How they work
How to qualify and apply
Bad credit home loan features
How your credit score works
How to improve your credit score
Bad credit home loans are specifically designed for people who’ve experienced financial difficulty, have a bad credit score, or have been declared bankrupt, and can enable them to finance the purchase of a home despite a low credit rating.
When applying for a bad credit home loan take time to consider all your options and make sure you can afford repayments so that your new loan doesn’t cause further financial stress.
How do bad credit home loans work?
Bad credit home loans can enable those who’ve declared bankruptcy or have bad credit to purchase a home, but there are a few drawbacks. They can have higher interest rates and fees than regular home loans and if you can’t make repayments your lender may be able to repossess your home.
Learn more about home loan fees and repayment options.
Before applying for a loan it may be a good idea to repair your credit score by checking any inaccuracies and making debt repayments on time over a long period. If that’s not an option there are several lenders who offer specialist loans for borrowers with bad credit.
If you make an application and are rejected, it may count as a negative credit event and further damage your credit score. Make sure you prepare your application thoroughly before applying.
Bad credit home loan application
Generally speaking, if your credit score is in the lower part of the average range or is below average you may need to apply for a bad credit home loan. The process is usually similar to applying for a regular home loan with a few notable differences.
Learn more about applying for a home loan.
Who can apply for a bad credit home loan?
To find out whether you’ve got bad credit and need a bad credit home loan, you can:
- Check your credit score
- Approach a lender or mortgage broker to enquire (enquires will not be listed on your credit file, only formal applications)
Common signs that you may have bad credit include:
- Missed mortgage repayments in the last six months
- Bankruptcy filing or debt arrangements
- Several applications for credit in the last 12 months
- Unpaid bills, taxes and other debts
- You are the director of a business that is struggling financially
- Several maxed credit accounts
- Income that is not sufficient to meet living costs and debt repayments
A bad credit home loan shouldn’t be your first option. If you are able to secure a regular home loan now, or improve your financial situation and apply later, you may save money on home loan fees and interest. Use our home loan calculator to estimate your home loan repayments.
How to apply for a bad credit home loan
Generally, major banks have strict credit requirements and are less likely to approve applications for bad credit home loans. In most cases, your best chance is to apply with a mortgage broker or non-bank lender.
There are several non-bank lenders and mortgage brokers who specialise in bad credit home loans. Lenders like these will assess your financial situation on a case by case basis, and include:
- Pepper Money
- Liberty Financial
- Adelaide Bank
Mortgage brokers that can help with bad credit home loans include:
- Yellow Brick Road Mortgages
- Redrock Group
To apply simply visit your chosen mortgage broker or lender’s website, fill out an online application form if available or contact the lender/broker directly to enquire.
Bad credit home loan features
There are certain features that may make your bad credit home loan more suited to you, helping you to improve your financial situation. These might include:
- Debt consolidation
Debt consolidation (rolling all your debts into one loan) is a great way to simplify your repayments into one easy-to-understand amount. Since home loans typically have lower interest rates than other types of credit, rolling those debts into your home loan may help you save money on interest.
This could help you pay your loans off sooner and save you thousands of dollars.
- Redraw facility
A redraw facility allows you to make extra repayments above the minimum requirement, then allows you to access those extra repayments should you need them. If used correctly it’s a great way to pay your loan off faster and make sure you always have funds available to cover expenses.
- 100% offset account
A 100% offset account links a savings or transactions account to your mortgage. Your mortgage interest is then calculated on your loan amount minus the amount in your linked savings account.
If you’ve managed to keep money aside before applying for a mortgage this could be a great way to minimise interest costs and pay your loan off faster.
Learn more about home loan types and features.
Home loan credit scores explained
Your credit report is a record of all your personal financial information including things like debts, late payments and credit enquiries.
Your credit score distils all this information down to a single number usually from 0 to 1,000 or 1,200 - with a high score indicating a good credit history and a low score indicating a bad credit history.
Lenders use this report and score to help decide whether to lend you money and to create a profile of you as a borrower. You have the right to access your credit report and score for free once a year and can view them online from the following agencies:
If your credit score is low it can be difficult to get a conventional home loan and you may need to apply for a bad credit home loan.
What goes into calculating a credit score
To calculate your credit score and prepare your credit report, rating agencies compile a record of your financial history. This includes:
- The number and types of accounts you have
- Your used credit versus available credit
- Your repayment history and behaviour
- Applications for credit
- The amount you owe
- The length of your credit history
Each item in your credit report will have either a negative or positive effect on your credit score and affect the lender’s perception of you as a borrower.
