Key facts about bad credit home loans in Australia:
- Borrowers with bad credit can still get a home loan in Australia, provided their current finances and income are in a good position.
- Interest rates on bad credit home loans are typically higher than average home loan rates and start from around 6.14% p.a. (comparison rate* 6.32% p.a.)
- To get a bad credit home loan you'll likely need to apply with a specialist lender, some of which only accept applications through a mortgage broker.
Bad credit home loan rates in Australia
The table below shows bad credit home loan rates, as well as key lending criteria from a range of lenders:
What are the interest rates on bad credit loans?
Interest rates on bad credit home loans in Australia typically range from around 6%-12% p.a. depending on the borrower and exactly how problematic their credit history is.
Unlike standard home loan rates, which tend to be the same for all borrowers in the same category, bad credit home loan rates are highly personalised to take account of the borrower’s credit history, income, debts and other factors.
As a result some, borrowers with a bad credit score will qualify for a rate that’s broadly comparable to standard home loan rates. Other bad credit borrowers will need to pay a much higher rate.
What’s a bad credit score and will I qualify for a home loan with one?
In Australia, any credit score below 600 could be considered ‘bad’ in a lender’s eyes. It will ultimately depend on the lender and which credit bureau they use to run credit score checks. But if your credit score is below 450, you’ll almost certainly be viewed as a bad credit borrower by most lenders.
The better news is that having a low credit score doesn’t necessarily mean you won’t qualify for a home loan. Instead it means you will likely need to be much more selective about where you apply for a home loan as you will have fewer lenders to choose from.
You’ll probably also need to pay a higher interest rate due to the increased risk bad credit lenders are taking on.
6 ways to get a better home loan rate with bad credit
- Improve your credit score. It will be easier to get a loan at a better rate if you pay off any outstanding defaults, fix any errors in your credit history and ideally wait until negative items fall off your credit report (timescales for this vary).
- Save a large deposit. Bad credit borrowers in particular can benefit from contributing a large deposit towards the property purchase (above 20%). This reduces risk for the lender and may result in a lower interest rate.
- Lower credit limits. If you have a credit card, consider lowering the limit to boost your borrowing capacity. Clearing other personal debt (car loans etc) could also help with mortgage approval and getting the best rate you can.
- Manage your spending. Before applying for a bad credit home loan, it’s a good idea to keep discretionary spending and more broadly show discipline in terms of how you manage your money.
- Connect with a specialist broker/lender: If you need a bad credit home loan, major banks and most other mainstream lenders are unlikely to consider you for a loan. Focus on finding the most suitable option and the best rate possible from brokers and lenders that specialise in bad credit lending. Some bad credit home loans are only available through a mortgage broker.
- Take your time. If you've been working towards improving your credit situation and have been managing your finances well, you may simply need more time to put yourself in the strongest position possible. Avoid the temptation to apply for a home loan before you and your finances are ready.
What home loan interest rate will I qualify for with bad credit?
Interest rates on bad credit home loans are personalised to the borrower based on their risk profile. Lenders take into account the details in your credit report, employment situation, your debt-to-income ratio and loan-to-value ratio.
Credit report detail
Bad credit lenders don’t just look at your credit score (although they will check this). They also look at what’s behind it and what issues are causing the low score, such as defaults, missed payments or, in more severe cases, court judgments. Lenders will consider how long ago the issue was, the value of any defaults and whether they are paid or unpaid.
If the detail in your credit report indicates a lower level of risk than your credit score alone would suggest, the lender may be willing to offer you a lower interest rate.
Employment situation
Lenders will consider employment status as one of the key indicators of a borrower’s ability to service the loan, particularly for bad credit borrowers. If you’re in long-term employment, lenders view this favourably and may adjust your rate downwards. If you’ve changed jobs recently or are self-employed, this increases the level of risk in the lender’s eyes.
