Bad Credit Home Loan Guide

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Yes — you can get a home loan with bad credit in Australia, but not through a major bank. This guide explains how specialist non-conforming lenders assess bad credit applications, what rates and fees to expect, and how to use a specialist loan as a stepping stone to a prime lender within 12–24 months.

Can you get a home loan with bad credit in Australia?

Yes — but not through a major bank. If your Equifax credit score is below 500, or you have defaults, court judgments, or a Part IX Debt Agreement on your file, mainstream lenders will decline your application. However, a group of specialist non-conforming lenders — including Pepper Money, Liberty Financial, Bluestone, and La Trobe Financial — exist specifically to assess borrowers in this situation. They look at your full financial picture, not just a credit score.

This guide explains how specialist lenders assess 1 applications, what rates and fees to expect, how to maximise your approval chances, and — critically — how to use a bad credit loan as a stepping stone to a prime loan within 12–24 months. If you want to understand your specific situation right now, use our free Eligibility Checker or read our dedicated bad credit home loans page.

What Counts as Bad Credit in Australia?

In Australia, your credit file is maintained by three credit reporting agencies: Equifax, Experian, and Illion. Each uses a slightly different scoring model, but Equifax is the most commonly referenced by lenders. An Equifax score below 500 is generally considered poor, and below 400 is very poor.

Events that negatively affect your 1 include:

  • Defaults — unpaid debts listed by a creditor (paid defaults remain on your file for five years; unpaid defaults for seven years)
  • Court judgments — debts that have proceeded to legal action
  • Bankruptcy — remains on your file for five years after discharge (or two years after the bankruptcy period ends, whichever is longer)
  • Part IX Debt Agreements — a formal arrangement with creditors under the Bankruptcy Act, which stays on your file for five years
  • Multiple credit enquiries — applying for several credit products in a short period signals financial stress to lenders

Under Comprehensive Credit Reporting (CCR), introduced progressively since 2018, lenders can now also see your positive repayment history — not just negative events. This means that if you have been making consistent on-time repayments on existing debts, this positive data works in your favour even if your file has older blemishes. The Office of the Australian Information Commissioner (OAIC) provides detailed information on your rights regarding credit reporting.

You can access your 1 for free once per year from each of the three agencies. Reviewing your report before applying for a home loan is strongly recommended — errors on credit files are more common than most people realise, and disputing an incorrect listing can significantly improve your score.

How Specialist Lenders Assess Bad Credit Applications

Unlike major banks, which apply automated credit scoring models that will simply decline an application below a certain threshold, specialist non-bank lenders conduct manual credit assessments. A human underwriter reviews your application and considers the full context of your financial situation.

The key factors a specialist lender will assess include:

  • The nature and age of the credit issue — a default from five years ago is treated very differently from one from six months ago. Lenders want to see that the issue is behind you, not ongoing.
  • Whether defaults have been paid — a paid default is significantly less damaging than an unpaid one.
  • The reason for the credit issue — lenders distinguish between defaults caused by genuine hardship (illness, job loss, relationship breakdown) and those caused by financial mismanagement.
  • Current income stability — consistent, verifiable income is one of the most important factors.
  • Debt-to-income ratio — the total of your existing debts and the proposed new loan repayment relative to your income.
  • Deposit size — a larger deposit reduces the lender's risk and is one of the most powerful levers available to a bad credit borrower.

Typical Rates, Fees, and LVR Limits

Bad credit home loans carry higher interest rates than standard bank loans, reflecting the additional risk the lender takes on. As a general guide:

Credit ProfileRate Premium Above StandardMax LVR (Typical)
Minor issues (1–2 small defaults, paid)+0.5% – +1.5%90–95%
Moderate issues (multiple defaults, some unpaid)+1.5% – +2.5%80–85%
Severe issues (bankruptcy, Part IX, large defaults)+2.5% – +4%70–80%

In addition to higher rates, specialist lenders typically charge a risk fee (sometimes called a non-conforming fee) in lieu of Lenders Mortgage Insurance (LMI). This fee is typically 1% to 2% of the loan amount.