Example of how certain actions may affect your credit score
|Action||Positive effect||Negative effect|
|Debt repayment||Making debt repayments on time consistently||Missing debt repayments or making late repayments|
|Used vs Available credit||Not using all available credit||Maxing out your credit limit on several accounts|
|Number of accounts||Having a few credit accounts||Having several debts from multiple providers|
|Types of credit used||Mortgages, student loans with good repayment history||Multiple credit cards, multiple car loans and/or personal loans|
|Bankruptcies||Having a record clear of bankruptcies, foreclosures and wage attachments||Bankruptcies, foreclosures and wage attachments|
|Applications for credit||Few applications for credit||Several applications for credit over a long period of time|
What is a bad credit score for a home loan?
Your credit score in Australia will be between 0 and 1,000 or 0 and 1,200 with a low number indicating a poor credit history and a high number indicating a good credit history. Each of the three main rating agencies uses a different credit score scale.
Example of credit agency score ratings
|Excellent||833 - 1,200||800 - 1,000||800 - 1,000|
|Very Good / Great||726 - 832||700 - 799||700 - 799|
|Good||622 - 725||625 - 699||500 - 699|
|Fair / Average||510 - 621||550 - 624||300 - 499|
|Below Average / Low||Below 510||Below 549||Below 300|
How to improve your credit score
If you’ve got a bad credit score and you’re not in a hurry to buy a home you could take some time to improve your credit score before applying. The first step to improving your credit score is knowing what it is, so take the time to visit a credit agency’s website and access your credit report and credit score.
If your credit score is poor here’s what you can do:
- 1. Make sure your credit report is accurate
If your credit report is inaccurate it could negatively impact your credit score and ability to secure a home loan. Check yours for incorrect debt amounts, duplicated debts, debts that aren’t yours and other inaccuracies to make sure that’s not the case. If you find anything wrong, you can contact:
- The credit provider who listed the mistake
- The credit reporting agency
In some cases, these mistakes can be identity theft, but usually it will come down to a mistake by your credit provider or the reporting agency.
- 2. Pay off overdue debt and bills
If you’ve got overdue debt and bills paying them off as soon as possible and/or coming to an arrangement with the credit provider will help to minimise the damage they do to your credit score.
- 3. Make bill and credit repayments on time, every time
The best way to improve your credit score is to consistently pay bills and make debt repayments on time over the long term.
- 4. Apply for credit (if you don’t have any)
While unpaid debts may damage your credit score, paid debts can actually improve it - demonstrating your ability to repay a finance amount can reduce your risk level. If you don’t have any debt, applying for credit that you can easily afford to repay and that won’t harm your financial situation could help improve your credit score over time.
- 5. Hold onto debt that you can easily manage
If you’ve got a credit card or other similar debt cancelling it won’t necessarily improve your credit score. In fact, lenders like to see that you’ve held credit over a long period of time and consistently made payments on or before the due dates.
- Get expert advice
If you're experiencing financial difficulty, it’s often a good idea to speak to a financial advisor for help with solving your problems. You may be able to access free financial advice with the help of your state’s Financial Counsellors Association:
Mortgage brokers may also offer financial advisory services free of charge and there are several other paid services available.
Those who have bad credit or have been bankrupt may still be able to buy a property with a bad credit home loan. If your financial situation has improved and you’re confident that you can afford to make repayments, a bad credit home loan can be a way to both improve your credit score and buy a home.
Before applying, always make sure you’re getting a good deal by comparing each loan's fees, interest rates and features or getting a mortgage broker to help you do so.
Bad credit home loans pros and cons
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Bad credit home loan FAQ
What is a bad credit home loan?
A bad credit home loan is a loan product designed specifically for borrowers who have bad credit or have been declared bankrupt.
How do I submit a bad credit home loan application?
In most cases you can submit a bad credit home loan application just like a normal home loan application - either online through your lender’s website, by scanning and emailing your application and documents or by visiting your lender’s office.
Can I get a bad credit home loan through a broker?
Yes, mortgage brokers can arrange bad credit home loans for borrowers. Some mortgage brokers even specialise in securing bad credit home loans from non-bank lenders.
Do bad credit home loans have higher rates?
Bad credit home loans usually have higher interest rates than normal home loans. The worse your credit score is, and the smaller your deposit - the more lenders are likely to charge you.