Bad credit doesn't mean you can't buy a home. Specialist lenders in Australia provide home loans to borrowers with defaults, judgments, bankruptcy, low credit scores, and other credit issues. This guide explains how to get approved and what to expect.
What is a Bad Credit Home Loan?
A home loan designed for borrowers with impaired credit:
Who qualifies as "bad credit": ✅ Credit score below 600 ✅ Paid or unpaid defaults ✅ Court judgments (CCJs) ✅ Discharged bankruptcy (1-3 years ago) ✅ Part IX debt agreement ✅ Multiple credit applications ✅ Mortgage arrears/late payments ✅ Tax debt or ATO issues
Types of bad credit loans:
- Non-conforming home loans
- Specialist lender products
- Near-prime mortgages
- Private/hard money loans
Bad Credit Loan Rates & Costs 2025
Rates vary by severity of credit issues:
Credit score tiers:
- Good (650+): 6.0-6.5% p.a. (standard bank)
- Fair (550-650): 7.0-9.0% p.a. (non-bank)
- Poor (450-550): 9.0-12% p.a. (specialist)
- Very poor (<450): 12-15%+ p.a. (private)
By credit issue type:
- Paid defaults (<$1,000): 7-8% p.a.
- Paid defaults ($1,000-$5,000): 8-10% p.a.
- Unpaid defaults: 10-13% p.a.
- Discharged bankruptcy (2+ years): 9-12% p.a.
- Recent bankruptcy (<2 years): 12-15% p.a.
Additional costs:
- Application fee: $500-$1,500
- Valuation: $300-$800
- LMI (if LVR > 80%): Higher premiums
- Monthly fees: $10-$30 (some lenders)
- Exit fees: Sometimes applicable
How Bad Credit Loans Work
Credit Score Impact
Australian credit scores (Equifax):
- Excellent: 833-1200
- Very Good: 726-832
- Good: 622-725
- Average: 510-621
- Below Average: 0-509
What affects your score:
- Payment defaults
- Bankruptcy/insolvency
- Court judgments
- Multiple credit applications
- High credit utilization
- ✅ On-time payments
- ✅ Length of credit history
- ✅ Low credit utilization
Checking your score:
- Free: Equifax, Experian, illion (once/year)
- Paid: CreditSavvy, Credit Simple (monthly)
Loan to Value Ratios
Maximum LVR by credit quality:
Good credit (650+):
- Up to 95% LVR (with LMI)
- First home buyer: 95%
- Investor: 90%
Fair credit (550-650):
- Up to 85% LVR
- Deposit: 15% minimum
- LMI more expensive
Poor credit (450-550):
- Up to 80% LVR
- Deposit: 20% minimum
- Some lenders: 70% max
Very poor (<450):
- 60-70% LVR maximum
- Deposit: 30-40%
- Private lenders only
Example $600,000 property:
- Good credit: $570k loan (95%), $30k deposit
- Fair credit: $510k loan (85%), $90k deposit
- Poor credit: $480k loan (80%), $120k deposit
- Very poor: $420k loan (70%), $180k deposit
Serviceability
Income assessment:
- Stricter than standard loans
- Must prove ability to pay higher rate
- Tested at higher buffer (3-4%)
- Rental income discounted more
- Side income scrutinized
Required income verification: ✅ Payslips (3 months PAYG) ✅ Tax returns (2 years self-employed) ✅ Bank statements (3-6 months) ✅ Employment letter ✅ Rental income proof (if investment)
Types of Bad Credit Home Loans
1. Non-Conforming Loans (Non-Bank)
Specialist non-bank lenders:
Who they lend to:
- Paid defaults under $10,000
- Credit score 500-650
- Discharged bankruptcy (2+ years)
- Self-employed with complex income
Typical terms:
- Rates: 7-10% p.a.
- LVR: Up to 85%
- Features: Some have offset, redraw
- Approval: 1-3 weeks
Best for: Moderate credit issues, steady income
2. Near-Prime Mortgages
For borrowers close to prime:
Who qualifies:
- Credit score 600-650
- Small paid defaults (<$2,000)
- Stable employment
- Good deposit (20%+)
Typical terms:
- Rates: 6.5-8% p.a.