Debt-to-income ratio (DTI)
It’s one thing having a high (and ideally stable) income, but if you also have high levels of existing debt (credit cards, personal loans, other property loans), the lender will likely charge an interest rate premium.
Your debt relative to your income is assessed through what lenders call your debt-to-income ratio and anything above 6 is generally considered risky. In other words, your debt is six times your annual income.
Loan-to-value ratio (LVR)
This is simply your loan amount as a percentage of the value of the property you’re buying. For bad credit loans, there may be additional restrictions on how much of the purchase price of the property you can borrow (e.g. up to 80% compared to 95% on standard home loans typically). A higher LVR will typically result in a higher interest rate and vice versa.
The type of loan
This doesn’t just apply to bad credit home loans, but lenders typically charge higher rates on investment home loans versus owner occupier loans. If you choose interest-only repayments instead of paying principal and interest, expect to pay an interest rate premium too.
What are the fees on bad credit home loans?
Fees are generally also higher on bad credit home loans and can add significantly to your overall costs. Most fees will be reflected in the loan’s comparison rate, but it’s worth checking individual fees too. Here are the main fees you may be charged and indicative amounts for each:
- Application/establishment fee: Up to $1,000
- Risk fee: Up to 3% of the value of the loan
- Legal fees: Generally up to $500
- Title protection fee: Up to $300
- Valuation fee: Up $400
- Settlement fee: Up to $200
- Ongoing fees: Up to $50 per month
- Discharge fee: Up to $400
- Loan variation fee: Up to $200
Fees shown are a general guide only. Actual lender fees may vary.
More bad credit home loan FAQs
Which lenders offer bad credit home loans?
Some of the most prominent bad credit home loan providers in Australia include Pepper Money, Liberty Financial, ORDE Financial, Bluestone Home Loans, Resi, Axis Lending, Restock and MA Money.
Some of these more specialist lenders are only available to customers who apply via a mortgage broker.
How do different types of lenders treat bad credit home loans?
Mainstream banks
Major banks and other large lenders generally do not lend to anyone who does not have a ‘good’ credit score. They typically have firm credit score cut-offs and if your score falls below this, your home loan application will be automatically declined.
Online lenders
Some online lenders have more flexible lending policies versus banks, but your chances of approval are still not great. Most online-only lenders advertise low rates and operate with low costs and narrow profit margins. They generally don’t have thecapacity to assess more complicated mortgage applications.
Specialist lenders
If you have bad credit, getting a home loan with a specialist bad credit lender is likely to be your best bet. These lenders usually don’t refer to themselves as ‘bad credit lenders’ and instead often use terms like ‘alternative’, ‘flexible’ and ‘specialist’. These lenders have greater capacity and appetite to assess complicated applications and take on additional risk with higher rates and fees to offset that risk.
Some specialist lenders only offer loans through mortgage brokers, with the broker doing a lot of the heavy lifting in terms of assessing their clients' eligibility.
Can I refinance my home loan to a better rate if I have bad credit?
If your credit score has worsened since you took out your loan initially, it’s unlikely you’ll be in a great position to get one of the better refinance home loan rates available. Refinancing your home loan effectively involves applying for a new loan and the lender will assess your credit score as part of that. The lenders offering the best rates typically require a good credit score.
If, however, you took out your loan when your credit score was low and you have since improved it, there’s a good chance you’ll be able to refinance to a better rate.
Will my interest rate decrease if my credit score improves?
If your credit score improves, the interest rate on your home loan won’t automatically decrease. Instead you’ll need to refinance your loan, potentially with a new lender.
Can I get a bad credit home loan with no deposit?
It’s unlikely that you’ll be able to get a bad credit home loan with absolutely no deposit. Most lenders require at least some deposit and some lenders may require at least 20%.
Are there bad credit home loans guaranteed approval?
You can’t get a bad credit home loan with guaranteed approval in Australia. Lenders must assess each applicant to ensure the loan is not unsuitable for them. This doesn’t necessarily involve a credit check, but it more than likely will.