If you have an average or bad credit score and are looking to buy a home, you aren’t alone. According to Finder, around one in five Australians had an average or below average credit score as of 2024. This could be due to a record of missed payments, defaults, or even just a limited credit file, all of which can work against you in a traditional lending assessment.
Having a less-than-perfect credit history doesn't mean homeownership is out of reach, though. There are home loan products out there that are designed specifically for borrowers in your position. The next big challenge for those who’ve struggled with their credit is knowing where to turn next.
What are bad credit home loans?
Bad credit home loans are, as the name suggests, home loans designed for borrowers whose credit score and history are below average or poor. Rather than assessing applications against the strict criteria of a major bank, these loans are typically offered by specialist and non-bank lenders who take a broader view of a borrower's financial situation.
While bad credit home loans work in the same fundamental way as a standard home loan, the terms on offer will typically reflect the additional risk the lender is taking on. This generally means higher interest rates, larger deposit requirements and additional fees. For borrowers who may otherwise be locked out of the property market, though, they’re a much-needed open door to home ownership.
How do I get approved for a bad credit home loan?
Getting approved for a bad credit home loan isn’t straightforward, so it pays to go in prepared. Here are some of the most effective steps you can take to improve your chances of approval:
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Work with a specialist mortgage broker
A mortgage broker with experience in bad credit lending can help match you with lenders who are likely to consider your application, saving you time and protecting your credit file from unnecessary enquiries.
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Know your credit score before you apply
Before approaching a lender, it’s worth reviewing your credit file carefully. Errors on credit files are more common than many people realise, and having incorrect listings removed can improve your score before you've changed anything else about your finances. Not all credit reporting bureaus are accurate, though, so getting your broker to review this for you is often the safest option.
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Reduce existing debt where possible
Lenders will look at your overall financial position, not just your credit score. Paying down outstanding debts like HECS-HELP and other study loans, as well as car or personal finance, before you apply reduces your debt-to-income ratio. This helps demonstrate that you're actively managing your finances responsibly.
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Avoid multiple credit applications
Every credit application you make leaves an enquiry on your file, and multiple enquiries in a short period can further damage your score. Be selective about where you apply, which a broker can help you do.
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Show stable income and employment
Lenders want confidence that you can service the loan. A consistent employment history and steady income, even if your credit history is patchy, can go a long way toward reassuring a lender that your financial situation has stabilised.
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Apply with a guarantor if you can
If you have a parent or grandparent who’s in a position to act as a guarantor on your home loan, this could increase your chances of approval. Guarantors add a further layer of security and are commonly used by buyers with good credit but a small deposit.
Not all bad credit is made equal
"Lenders won’t just look at your score when they assess your application, but also why it is the way it is. If it’s suffered as a result of a couple of minor non-finance defaults, like utility bills, those that accept bad credit can often be more flexible with rates and terms. Major finance defaults, such as those on other loans, bankruptcy and insolvency are likely to limit your options significantly, but there may still be lenders out there that can work with you."
How much will I need to pay as a deposit for my bad credit home loan?
For some bad credit home loans, lenders will require a minimum deposit of 20%, which equates to a loan to value ratio (LVR) of 80%. This is higher than the minimum required for a standard home loan, where some lenders will accept a deposit as low as 5% with the help of either a guarantor, Government first home buyer program (where applicable) or lenders mortgage insurance (LMI).
However, this won’t always be the case. There are specialist bad credit lenders in the market who can work with borrowers who only wish to put up 5% to 10%, though whether you can be approved with a deposit that small will depend on your circumstances. A larger deposit reduces the risk posed to your lender and gives them greater confidence that the loan can be serviced.