- LVR: Up to 90%
- Features: Full features available
- Approval: 2-4 weeks
Best for: Minor credit blemishes only
3. Private/Hard Money Loans
Asset-based lending:
Who they lend to:
- Any credit (even bankruptcy)
- Unpaid defaults
- No income verification
- Quick settlement needed
Typical terms:
- Rates: 10-18% p.a.
- LVR: 60-75% maximum
- Term: 1-3 years typically
- Approval: 3-10 days
Best for: Severe credit issues, temporary solution
Lender Requirements by Credit Issue
Defaults
Paid defaults:
- Under $1,000: Many lenders accept
- $1,000-$5,000: Non-bank lenders
- Over $5,000: Specialist/private only
- Multiple defaults: More difficult
Unpaid defaults:
- Must explain why unpaid
- Some lenders require payment plan
- Higher rates apply
- Lower LVRs (70-80%)
Aged defaults:
- 5+ years old: Often ignored
- 3-5 years: Less impact
- 0-2 years: Significant impact
Bankruptcy
Discharged bankruptcy:
- 3+ years: Some non-banks
- 2-3 years: Specialist lenders
- 1-2 years: Private only
- <1 year: Very limited options
Requirements:
- Certificate of discharge
- Explanation letter
- Larger deposit (20-30%)
- Higher rates
Cannot lend:
- Undischarged bankruptcy
- Active Part IX/X agreement (usually)
Court Judgments
Satisfied judgments:
- Easier than defaults
- Provide satisfaction certificate
- Non-bank lenders accept
Unsatisfied judgments:
- Must be paid or payment plan
- Harder to get approved
- Private lenders may accept
Multiple Credit Applications
Recent applications (6 months):
- 3+ applications: Negative impact
- 5+ applications: Difficult to approve
- Wait 6 months before applying
Strategy:
- Don't apply yourself
- Use mortgage broker
- Broker submits to best lender only
Getting Approved with Bad Credit
Step-by-Step Process
1. Check Your Credit Report
- Get free report from Equifax
- Identify all issues
- Check for errors (dispute if wrong)
- Note dates and amounts
2. Prepare Explanations
- Why did issues occur?
- What's changed since?
- How will you avoid repeat?
- Evidence of improvement
3. Gather Strong Documents ✅ 3-6 months payslips ✅ 2 years tax returns ✅ Bank statements (clean) ✅ Employment verification ✅ Savings evidence ✅ Default payment receipts
4. Build Larger Deposit
- 20%+ much better
- Shows savings discipline
- Reduces lender risk
- Improves rates
5. Use a Specialist Broker
- Knows bad credit lenders
- Pre-qualifies before applying
- One application only
- Better approval odds
6. Consider a Guarantor
- Parent/family guarantee
- Compensates for bad credit
- Can get near-standard rates
- Guarantor needs good credit
Documents Required
Standard documents: ✅ Photo ID (license/passport) ✅ Proof of income ✅ Bank statements (6 months) ✅ Property details/contract ✅ Credit report ✅ Asset/liability statement
Bad credit specific: ✅ Explanation letters for all credit issues ✅ Evidence of payment (paid defaults) ✅ Discharge certificate (bankruptcy) ✅ Satisfaction certificate (judgments) ✅ Statutory declaration (explaining circumstances)
Improving Your Credit for Better Rates
Immediate Actions (0-3 months)
1. Pay Outstanding Defaults
- Pay smallest first
- Get confirmation letters
- Keep receipts
2. Close Unused Credit
- Cancel unused credit cards
- Close personal loans
- Reduce credit limits
3. Register on Electoral Roll
- Increases credit score
- Verifies address
- Free and easy
4. Fix Errors
- Dispute incorrect listings
- Provide evidence
- Follow up until corrected
5. Stop Applying
- No new credit applications
- Damages score further
- Wait 6 months minimum
Medium Term (6-12 months)
6. Build Payment History
- Pay everything on time
- Set up direct debits
- Never miss payments
7. Reduce Debt
- Pay down credit cards
- Reduce utilization under 30%
- Shows responsible behavior
8. Build Savings
- Regular deposits
- Demonstrate stability
- Prepare larger deposit
9. Stabilize Employment
- Stay in same job
- 12+ months ideal
- Avoid job hopping
Long Term (12-24+ months)
10. Wait Out Old Issues
- Defaults fall off after 5 years
- Bankruptcy off after 5 years (2 years for discharge)
- Score improves with time
11. Maintain Clean Record
- No new defaults
- All payments on time
- Responsible credit use
12. Consider Credit Repair
- Professional services
- Remove incorrect listings
- Negotiate with creditors
- Cost: $2,000-$5,000
Refinancing from Bad Credit Loan
Strategy: Start with bad credit loan, refinance to better rate
Timeline
Year 1-2: Bad Credit Loan
- Get approved at 10% p.a.
