Bad credit home loans
If you have a ‘bad’ credit history, can you get approved for a home loan? And is it a good idea? Having bad credit can make it more difficult and riskier to get a loan compared to someone with ‘good’ credit. It can also be more expensive.
What is a bad credit home loan?
Bad credit home loans are simply home loans designed for those with poor credit. They are typically offered by specialist lenders, also known as non-conforming lenders. But there is often a catch — bad credit home loans typically charge higher interest rates. This is to account for a higher risk of default.
Over the life of a home loan – typically 25 or 30 years – even a slightly higher interest rate can make a big difference to how much it will cost you overall.
For this reason, bad credit home loans are usually intended to be a short- to medium-term solution, rather than a long-term fix. A borrower will typically seek to refinance to a standard home loan at a lower interest rate once their credit report has improved or negative information like overdue accounts and court judgments have dropped off their file.
Bad credit home loans can be riskier and more expensive than standard home loans, and you should research fees, interest rates, contract terms and risks that can apply.
Can you get a home loan with bad credit?
It may be possible to get approved for a home loan if you have a bad credit history, but it will depend on the other aspects of your application. Your credit history is just one factor lenders consider when assessing your home loan application.
Other factors such as your income, expenses, employment, how much you want to borrow and how much of a deposit you have will also be taken into account.
In Australia, lenders are legally required to lend money responsibly. This means they cannot give you a loan if they think you won’t be able to make the repayments. For example, lenders can reject your loan application if you have defaults or overdue payments listed on your credit report that suggest you may not be able to meet the repayments on the loan you’re applying for now.
If you have a bad credit history, some ‘traditional’ lenders (such as banks and credit unions) may not consider you for a loan. But it’s worth noting that lenders won’t necessarily treat all defaults the same way. For example, lenders may be more lenient if the default is only for a small amount, if you have paid the default or if it is an old (rather than new) default.
There are also specialist lenders who offer ‘bad credit home loans’. Specialist lenders may be more willing to lend to those with impaired credit. But it’s important to be fully across the costs and other terms and conditions that may apply.
→Related: Bad Credit Mortgage Brokers: What to know
Should I apply for a home loan if I have bad credit?
If you have a bad credit history, it’s important to carefully consider whether applying for a home loan is the most prudent thing to do. This may be particularly important for some people given the recent cost of living increases.
If you take out a home loan and your circumstances change unexpectedly, for example, this could lead to mortgage stress, or increased risk of default, depending on your circumstances.
When you take out a loan, you take on a degree of risk as a borrower and this can be high if you have a bad credit report and may be paying a higher interest rate as a result.
It may be better to wait until you have built up savings and have improved your credit history so you are in a stronger position to apply for a home loan. For example, Bendigo Bank recommends that those with a bad credit history save up a deposit of at least 20% of the value of the house (or an 80% loan-to-value ratio) so you won’t need to be considered for lender’s mortgage insurance.
Once you are ready to apply for a loan, it’s important to tread carefully. Each time you apply for a loan, it is marked on your credit report. If you apply for multiple loans within a short space of time, it can signal that you are in credit stress, and may have a negative effect on your credit score. To this end, it’s important to do your research before you apply.
You might want to get financial advice before committing to a loan. Free financial counselling is also available to support you if you need it, such as from the National Debt Helpline on 1800 007 007 or the Mob Strong Debt Helpline on 1800 808 488 (for Aboriginal and Torres Strait Islander peoples).
How can I improve my credit score?
If you have a poor credit score, there are steps you can take to help improve it. Although your credit score won’t change overnight, it can be improved over time as more positive information is added to your report and negative information gradually expires.
For example, you may want to:
- Regularly check your credit report and make sure that the information in it is correct. If it is not, you can contact the credit reporting body and ask them to fix it. It’s free to update your credit report or remove an incorrect listing.
- Make sure you pay any repayments and bills on time. Setting up automatic payments could help with this. You might also like to use Canstar’s Budget Planner Calculator.
- Think carefully before applying for new credit or loan products and try to limit any applications you make, whenever possible.
- If appropriate, consider lowering the limit on any credit cards you have.
Compare Home Loans (Refinance with variable rate only) with Canstar
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for homeowners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest to highest). Products shown are principal and interest home loans available for a loan amount of $500,000 in NSW with an LVR of 80% of the property value. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
Canstar is an information provider and in giving you product information Canstar is not making any suggestion or recommendation about a particular product. If you decide to apply for a home loan, you will deal directly with a financial institution, not with Canstar. Rates and product information should be confirmed with the relevant financial institution. Home Loans in the table include only products that are available for somebody borrowing 80% of the total loan amount. For product information, read our detailed disclosure, important notes and additional information. *Read the comparison rate warning. The results do not include all providers and may not compare all the features available to you.
Home Loan products displayed above that are not “Sponsored or Promoted” are sorted as referenced in the introductory text followed by Star Rating, then lowest Comparison Rate, then alphabetically by company. Canstar may receive a fee for referral of leads from these products.
When you click on the button marked “Enquire” (or similar) Canstar will direct your enquiry to a third party mortgage broker. If you decide to find out more or apply for a home loan, you can provide your details to the broker. You will liaise directly with the broker and not with Canstar. When you click on a button marked “More details” (or similar), Canstar will direct your enquiry to the product provider. Canstar may earn a fee for referral of leads from the comparison table above. See How We Get Paid for further information.
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This article was reviewed by our Content Producer Karen Yang before it was updated, as part of our fact-checking process.
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