Bad Credit Home Loans Australia: Where To Apply
- Compare lenders offering bad credit home loans.
- Get expert tips on improving your chances of approval.
In our bad credit home loans guide:
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Compare bad credit home loan providers and interest rates
The table below shows a selection of the specialist lenders in Australia offering home loans for bad credit borrowers, based on Money.com.au’s analysis. The table is sorted by lowest interest rate. Where rates are shown, these are the very lowest advertised by the lender. Actual rates may be higher depending on your situation.
| Interest rates starting from | Borrowers considered | Max loan amount | Max LVR | |
|---|---|---|---|---|
Pepper Money - Variable Home Loan | 7.09% p.a. (7.27% p.a. comparison rate^) for LVRs up to 80% – higher rates apply for higher LVRs |
| $2.5m | 95% |
ORDE Financial (apply through broker only) | 7.19% p.a. (7.28% p.a. comparison rate^) |
| $2m | 80% |
Bluestone - Variable Home Loan | 7.29% p.a. (7.24% p.a. comparison rate^) |
| $3m | 90% |
Liberty Financial - Fresh Start Home Loan | 7.54% p.a. (8.24% p.a. comparison rate^) |
| $3m | 95% |
Resi - Renew/Restart Home Loan | Rates provided based on your individual information |
| No maximum advertised | 90% |
Axis Lending | Rates provided based on your individual information |
| No maximum advertised | Not disclosed |
MA Money | Rates provided based on your individual information |
| $2m | 80% |
Red Rock | Rates provided based on your individual information |
| No maximum advertised | 95% for purchase or 90% for refinance |
Can you get a home loan with bad credit?
It’s often still possible to get a home loan if you have bad credit. In fact, there are several specialist lenders and mortgage brokers in Australia who cater specifically for bad credit home loan borrowers.
“A lot of people think that because I'm a discharged bankrupt or I've had a default, or multiple defaults, I can't get a home loan. That's not the case. There are lenders out there that will give you money under all sorts of circumstances. They just charge more for the risk.”
Mansour Soltani, Money.com.au's home loan expert
How do bad credit home loans work?
Bad credit home loans are designed for people who aren’t eligible for a loan with mainstream lenders. That might be because they have experienced financial difficulty or have a bad credit score due to missed payments, defaults or having been declared bankrupt in the past.
Bad credit home loans can offer a valuable solution to borrowers with credit issues looking to buy a home. But there are drawbacks. Specifically, bad credit home loans can be considerably more expensive than standard loans, with higher than average interest rates and fees.
According to Mansour, the strategy is usually to start out with the bad credit home loan to buy the property initially, but to refinance the home loan to a lower rate as soon as the borrower’s situation has improved.
Here are the other main ways bad credit home loans differ to standard home loans:
- The application is generally ‘low doc’ meaning you won’t be subjected to the same strict criteria that mainstream lenders apply when assessing loan applications.
- There may be restrictions on how much you can borrow as a percentage of the value of the property you’re buying (known as your loan-to-value ratio or LVR).
- Some lenders are more selective about what kinds of properties and postcodes they will fund loans for (e.g. large acreage properties in certain rural areas may be off limits).
Reasons you might need a bad credit home loan
Common reasons you may need to go with a bad credit home loan provider include:
- You have an average or below average credit score (e.g. lower than 660).
- You have a bankruptcy filing or are subject to debt arrangements
- You have made numerous applications for credit in the last 12 months
- You have unpaid bills, taxes and other debt payments (defaults)
- You are the director of a business that is struggling financially
Here are two bad credit home loan case studies based on Mansour’s recent mortgage broking clients.
Bad credit home loan case studies
Case study 1 : Borrower with too many credit applications and late repayments
A client of mine was looking to buy a property with a $900,000 loan, but he had made more than 20 other credit requests over the last three years (credit cards, business loans, personal loans).
These credit applications were primarily to help his business through COVID, buy they caused real damage to his credit score. On top of that, he wasn't always paying his credit card on time.
However, this client’s business is successful with a high turnover, meaning he can easily afford the repayments on a home loan.
We spoke with several standard lenders to explain the situation. But for a lot of them, anything over seven credit inquiries on your credit report in the last 24 months is an automatic decline.
In that case, we needed to go with a low doc home loan application with a bad credit lender. There was a 1% risk fee charged by the lender but the client made the decision that it was overall the right approach.
Case study 2: Discharged bankrupt
Another client I worked with recently is a discharged bankrupt. He came to me two or three months ago looking for a construction loan.
A construction loan is a high risk prospect for a bank anyway, because there's so many different things that can go wrong. The builder can go bust, you can have supplier issues etc.
Overall, given the risk involved we decided it was best to wait a few more months before applying. That way, the client will have been discharged from bankruptcy for more than five years. At that point, it will come off his credit file and he will be in a much better position to apply.
Am I eligible for a bad credit home loan?
There are bad credit home loan options designed to cater for virtually every type of borrower, whether you're a first-home buyer, refinancer or investor.
