Bankruptcy is a financial setback, but it does not have to define your future or end your dreams of home ownership. So what are the rules around getting a home loan after bankruptcy?
Can you get a home loan after bankruptcy?
If you are currently bankrupt and you want to make purchases worth over a set amount (currently $7,457) on credit or by using a cheque, you must disclose your status to your lender. Failing to do so is a criminal offence, per the Australian Financial Security Authority (AFSA). This means you almost certainly won’t be able to access a home loan during your bankruptcy.
However, after your bankruptcy has ended, there’s no restriction on applying for loans or credit, according to AFSA. Having a bankruptcy in your past can impact your ability to get approval for most types of credit, including a home loan, but that doesn’t mean it’s impossible. It’s up to the lender to assess your financial circumstances and decide if it’ll approve your application.
What is bankruptcy?
Bankruptcy is a legal process in which you declare that you can’t pay your debts. In that sense, bankruptcy can offer a level of relief, as it releases you from most debts – though you may still owe money on certain things like government-funded student loans.
Bankruptcy can offer something akin to a fresh start financially, but it’s certainly not a quick fix, and you’ll be subject to various strict conditions should you need to apply for it.
How long does bankruptcy last?
Bankruptcy normally lasts for three years and a day, says AFSA. During this time, a trustee will be appointed to manage your bankruptcy, and if you earn over a set amount after tax (currently $75,475.40 if you have no dependents), you may need to make payments to the trustee. In addition, you can face restrictions around leaving Australia.
How will home loan lenders know I’m bankrupt?
When you’re declared bankrupt, your name is listed permanently on the National Personal Insolvency Index (NPII). This is a public register that shows personal details such as your name, date of birth, and address, along with whether you’re still bankrupt or have been discharged from your bankruptcy. While it’s possible to request that some details like your address are hidden from public view for safety reasons, your name and date of birth will always remain on the NPII. Lenders will likely check this register when assessing loan applications.
Your credit report can also disclose details of bankruptcy. Credit reporting agencies keep a record of bankruptcy for five years from the date you become bankrupt, or two years from when your bankruptcy ends, whichever is later.
How do you buy a house after bankruptcy?
The home loan application process is the same regardless of whether you’ve previously been bankrupt or not. The difference is that if you’ve been declared bankrupt in the past, it can take time to rebuild your finances so you can confidently apply for a loan. Learning to budget and save can “go a long way towards helping you build a new life”, suggests AFSA.
Your ability to land a home loan can also depend on your choice of lender. Your bankruptcy will typically remain on your credit report for two years after it ends, so it could be worth spending that time growing your savings and improving your credit score, rather than applying for a home loan straight away.
Regardless of when you apply, most lenders will either check the NPII or ask if you’ve been declared bankrupt in the past, and some won’t approve a home loan even if your bankruptcy is well behind you.
Can you borrow from a specialist lender?
There are several specialist “non conforming” or non-bank lenders that may be more likely to offer home loans to Australians who’ve been bankrupt in the past. Whether or not a particular lender will approve your home loan application will depend on your circumstances, including your credit and savings history following the end of your bankruptcy.
The drawback of using a specialist lender is that you may have to jump through extra hoops, and it can be more expensive than a home loan from a traditional lender. This all reflects the fact that from a lender’s perspective, a track record of bankruptcy poses a higher risk of missed repayments or defaults in future.
As a guide, you may need to:
- Provide a larger deposit
- Pay higher upfront and ongoing fees
- Pay a higher interest rate compared to a mainstream lender
- Provide additional paperwork, like a written explanation of your credit circumstances or a letter from your accountant.
While a loan from a specialist lender may cost you more, it may be an option if you’re keen to own your own home. If you do opt for a specialist lender, then keep in mind that after several years of regularly making loan repayments, it may be possible to refinance your home loan with a traditional lender, and potentially save money with a lower rate.
Should I apply for a home loan after bankruptcy?
This will be a personal decision, but bear in mind if you’ve been through the bankruptcy wringer, it pays to choose your home loan lender with care. You may want to seek professional financial advice before jumping in, to help ensure the lender and loan you choose are suitable for your circumstances.
Making multiple loan applications and having them knocked back will also potentially lower your credit score, so it could be worth discussing your options with a lender or mortgage broker before rushing to make an application.
It’s also important to think about whether you’re ready to take on a significant debt. You need to be sure you can comfortably manage the repayments and that you’re not putting yourself back in a position where you’re struggling with debt. If you’re struggling with debt or bankruptcy-related issues and need advice, you can contact the National Debt Helpline (NDH) on 1800 007 007 for free, confidential financial counselling.
