial history and personal information. This is where credit providers can find your information and determine if they would like to approve your application or if they find you to be too high risk.

How does my credit rating affect me?

Due to the fact that your credit score is affected by things such as any late payments you made or any loan and credit applications, you may find it hard to be approved for loans if your credit score is low. The more applications you make in a small amount of time, the more your score will be affected in a negative way. Don’t apply for more than one loan in six months.

Can I apply if I have been declared bankrupt?

You can apply for credit products at least 18 months after you have been discharged from a bankruptcy or a Part IX Debt Agreement.

Can I refinance my bad credit loan?

Yes. Once you have improved your credit score, you can look into refinancing to a standard loan where your interest rate will be more competitive than those on a bad credit loan.

Does having bad credit mean slower approvals?

No. Approvals for bad credit home loans usually take the same amount of time as a standard home loan.

Glossary of terms

Application The process of applying for a loan, which records relevant information about the prospective borrower.
Asset Anything valuable owned by an individual that a lender will take into account when assessing a home loan.
Bad credit A negative credit rating due to a debtor failing to make repayments on bills and loans etc. Bad credit makes it difficult to apply for further loans.
Bad debt Debt that cannot be collected and is worthless to the creditor.
Bankrupt When a person or institution is unable to repay debts they owe to creditors.
Budget A detailed plan of income and expenses over a defined period of time. A budget can help you manage costs and repayments.
Contract A binding agreement between two or more parties.
Credit Where a borrower enters into an agreement with a lender to receive something of value in exchange for repayment (usually with intertest) at a later date.
Credit report A person’s past history reported by a credit bureau and used that by a lender to determine a loan applicant’s worthiness.
Debt The amount of money (borrowed funds) a borrower must repay to the lender.
Debt consolidation When you roll multiple loans into a single loan, usually at a lower periodic payment and interest rate.
Default Inability to pay a debt by its due date.
Finance Provision of funds and capital.
Grace period A period of time in which the borrower is not required to make payments on a debt.
Home loan The money borrowed for a residential mortgage secured by a primary residence.
Instalment The scheduled payment a borrower will make to a lender.
Lender Those who supply funds to borrowers.
Liability The debts or financial obligations of a person or company.
Liquidate A company unable to pay off its debts will shut down and sell assets to the open market.
Loan Funds that are borrowed and repaid with interest.
Loan term Agreed terms of a loan including interest rate, fees and charges.
Low doc loan A loan requiring a lower level of verification documents.
Mortgage A legal document that requres a borrower to pay back a property to the lender as security for the payment of a debt.
No doc loan A loan requiring no documentation of verification.
Rate The annual interest on a loan.
Refinance When you revise a payment schedule to repay one or more existing mortgage loans with a new loan on better terms.
Repayment plan An agreement between a lender and a borrower to help the borrower repay installments.
Self-employed Individuals who operate as sole proprietors.
Second mortgage When the loan on one mortgage is secured against another.
Secured loan A loan that is backed by collateral.
Settlement The signing of loan and mortgage documents to complete the loan transaction.
Short term loan A loan that will be repaid within a year.
Term The period of time during which loan payments are made.
Underwriting Verification of data and approval of a loan.
Unsecured loan A loan that is obtained without collateral.
Variable-rate An interest rate that changes with the market.
Write off When a loan is not collectible.