How Much Deposit Do You Need?

  • 5% deposit — possible for borrowers with minor credit issues and strong income, but rare
  • 10–15% deposit — available from some specialist lenders for moderate credit issues
  • 20% deposit — the most commonly recommended threshold; significantly improves approval chances
  • 30%+ deposit — for severe credit histories, a larger deposit may be required

The Exit Strategy: Your Path to a Prime Loan

The most important concept to understand about bad credit lending is the exit strategy. You are not locked into a specialist loan forever. The plan is:

  1. Use the specialist loan to secure your property now
  2. Make every repayment on time — this positive data appears on your credit file under CCR
  3. Allow the negative listings on your file to age (defaults are removed after five years)
  4. After 12–24 months of clean repayment history, refinance to a mainstream lender at a substantially lower rate

The interest rate saving from refinancing can be substantial — often $5,000 to $15,000 per year on a $500,000 loan.

Which Lenders Offer Bad Credit Home Loans?

Specialist non-bank lenders include Pepper Money, Liberty Financial, Bluestone Mortgages, Resimac, and La Trobe Financial. Critically, these lenders are not available directly to consumers in most cases. They work through mortgage brokers.

How to Improve Your Approval Chances

  • Pay outstanding defaults — a paid default is significantly less damaging than an unpaid one
  • Avoid new credit enquiries — do not apply for any new credit products in the six months before applying
  • Demonstrate stable income — two or more years with the same employer is viewed favourably
  • Reduce existing debts — paying down personal loans and credit cards improves your debt-to-income ratio
  • Save a larger deposit — even an additional 5% can open up better lender options
  • Get your credit report and dispute errors — errors on credit files are more common than most people realise

Frequently Asked Questions

Will using the Eligibility Checker affect my credit score?

No. The Eligibility Checker is an information tool only — it does not submit a credit application or create any enquiry on your credit file.

Can I get a home loan with an unpaid default?

Yes, in some cases. The outcome depends on the size, age, and type of the default. Defaults under $1,000 are generally treated more leniently.

How long does a default stay on my credit file?

Defaults remain for five years from the date listed, regardless of whether paid or unpaid.

Can I get a home loan after bankruptcy?

Yes, but most specialist lenders require you to have been discharged for at least one to two years.

Do I need a mortgage broker?

For bad credit home loans, using a specialist mortgage broker is strongly recommended. Most specialist lenders work exclusively through brokers.

Official & Government Resources

Bad Credit Home Loans by State

Stamp duty rates, first home buyer grants, and property market conditions vary significantly by state. Read our state-specific guides for detailed information:

Frequently Asked Questions

Can I get a home loan with bad credit in Australia?
Yes. Specialist and non-bank lenders assess applications on the full picture — income, deposit, recent conduct, and the reason for past credit issues — rather than relying on a credit-score cutoff like a major bank. Approvals at LVRs up to 80–90% are common for applicants with paid defaults, historical arrears, or a prior decline.
How long do defaults stay on my credit file?
Paid defaults stay on your credit file for 5 years from the listing date under current Australian credit reporting rules. Unpaid defaults stay for 5 years as well but are viewed much less favourably. Lenders will weight recent defaults (under 2 years old) more heavily than older ones.
Are specialist lender rates much higher than bank rates?
Specialist lender rates are typically 0.5–1.5% above prime bank rates. The exact margin depends on credit file severity, LVR, and loan purpose. Many borrowers use a specialist lender temporarily and refinance to a prime lender after 12–24 months of clean conduct.
Do I need a bigger deposit with bad credit?
Usually yes. Most specialist lenders cap LVRs between 80% and 90% for bad-credit applications, meaning a 10–20% deposit plus costs. The stronger your credit file and income, the higher the LVR available.
Should I pay off defaults before applying?
In most cases, yes — paid defaults are viewed significantly more favourably than unpaid ones. However, if funds are limited, it is usually better to pay off smaller recent defaults first and keep deposit funds intact.