Bad Credit Home Loans — Options When Banks Say No

Understanding Your Credit File and What Affects It

Your credit file is a record maintained by credit reporting agencies (Equifax, Experian, and illion in Australia) that tracks your borrowing and repayment history. When you apply for a home loan, lenders pull your credit file and use it alongside your income and expenses to make a lending decision. Understanding exactly what is on your file — and how long it stays there — is the first step toward navigating a bad credit home loan.

Defaults are recorded when you fall more than 60 days overdue on a payment of $150 or more. They remain on your file for 5 years from the date of listing. A paid default is viewed more favourably than an unpaid one, so clearing outstanding defaults before applying is advisable where possible.

Court judgments are recorded when a creditor takes legal action against you for an unpaid debt and a court orders you to pay. These remain for 5 years from the date of the judgment and are treated seriously by all lenders. Satisfying the judgment (paying it) is essential before a non-conforming lender will consider your application.

Bankruptcies remain on your credit file for either 2 years after discharge or 5 years from the date of bankruptcy, whichever is later. While the most serious credit event, specialist lenders will consider applications from discharged bankrupts, typically requiring 1-2 years post-discharge, a substantial deposit, and evidence of reformed financial behaviour.

Credit enquiries are recorded each time a lender checks your file. Multiple enquiries in a short period can indicate financial stress and reduce your credit score. This is why it is important to work with a broker rather than applying to multiple lenders directly — we make one application to the right lender rather than scattergun applications that damage your score further.

Non-Conforming Lenders: How They Differ from Banks

Non-conforming lenders operate differently from the major banks. Where banks apply rigid credit policies that automatically decline applicants with certain credit events, non-conforming lenders take a more nuanced approach. They assess each application on its merits, considering the circumstances around the credit issue, the time elapsed since it occurred, the steps you have taken to rehabilitate your finances, and your current ability to service the loan.

These lenders are not fringe operators — they are fully licensed and regulated by ASIC under the same National Consumer Credit Protection Act that governs the banks. The difference is in their risk appetite and assessment methodology, not their regulatory standards. Many non-conforming lenders are backed by institutional investors and have been operating in Australia for decades.

The trade-off for more flexible approval criteria is higher interest rates and, in some cases, additional fees. Rates for bad credit home loans typically range from 1% to 3% above standard home loan rates, depending on the severity of the credit issues and the LVR. However, these rates have become significantly more competitive in recent years as more lenders enter the non-conforming space.

Planning Your Exit Strategy

A bad credit home loan should be viewed as a stepping stone, not a permanent arrangement. The key is to enter the loan with a clear plan to refinance to a mainstream lender at a competitive rate once your credit position improves. We build this exit strategy into our recommendation from day one.

The typical timeline for transitioning from a non-conforming to a mainstream lender is 12-24 months. During this period, you need to make every repayment on time — your new loan repayment history is the most powerful evidence of financial rehabilitation. Additionally, any remaining defaults or judgments should be paid or satisfied, and you should avoid any new credit issues.

After 12-24 months of clean repayment history on your non-conforming loan, we revisit your credit file and reassess your options. Many borrowers are surprised by how quickly their options improve. A move from a non-conforming rate of 8.50% to a mainstream rate of 6.00% on a $500,000 loan would save approximately $12,500 per year — a powerful incentive to maintain financial discipline during the transition period.

Steps to Improve Your Credit Before Applying

If you have some time before you need to buy, taking steps to improve your credit position can significantly improve your loan options. Here are practical actions you can take:

Request your free credit report from Equifax, Experian, and illion. Check for any errors — it is not uncommon to find incorrectly reported defaults or enquiries that you did not authorise. Disputing and removing errors can improve your score immediately.

Pay off outstanding defaults and judgments. While the listing remains on your file for the full 5 years regardless of payment, a paid default is viewed much more favourably than an unpaid one. Contact the creditor and negotiate payment, then request confirmation that the listing has been updated to show as paid.

Close unused credit accounts. Credit cards, store cards, and personal loans that you no longer use should be formally closed. Open credit facilities reduce your borrowing capacity even if the balance is zero.

Establish positive payment history. Comprehensive credit reporting means that on-time payments are now recorded on your credit file. Consistently paying your rent, utilities, and any existing credit commitments on time builds a positive track record that improves your overall credit score over time.