Top tips for home loan approval with bad credit
The table below outlines the key similarities and differences between a home loan for someone with regular or good credit and someone with bad credit:
| Bad credit home loan | Standard home loan | |
|---|---|---|
| Interest rate | Higher, to reflect the additional risk to the lender | Lower, available to borrowers with a strong credit profile |
| Fees | Higher fees are common, including risk fees (0.50% to 2.00% of your loan amount | Generally lower fees, particularly with major banks |
| Minimum deposit | May be capped at 20% with some lenders for certain profiles, though as little as 5% to 10% available | As little as 5% available, with lenders mortgage insurance (LMI) required in some cases |
| Borrowing power | Lower | Higher |
| Repayment structure | Principal and interest or interest only | Principal and interest or interest only |
| Lender options | Specialist non-bank lenders | Bank and non-bank lenders |
Over time, borrowers who keep up with repayments on a bad credit home loan may be able to refinance onto a standard product with more competitive terms, making it worth revisiting your options as your credit profile improves.
How much do bad credit home loans cost?
As we’ve discussed, bad credit home loans typically come with higher interest rates than standard products. On a loan the size of a mortgage, even a small difference in rate can add up to a significant sum over time. The table below illustrates the impact of rising rates on a $500,000, 30-year loan:
| Loan amount | Loan term | Interest rate | Monthly repayment | Total repaid | Total interest |
|---|---|---|---|---|---|
| $500,000 | 30 years | 6.25% p.a. | $3,079 | $1,108,291 | $608,291 |
| $500,000 | 30 years | 6.75% p.a. | $3,243 | $1,167,477 | $667,477 |
| $500,000 | 30 years | 7.25% p.a. | $3,411 | $1,227,917 | $727,917 |
| $500,000 | 30 years | 7.75% p.a. | $3,582 | $1,289,542 | $789,542 |
| Calculations are for illustrative purposes only and do not include any additional loan fees. Rates, amounts and term lengths aren't necessarily reflective of the terms you'll receive on your bad credit home loan. | |||||
Beyond the interest rate, several other factors will affect the total cost of your home loan:
- Deposit size: a larger deposit reduces the amount you need to borrow and therefore the total interest paid over the life of the loan.
- Fees: the higher establishment fee, ongoing account-keeping fees and risk fee charged on bad credit home loans can add up.
- Loan term: a longer loan term lowers your monthly repayments but increases your overall interest bill.
- Rate type: a variable rate may move up or down over the life of your loan, while a fixed rate locks in your repayments for one to five years, making budgeting more predictable.
Can I refinance a home loan with bad credit?
Yes, refinancing with bad credit is possible. The most common reason bad credit borrowers look to refinance is to secure a lower interest rate after their credit situation has improved, while others do so to consolidate other outstanding debts and alleviate high levels of financial stress.
If your credit profile hasn't improved significantly since taking out your original loan, you’re likely to find that your refinancing options are limited to other specialist or non-bank lenders, rather than mainstream banks.
It's worth speaking to a mortgage broker beforehand, as they can assess your current credit profile and identify whether the timing is right and which lenders are likely to consider your application.
When refinancing with bad credit can help you out of a sticky spot
"If you're struggling to keep on top of your debts, don't assume having impaired credit means you can't refinance. Consolidating debt into your home loan will not only get debtors off your back, but provide much-needed relief on your monthly budget. There are lenders out there that will approve a refinance if they can see they are improving your financial situation, despite low scores or credit issues."
How to apply for a bad credit home loan with Savvy
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Complete our online form
Tell us about your finances and your credit situation so we can understand more about you.
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Submit the required documentation
We’ll need to verify things like your income and identity as part of the initial process.
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Chat to your broker about your situation
You’ll get a call from your Savvy mortgage broker to discuss your bad credit mortgage options.
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Receive pre-approval
If your profile satisfies one of our lending partners, you’ll receive conditional approval.
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Lock in your home purchase
Shop around for a home in your budget and, when the time is right, buy it.
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Have your formal application prepped and submitted
We’ll help you with the formal application process and submit everything to your lender.
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Settlement and home ownership
Once everything is agreed upon, you can sign off on the deal and the home is yours!
