So, can you get a mortgage with bad credit? Obviously, it’s everybody’s goal at some point to own a home, but we get that not everyone’s been blessed with a smooth financial life and may have made some poor financial decisions over the years that have resulted in bad credit.
Fortunately, the reality is that you can, but it usually takes a bit more effort and creativity since it’s definitely not going to be as easy.
In Australia, lenders will definitely pull your credit file when you apply for a home (mortgage), so they see everything:
- Your credit scores
- Any missed payments
- Defaults
- Any active credit cards or loans
Lenders literally use your credit rating to decide whether to lend you money. So, what are your options here?
Why Non-Bank Lenders and Mortgage Brokers Matter
Banks and building societies tend to shy away if your credit history is fairly rocky, which should be expected. That said, there are other home loan options available. For example, mortgage brokers and non-bank lenders often specialise in tougher cases where you can’t just go to a traditional bank.
Brokers can facilitate bad credit home loans by finding a lender you wouldn’t be able to reach on your own. These specialists essentially take a “real-life” view of your finances and look beyond the credit score.
So to put that simply, even with a poor credit score, a broker might find a lender willing to give you a shot if your situation has improved since back in the day and your other finances check out.
The Trade-Off: Higher Interest Rates and Risk Fees
Be prepared for a trade-off, though. Loans for borrowers with bad credit nearly always come with higher interest rates and extra fees. Bad credit home loans can be considerably more expensive than standard mortgages.
A bad-credit home loan is basically a normal mortgage but with higher interest and fees attached. The rates are usually somewhere around 2-6% above the big banks’ current rates for the same deal.
So in practice, that means if prime borrowers are getting, say, 5% on a loan, you might be looking at 7% or 8% with a home loan with bad credit. And don’t forget risk fees or special insurance: with a higher loan to value ratio (LVR), lenders might tack on a risk fee instead of the usual Lender’s Mortgage Insurance (LMI). For example, at 90% LVR (just a 10% deposit), you could face a 1.5% risk fee on top of the higher rate.
That’s clearly quite heavy, but on the positive side, these loans often require less paperwork. Standard banks might demand strict documentation, but bad-credit lenders sometimes relax some rules.
That said, less paperwork doesn’t exactly mean no requirements. You’ll still need a genuine deposit (often 10-20%) and proof of income and savings. Some lenders even let borrowers apply with only a 5% deposit on some products – essentially a 95% LVR – if the rest of their finances are solid. But more commonly, having at least 10-20% down will make lenders much happier.
Cleaning Up Your Financial History Before You Apply
Whichever lender or broker you use, get ready for scrutiny of your financial history. They’ll want to see that the mess in your credit past is behind you. So this means clean, “good” bank statements (no unexplained large overdrafts or missed bills), and that you’ve been paying any current loans or credit cards on time.
Lenders love to see that you pay your credit cards off in full each month and keep debts in check. Showing that you’ve consistently handled your day-to-day finances well can convince them that you’ve turned a corner.
Reduce Credit Inquiries
Also, remember that credit reports often include small marks that might surprise you – for example, applying for credit (like a credit card or car loan) will appear as a loan application enquiry on your report.
If you’ve applied around the time you apply for a mortgage, it could look like more risk. A credit enquiry (even a loan application) is listed on your credit report and stays there for years. So it pays to space out applications and clean up any old issues.
Before you start shopping for that bad-credit mortgage, take a moment to improve your standing where you can. Even a few on-time payments on a small personal loan can raise your profile. Fix any errors on your credit report (you have a right to get mistakes corrected for free).
And yes, start saving as much deposit as possible – a bigger deposit lowers your LVR and often results in better rates and fewer extra fees.
After Settlement: When and How to Refinance
If you do land a loan, plan to revisit it later. Many experts (and lenders themselves) suggest that you actually just grab the loan now and refinance once your credit score and financial situation improve.
For example, you could use a bad-credit loan to buy now, then, after you’ve built up savings and a perfect repayment record, refinance to a cheaper loan. That way you get into the market sooner, despite the extra cost, and then switch out of the premium price later.
Using Comparison Rates to See the Real Cost
And to compare all these pricier deals, make sure you always check the comparison rate. In Australia, lenders must quote both the interest rate and the comparison rate – the latter bundles in most fees.
The comparison rate is the “real cost” of the loan and is usually slightly higher than the headline rate. So if a broker shows you a 7% interest rate but a 7.8% comparison rate, that extra 0.8% is the fees and charges. Comparing loans by their comparison rates (rather than interest rates alone) is especially important when your credit score isn’t great, as it makes sure you’re not getting any shocks with hidden costs.
So, what’s the bottom line? Poor credit history or a poor credit score makes things harder, but doesn’t shut the door completely. A missed payment, default or bankruptcy will definitely raise eyebrows, but tons of Aussies have rebuilt after worse.
Just explain what the issues were (in your own mind and possibly to the lender) then show evidence that the situation is better now – perhaps through improved income or by paying all your billab ng time for the last year. Every lender is different. Some big banks might simply refuse, but many non-bank lenders will weigh these “explanations” seriously.
Why Non-Bank Lenders and Mortgage Brokers Matter
Get a broker involved, and you might find lenders who pre-vet your file upfront. In fact, brokers often offer free credit checks – they’ll spot things like bounced credit card payments or late utilities and suggest what to fix.
As mentioned earlier, some of those lenders typically only work through brokers and deliberately help borrowers who’ve had trouble.
If you have any family who can act as guarantors or co-signers, that’s also an option. A guarantor (say a parent) can let you borrow at a higher LVR without paying LMI, and gives the bank extra comfort.
How Upscore Can Help
Ready to check out loans from multiple lenders and get more home loan options? Sign up for Upscore’s Finance Passport today and boost your chances of securing the home loan you want.