As long as you meet the basic criteria (being over 18 and either an Australian citizen or permanent resident), your eligibility mainly comes down to your capacity to meet the loan repayments.
Bad credit mortgage lenders are still bound by Australia's responsible lending rules (National Consumer Credit Protection Act 2009) and will consider each application individually based on:
- Your income
- Your expenses
- Your other debts and assets
- The loan amount
- Your loan-to-value ratio
- The property you’re buying (the security for the loan)
How to apply for a bad credit home loan
Here are the main steps involved in applying for a bad credit home loan:
1. Check your credit score and report
Review your credit report as a first step. Sometimes a bad credit score is down to errors in your report that can be fixed.
You can also check when information was added to your credit report and, based on that, work out how soon it will be removed. This can influence whether you choose to apply for a home loan now, or wait. For example, some missed payments or defaults can remain on your credit file for up to two years, according to the OAIC.
You can request a free copy of your credit report from one of Australia's main credit bureaus (Experian, Equifax and illion) every three months.
Check your credit score and report
Not sure what your current credit score is? Check it now for free. Checking won’t impact your credit score or report.
Check my scoreCheck my score2. Speak to lenders (or a mortgage broker)
Before submitting an application, it’s best to speak to several lenders to discuss your situation and options.
You can either do this by approaching lenders directly or through a broker. Doing this will ultimately give you a better chance of being approved while allowing you to compare the rates and loan features different lenders may offer you.
3. Make an application
Most bad credit home loan applications can be completed online and relatively quickly if you have the necessary information ready.
Exactly what supporting documentation you’ll need to submit with the application varies depending on the lender and your situation, but it can include:
- Australian passport or valid Australian permanent residency visa
- Recent bank and loan statements
- Proof of assets (e.g. share trading account statement)
For PAYG employees
- Recent payslips
- Letter of employment
For self-employed applicants
- Proof of ABN and GST registration
- Business bank statements
- Recent tax returns, notice of assessments and financial statements
- Declaration of financial position signed by your accountant
Some lenders offering low doc home loans will require the bare minimum documentation. If you can’t supply the information above, it may be best to discuss options with a mortgage broker.
4. Loan is approved subject to valuation
If the lender is happy with your application, it will grant conditional approval. The last step involves the lender ordering a valuation of the property you’re buying.
Because the property will be used as security for the loan, the lender will only give full approval if the valuation is high enough so that the LVR on the loan is lower than the maximum it allows.
Compare bad credit home loan features
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Extra repayments
Most loans allow you to pay more than the minimum regular repayments so you can pay down the debt faster. Look for loans that allow unlimited extra repayments without fees.
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Redraw facility
A redraw facility gives you the option to withdraw any extra repayments you made on the loan if you need to access cash. Ideally you want a redraw facility with no limits or fees.
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100% offset account
A 100% offset account is a savings or transactions account linked to your mortgage. Your mortgage interest is calculated on your loan balance minus the amount in your linked savings account.
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Interest-only option
Some bad credit home loans will give you the option to pay only the interest on the loan for a period of up to five years. The eligibility criteria on interest-only loans (e.g. maximum LVR) are usually stricter, with higher interest rates.
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Debt consolidation
Debt consolidation means rolling some or all your other debts into your home loan. This could mean paying a lower interest rate on the likes of personal loan and credit card debt, plus the convenience of a single repayment. The drawback is potentially higher overall interest costs due to the longer loan term (up to 30 years on a mortgage).
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Split loan option
You’ll generally have the option of either a variable or fixed rate on a bad credit home loan. But some loans also offer the option to split the loan between a fixed and variable portion (e.g. 50:50, 60:40; 70:30). This can offer a combination of certainty (fixed portion) plus more flexibility to make extra repayments (variable).
Should you apply for a bad credit home loan or improve your credit first?
This is where having an initial conversation with potential lenders or a mortgage broker is crucial. Doing that will give you an idea of how likely it is that you will be approved now, and if not, what or how long it will take to improve your credit score and overall situation so you are eligible in future.
If it’s a ‘no’ now, what will it take to get to ‘yes’?
"Sometimes having run through scenarios with various lenders for clients, I can see that their application is not going to work. That can be first-time buyers, investors or whatever. But I always tell them how long it will be before it is going to work and what that will take. Sometimes it's a case of waiting for an interest rate drop, an increase in income or something negative coming off your credit report. If you do get a ‘no’ from your broker or your bank, ask them 'what next?'"
Mansour Soltani, Money.com.au's home loan expert
Bad credit home loans pros & cons
Pros
- Offers an alternative when other lenders won’t approve your application.
- Allows you to get into the property market sooner.
- Repaying a bad credit home loan consistently could help you build your credit score.
Cons
- Higher interest rates compared to standard loans.
- Higher fees, particularly ‘risk fees’.
- If your application is rejected, that may further damage your credit score.
