The full term of bankruptcy can last up to 5 years, but that period is divided between undischarged bankruptcy, which lasts for 3 years and one day, and discharged bankruptcy which lasts for the remaining time, but can be ended earlier. Bankruptcy can certainly put your plans on hold for a while, however it doesn’t have to stop you from buying a home in the future.
The rest of this article will discuss what bankruptcy means for applying for credit in the future, and how you can apply for a home loan after being declared as a discharged bankrupt.
What is undischarged bankruptcy?
When you are first declared bankrupt you will be classified as an ‘undischarged bankrupt’, which essentially means you are still in the process of bankruptcy.
Undischarged bankruptcy lasts for the first three years of the bankruptcy period, in which several restrictions apply:
- Only allowed to own limited assets
- Not allowed to travel overseas
- Not allowed to apply for credit products such as home loans or credit cards
During this time you will not be able to apply for a home loan in most normal circumstances, and only specialist bankruptcy home loan lenders can offer home loans (with stricter criteria and conditions) depending on the borrower’s credit history.
How long after bankruptcy can I get a home loan?
Once you are declared as a ‘discharged bankrupt’ this will technically release you from bankruptcy, meaning you are no longer required to have limited assets, and you are once more free to travel overseas and apply for credit products like a home loan.
However, your finances will still be monitored by a nominee from the Australian Financial Security Authority (AFSA), and they will pay close attention to you until the period of bankruptcy officially ends.
During the two year discharged period of bankruptcy (sometimes less, depending on the conditions), you cannot manage a company. You are obligated to cooperate with the AFSA, and failure to do so can see you declared as an undischarged bankrupt once again.
Can I get a home loan after bankruptcy?
Yes, you can still get a home loan after bankruptcy – it’s not a dead end for your finances. Discharged bankrupts can still apply for a home loan to buy either a home to live in or an investment property.
This is because bankruptcy is not intended to be a punishment, but instead is meant to be a kind of reset button for people who have struggled with their finances. The Australian Bankruptcy Act was first introduced in 1966 in order to help Australians who have found themselves in debt that’s too much for them to pay off.
Technically, anyone with unpaid, overdue debts that they cannot repay can make an application for bankruptcy, whatever those debts might be, but this isn’t a recommended course of action. The AFSA can reject any petition for bankruptcy if they believe the person can reasonably fulfill their liabilities.
Declaring bankruptcy is obviously not without consequences. All bankruptcies are recorded on the National Personal Insolvency Index (NPII) permanently.
Getting a home loan after bankruptcy
Undischarged bankrupts can find it difficult to find a suitable home loan, but it is not impossible to get a home loan with a bad credit history.
There are specialist bankruptcy home loan lenders who offer home loans to discharged bankrupts. Since discharged bankrupts naturally have a bad credit history, the lenders willing to lend to them have stricter terms and conditions than lenders offering other types of home loans, such as:
- Stricter set of eligibility requirements
- Require initial deposits that are about 20% higher than normal
- Higher interest rates
- Higher fees
Obviously, paying more for a home loan than normal is not an ideal situation for anyone, especially someone who is already on tight finances, when home loans are already an expensive long-term debt.
Nevertheless, discharged bankrupts may be more likely to get a more reasonable interest rate on their home loan if they can prove that:
- The bankruptcy will not be repeated
- They have a good repayment history since
- They have a stable employment history
- They have saved for a deposit of 20% or more
Types of home loans available after bankruptcy
There are generally 3 kinds of home loans that are available after bankruptcy in Australia:
- Basic home loans
- Low doc home loans
- Package home loans
1. Basic home loans
In most cases, you might expect to pay a slightly higher interest rate due to your perceived risk as a borrower, but this isn’t always the case. See ‘Getting a home loan after bankruptcy’ above for some things you can do to qualify for a discounted interest rate above.
Some features like home loan pre-approval might not be available, and you should always check a loan’s product disclosure statement (PDS) and key facts sheet for any terms and conditions that apply to discharged bankrupts.
But if you shop around, you should still be able to find a decent home loan after bankruptcy.
2. Low doc home loans
A low doc home loan is a type of home loan intended for borrowers who are self-employed or own a small business, but they are also useful for people struggling financially. They are called ‘low doc’ loans because you don’t require the same level of documentation that you would normally require for a standard home loan.
Low doc loans are particularly useful for people who don’t have as much proof of income, like recent payslips or tax returns. With a low doc home loan, potential borrowers can simply declare their annual income, and they then pay a higher than normal interest rate to reflect the risk the lender is taking on.
This makes low doc loans another option for discharged bankrupts because their financial documents look less than ideal.
3. Package home loans
A package home loan involves ‘packaging’ your home loan together with other products with the one financial institution, such as a transaction account, credit card, and insurance or other products.
By packaging all of these products into a bundle, your lender will charge you one single annual fee, instead of multiple different fees on the separate loans, accounts, and cards. This annual fee can be around $300 – $400 per year at the time of writing.
In terms of home loans, a package home loan can give you a discounted interest rate of around 0.50% p.a, resulting in some significant savings. This can be attractive to cost-sensitive home buyers such as discharged bankrupts.
What to look for in a home loan after bankruptcy
It’s important not to set your hopes too high for a home loan after bankruptcy. Don’t expect low interest rates right from the start, and be ready to have certain home loan features made unavailable to you.
Another thing to consider is to avoid making any home loan applications too son and getting rejected. Every rejected home loan application shows up on your credit report, making potential lenders even warier of you in the future. To avoid this, you can look for a specialist lender with a history of giving home loans to discharged bankrupts – and you may need to speak to a lender’s mortgage manager to find this out.
Canstar can help you compare your options for home loans, so that you can find the right place to look for a home loan after bankruptcy.