Home Loans for Bad Credit in Australia

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    How can you get a home loan with bad credit in Australia?

    Getting a home loan isn’t always easy, but with a low credit score, sometimes it seems outright impossible. Can you even get a home loan with bad credit? Fortunately, taking out a bad credit mortgage is not as hard as you think. In this article, you can learn about bad credit home loans and how to boost your chances of getting a good deal.

    What is a bad credit home loan?

    A bad credit mortgage, also known as a bad credit home loan, is designed to help borrowers with poor credit histories access home financing. They are designed as a short- or medium-term solution while the borrower rebuilds their credit. These loans will have higher interest rates and often require a larger initial deposit to counteract the risk associated with the borrower.

    Since these loans are often more expensive than conventional home loans, it’s helpful to get familiar with the fees, interest rates, and other contract terms. You should also look for special features that add flexibility to the loan structure. Finally, keep in mind that each loan has a different target customer and some might be a better fit than others.

    Types of bad credit mortgages

    Home loans for bad credit are designed for a variety of needs. There are several options available and it’s crucial to learn the key points of each one.

    • Paid and unpaid defaults home loan This loan is geared for borrowers who were unable to pay a debt in the past, which is known as a default. Unfortunately, this makes the borrower a larger risk for a bad credit mortgage broker. Some will only give loans for customers who have paid off their defaults, while others will also consider customers who still have unpaid defaults.

    • Discharged bankrupt home loan This type of loan is for those who had declared bankruptcy and have since had the bankruptcy discharged (i.e they are no longer obligated to pay off some or all of their past debt). Lenders are naturally cautious with customers who could not pay off prior debt, but certain bad credit mortgage brokers will still accept those types of borrowers.

    • Part 9 debt agreement loan A Part IX is a flexible financial arrangement to negotiate debt settlements without having to declare bankruptcy. However, similar to a bankruptcy, a Part IX stays on your credit history for 5-7 years. Lenders are often wary of borrowers that have a Part IX on their record, but the agreement can be perceived as an earnest effort to fulfill prior debt.

    • Tax debt home loan This is a loan granted to borrowers with substantial debts to the Australian Taxation Office (ATO). Typically, the ATO debt will be added on top of the mortgage. When taking out this type of home loan, be extra careful with your year-end taxes so that you avoid any unnecessary penalties.

    • Debt consolidation home loan Another bad credit home loan type is built on debt consolidation. This is a process where several high-interest debts are restructured under one larger, low-interest debt. That debt can even be your home mortgage, effectively combining your home loan with your other outstanding loans. This saves you money if you have a lower interest rate.

    Pros and cons of bad credit home loans

    Like with any big financial decision, you need to become familiar with both the advantages and disadvantages of a bad credit mortgage.

    Benefits of home loans for bad credit

    • Enabling you to buy your own home: These loans can help you reach a long-held dream of home ownership and enjoy all the comforts that come with it.
    • Escaping the rent cycle: Instead of endlessly paying money to a landlord, your payments are now going towards an achievable goal and a tangible asset.
    • Not having to wait years for a home purchase: Repairing credit takes a while, and by the time you’re eligible for a mainstream lender, prices might surge.

    Drawbacks of home loans for bad credit

    • Putting you further into debt: If you’ve had a hard time paying off previous loans, you might end up falling behind on your home loan payments as well.
    • Risking a rejected application: If you’re turned down, then not only would you lose the application fee, but getting an application rejected will ding your credit.
    • Higher interest rates and fees: Lenders charge steeper rates and fees for high-risk borrowers, and some require pricey Lenders Mortgage Insurance.

    As you can tell, while bad credit mortgages can serve as a lifeline, they also carry the risk of digging you deeper into debt if you’re not careful.

    How can I improve my credit score?

    Most home loans for bad credit are built around the idea that your credit score will improve over time. To help you stay on track, it’s important to do the following:

    • Check your credit report regularly for any mistakes. This is free and you might spot an inaccurate entry that is hurting your credit score.

    • Limit your loan applications , as well as credit card applications. Applying for too many will make you appear more risky for the lender.

    • Try to reduce outstanding debts wherever possible. Substantial unpaid debt piles up fast and will be a drag on your credit.

    • Don’t miss any payments for loans, credit cards, or bills. The simplest way to raise your credit is making each payment on time.

    Home loans for bad credit FAQ

    Can I get a bad credit home loan as a first time buyer?
    Yes. Even with a bad credit history, first time buyers can still be eligible for loans. In fact, there are government subsidies like the First Homeowners Grant to help make the purchase more accessible.
    Do I need a guarantor to get a bad credit home loan?
    No. However, while a guarantor is not a requirement, it will be helpful to get a family member with strong credit to cosign the loan. The lender will see your application as less risky and may require a smaller deposit.
    Does having bad credit mean I’ll always have to pay higher interest rates?
    No. After a few years of building your credit with consistent and timely payments, you will be in a much stronger position. The next step will be to refinance the home loan in hopes of getting lower interest rates.
    What do I do if I have good credit but my partner doesn’t?
    It’s important to note that if you apply jointly, you’ll be assessed based on the borrower with the lowest credit score. Your application might be stronger if you apply alone, but this will also limit your borrowing power.
    How do I refinance a home loan with bad credit?
    If you already have a home loan, it could be hard to get a new loan if your credit history is weak. If you’re set on refinancing, you can improve your chances by reducing your outstanding debt and by paying a deposit greater than 20%.

    Main takeaways about home loans for bad credit

    A bad credit history makes it challenging to get back on your feet and rebuild your financial future. However, many lenders are willing to help out borrowers by providing alternative home loans. These are a great tool as you transition towards a more stable financial future, but you have to be careful and make sure you don’t get taken advantage of. Following this article’s advice can help rebuild your credit and get you on the right track towards affordable home ownership.