Credit & Finance 10 min read

How to Get a Home Loan with Bad Credit in Australia

Quick Facts

  • Bad credit home loans available from specialist lenders
  • Interest rates typically 1-3% higher than standard loans
  • Minimum 10-20% deposit usually required
  • Credit repair can improve your options within 6-12 months

If you've been declined by the major banks due to bad credit, don't give up on your homeownership dreams. While having a poor credit history makes getting a home loan more challenging, it's not impossible. This guide explains your options, from specialist lenders to credit repair strategies.

Understanding Bad Credit in Australia

What Is Considered Bad Credit?

Your credit score ranges from 0-1,200 in Australia. Here's how lenders typically view different scores:

Credit Score Rating Home Loan Prospects
0-549 Below Average Specialist lenders only
550-624 Average Limited options, higher rates
625-725 Good Most lenders, standard rates
726-1,200 Very Good to Excellent Best rates and terms

What Causes Bad Credit?

Common Credit Issues

  • Defaults: Unpaid debts over $150 that are 60+ days overdue
  • Court judgements: Legal action for unpaid debts
  • Bankruptcy: Stays on record for 5 years (or 2 years after discharge)
  • Part IX agreements: Debt agreements that affect credit for 5 years
  • Multiple credit enquiries: Too many applications in a short time
  • Missed payments: Late payments on loans, credit cards, or bills

Home Loan Options for Bad Credit

1. Specialist Bad Credit Lenders

Non-bank lenders specialise in helping borrowers with credit issues. They assess applications differently from major banks.

Specialist Lender Features

  • Higher interest rates: Typically 7-10% (vs 6-7% for prime loans)
  • Larger deposits: Usually require 10-20% deposit
  • Flexible criteria: Consider explanation of past issues
  • Shorter terms: May offer 1-3 year loans initially

2. No Credit Check Home Loans

Some lenders offer loans without traditional credit checks, but beware:

Warning

  • • Very high interest rates (often 12%+)
  • • Large deposits required (30%+)
  • • Limited loan amounts
  • • May not be regulated - check ASIC registration

3. Guarantor Loans

If you have bad credit but a family member with good credit and property equity, a guarantor loan might work.

How Guarantor Loans Help

  • • Guarantor's property provides additional security
  • • Can borrow with little or no deposit
  • • Access better interest rates
  • • Guarantor's credit score matters more than yours

Note: This puts the guarantor's property at risk if you default

Improving Your Chances of Approval

1. Save a Larger Deposit

The more deposit you have, the lower the lender's risk:

Deposit Your Chances
5-10% Very difficult with bad credit
10-20% Possible with specialist lenders
20%+ Good chances, more lender options

2. Show Genuine Savings

Lenders want to see you've saved consistently over time:

  • Save regularly for at least 3-6 months
  • Keep savings in a dedicated account
  • Avoid large unexplained deposits
  • Show you can manage money despite past issues

3. Stabilise Your Employment

Employment Requirements

  • • Minimum 6-12 months in current job
  • • Permanent or long-term contract preferred
  • • Consistent income history
  • • Two years of tax returns for self-employed

Steps to Repair Your Credit

Before applying, take these steps to improve your credit:

  1. Get your credit reports: Free from Equifax, Experian, and Illion
  2. Check for errors: Dispute any incorrect listings immediately
  3. Pay defaults: Even if old, paying shows good faith
  4. Set up payment reminders: Never miss payments going forward
  5. Reduce credit limits: Lower total available credit
  6. Avoid new credit: Each application lowers your score

The Application Process

What You'll Need

Required Documents

  • ✓ 100 points of ID
  • ✓ Recent payslips (3 months)
  • ✓ Bank statements (3-6 months)
  • ✓ Tax returns (2 years)
  • ✓ Credit report
  • ✓ Explanation letter for credit issues
  • ✓ Evidence of savings
  • ✓ Proof of paid defaults (if applicable)

Writing Your Explanation Letter

A good explanation letter can make the difference. Include:

Letter Structure

  1. Brief explanation of what happened
  2. Why it won't happen again
  3. Steps taken to improve finances
  4. Current stable situation
  5. Supporting documentation

Costs to Consider

Bad credit loans often come with additional costs:

Typical Extra Costs

  • Higher interest: 1-3% above standard rates
  • Risk fees: $500-$2,000 one-off fee
  • Mortgage insurance: Higher premiums or not available
  • Application fees: $500-$1,000
  • Broker fees: Some charge for complex applications

Alternative Strategies

1. Wait and Improve

Sometimes the best strategy is to wait:

  • Defaults drop off after 5 years
  • Bankruptcies clear after 5 years
  • Each year of good credit helps
  • Save a larger deposit while waiting

2. Start with an Investment Property

Some find it easier to get approved for investment loans:

  • Rental income counts toward serviceability
  • Can claim tax deductions
  • Build equity for future owner-occupied purchase

Red Flags to Avoid

Warning Signs of Predatory Lenders

  • • No Australian Credit Licence number
  • • Pressure to sign immediately
  • • Unclear fees and charges
  • • Interest rates above 15%
  • • Request upfront fees before approval
  • • Won't provide written quotes

Success Story

Case Study: From Bankruptcy to Homeowner

Mark declared bankruptcy in 2019 after a failed business. Here's how he bought a home in 2024:

  • • Saved 20% deposit over 3 years
  • • Maintained stable employment
  • • Used a specialist lender at 8.2% interest
  • • Refinanced to major bank at 6.5% after 18 months
  • • Now building wealth through property

The Bottom Line

Bad credit doesn't have to mean the end of your homeownership dreams. While you'll face higher costs and fewer options initially, many Australians with past credit issues successfully buy homes through specialist lenders.

The keys to success are: understanding your options, improving your financial position, saving a solid deposit, and working with experienced brokers who know the bad credit market. With patience and the right approach, homeownership is still achievable.

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