5 tips to help you get your bad credit home loan approved
1. Demonstrate your ability to save
Lenders will want to see a history of genuine savings. They will check that you’ve gradually saved at least 5-10% of the property’s value over time (excluding cash gifts). Consider putting your money into a high-interest savings account that you top up each month. That way, when the lender asks for your bank statements, it will clearly show your discipline of saving money.
2. Show ‘clean’ bank statements
Lenders will ask for three months of bank statements to assess your income and expenses. They will comb over your transaction history to look at your spending habits and how you manage your money. Lenders want to see 'good banking conduct', which means no arrears, overdraws or dishonours. Additionally, too much discretionary spending may raise some flags. Ideally, you should always have money in your transaction account at the end of each pay cycle or month.
3. Kept your current debts in ‘good standing’
This means staying on top of any loan repayments and paying your credit card balance in full each month. This shows the lender that you prioritise your loan obligations, making you less likely to default on a home loan in their perspective.
4. Consider a guarantor
A guarantor is a family member (usually a parent) who may be willing to offer some of their home equity as additional security for your loan. Having a guarantor reduces your risk as a borrower, meaning lenders may be more inclined to approve your home loan application. However, if there’s a default and the property sale doesn’t cover the remaining loan balance, the lender may seek the guarantee amount from the guarantor, according to ANZ.
5. Continue to improve your credit score
Continue paying your utility bills and debts on time. More importantly, paying off debts sooner rather than later could improve your credit score, according to Equifax. You could use a snowball method that involves paying off your smallest debts first, then moving on to the next smallest, and so on. Keep in mind that lenders will look at the diversity of your 'credit mix' which shows you can responsibly manage different types of debt.
Bad credit home loan FAQs
What is a bad credit home loan?
A bad credit home loan is a mortgage product designed specifically for borrowers who have bad credit or have been declared bankrupt. These loans generally have more flexible eligibility criteria compared to standard home loans but typically come with higher interest rates and fees.
What’s a ‘good’ and ‘bad’ credit score?
Depending on the reporting agency, credit scores can range from 0 to either 1,000 or 1,200. For example, Equifax uses a score range up to 1,200 to calculate your credit rating and uses the following classifications:
- Below average (0 to 459)
- Average (460 to 660)
- Good (661 to 734)
- Very good (735 to 852)
- Excellent (853 to 1,200).
What’s the minimum credit score for a home loan?
There is no absolute minimum credit score required for a home loan as each lender has its own rules for assessing applications.
However, according to our home loans expert, Mansour Soltani, borrowers with a credit score below 660 (in Equifax’s ‘average’ or ‘below average’ brackets) are unlikely to be eligible with most mainstream lenders and may need to consider a bad credit home loan instead.
What are the interest rates on bad credit home loans?
Interest rates on bad credit home loans are usually in excess of 7% p.a. but can be considerably higher for some applicants who the lender views as representing a higher level of risk.
Here are the factors that lenders will usually consider when calculating the interest rate on a bad credit home loan:
- Your loan-to-value ratio (LVR) which is your loan amount as a percentage of the value of the property
- Whether the loan has a fixed or variable interest rate
- Whether it is a owner-occupied or investment property home loan
- Whether you are making interest-only repayments or principal and interest repayments
- Your income
- The specifics of your credit history
- Other debts you have
- Whether you own any other assets (e.g. a car or business assets)
What are ‘risk fees’ on bad credit home loans?
Lenders charge additional fees known as ‘risk fees’ on bad credit home loans, and on other loans where the borrower represents a high level of risk. These are designed to protect the lender for the increased risk in offering loans to borrowers with issues in their credit history.
How much you’re charged in risk fees will vary from lender to lender but it is commonly 1% of the loan amount. Borrowers can pay for risk fees up front when the loan settles or have the fees added to their loan amount, in which case there will be interest payable on the fee amount.
For example, on a $750,000 loan a 1% risk fee would equal $7,500. If added to the loan amount, that could actually end up costing the borrower more than $56,000 over a 30-year loan term, assuming an interest rate of 7% and monthly repayments.
What are the best lenders for bad credit home loans?
If you have issues in your credit history, applying through a specialist bad credit mortgage provider may give you the best chance of being approved. Here are some of the main bad credit home loan providers in Australia:
- Axis Lending
- Bluestone
- La Trobe Financial
- Liberty Financial
- MA Money
- ORDE Financial (available through brokers only)
- Pepper Money
- Red Rock
- Resi
Can I get a bad credit home loan through a broker?
Yes, mortgage brokers can facilitate bad credit home loans for borrowers and may have access to certain lenders that borrowers cannot apply with directly. Some mortgage brokers even specialise in securing bad credit home loans from non-bank lenders.
Home Loans guides and resources
What's the next step on your property journey? Our home loan guides will help you navigate the road ahead, whether you're buying, building or looking to save on an existing loan.
Written by
Editor
Sean Callery
Reviewed by
Home Loans Expert
Mansour Soltani
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