- Buy your home
- Make all payments on time
- Build good payment history
During loan:
- Never miss payments
- Keep credit clean
- Build equity
- Improve credit score
Year 2-3: Refinance
- Credit score improved
- 2 years payment history
- Equity increased
- Refinance to 6.5% p.a.
Savings example:
- $500k loan @ 10%: $4,388/month
- Refinance @ 6.5%: $3,160/month
- Save: $1,228/month ($14,736/year)
When to Refinance
Refinance when: ✅ Credit score improved 100+ points ✅ 12-24 months on-time payments ✅ Defaults aged or paid ✅ Bankruptcy 3+ years old ✅ 20%+ equity in property ✅ Stable employment
Costs:
- Discharge fee: $300-$800
- New application: $0-$1,000
- Valuation: $300-$800
- Potential break costs
- Total: $2,000-$5,000
Break-even: Usually 3-6 months
Common Bad Credit Loan Mistakes
1. Not Checking Credit First
Applied without knowing credit file Surprised by rejection More credit applications = worse score
✅ Solution: Check credit report BEFORE applying
2. Applying to Wrong Lender
Applied to mainstream bank Automatic rejection Wasted application
✅ Solution: Use specialist broker who knows bad credit lenders
3. No Explanation Letters
Didn't explain defaults Lender assumes worst Application declined
✅ Solution: Detailed, honest explanation with evidence
4. Insufficient Deposit
Only had 10% deposit Need 20%+ for bad credit Can't proceed
✅ Solution: Save larger deposit before applying
5. Not Cleaning Up First
Applied with unpaid defaults Could have paid them first Got worse rate
✅ Solution: Pay defaults, wait 6 months, then apply
Tips for Bad Credit Home Loan Success
Before applying:
- Get credit report - Know what lenders will see
- Pay what you can - Clear small defaults
- Build deposit - 20%+ much better
- Stabilize income - 12+ months same job
- Use a broker - Specialist bad credit broker essential
During application: 6. Be honest - Disclose everything upfront 7. Explain thoroughly - Letters for all issues 8. Provide evidence - Payment receipts, discharge certificates 9. Show improvement - Recent clean banking 10. Be patient - Takes longer than standard
After approval: 11. Never miss payments - Critical for future refinancing 12. Build equity - Pay extra when possible 13. Monitor credit - Track score improvements 14. Plan to refinance - In 2-3 years to better rate 15. Stay clean - No new credit issues
Alternative Options
Family Guarantor
Family member guarantees loan:
- Parent uses equity in their home
- You get standard rates despite bad credit
- Guarantor needs good credit
- Can remove guarantee later
Benefits: ✅ Better rates (6-7% vs 10%+) ✅ Higher LVR (up to 105%) ✅ Faster approval ✅ Build equity while improving credit
Risks: **Guarantor liable if you default **Family relationship risk **Guarantor can't use equity
Rent to Own
Live in property while building deposit:
- Rent property with option to buy
- Portion of rent goes to deposit
- Fixed purchase price
- Time to fix credit
Benefits: ✅ Lock in price now ✅ Build deposit while renting ✅ Time to improve credit ✅ "Own" sooner
Risks: **Usually higher rent **May lose deposit if don't buy **Limited properties available
Wait and Save
Delay purchase to improve position:
- Continue renting
- Pay off all defaults
- Build larger deposit
- Improve credit score
- Get standard loan later
When this is best:
- Credit improving rapidly
- Close to 620+ score
- Can save quickly
- Defaults aging off soon
Need a Bad Credit Home Loan?
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