Normally, people with a bad credit history have to go to a specialist lender in order to get approved for a home loan.

A specialist lender charges a higher interest rate, which can be anywhere between 2-4% higher than standard interest rates.

While this may be the only option available to you, you may still be able to get the same interest rates as someone with a clean credit file!

Get competitive interest rates with a major bank

Since lenders believe that bad credit applicants pose a higher risk, specialist lenders generally don’t lower their interest rates.

However, if you can qualify with a major bank or lender instead, you can automatically get a more competitive interest rate.

As long as your bad credit history consists of nothing more than a paid non-financial institution debt of less than $1,000 such as a missed electricity, water or telco bill, you can apply with a major bank without having to meet additional requirements.

If you’re in a strong financial position then some banks may approve your home loan even if you are discharged bankrupt, have completed a part 9 debt agreement, have up to two defaults or even if you have a court writ.

Generally speaking, you’ll be restricted to borrowing a maximum of 80% of the property value, although some lenders may consider up to 90% LVR (Loan to Value Ratio).

Conditions and other requirements apply so check out the bad credit home loan section for more vital information.

Also, if you’re borrowing less than $500,000 or below 80% of the property value then you’re more likely to get a better interest rate because of the lower risk to the lender.

If the bank declines your application, you’ll have no option but to apply with a specialist lender at a higher interest rate.

Will I always pay a higher interest rate with a specialist lender?

Although it’s very rare, you can get a slightly lower interest rate with a specialist or non-conforming lender but you’ll need to meet the following requirements for a better chance at qualifying:

• A minor bad credit history: If you have unpaid defaults of more than $1,000 or multiple bad credit records on your credit file then you likely won’t qualify for a low interest rate. However, some specialist lenders may still consider your application on a case by case basis.
• Proof that you’re a low risk borrower: This means you’ll need to be a high income professional such as an accountant, doctor or lawyer. Low risk professions such as nursing or teaching are also accepted.
• Stable employment: You’ll need to have been working in your current job role for at least 3 to 6 months meaning you must be past the probationary period. If you’ve changed jobs recently, then you need to have been working in the same industry for at least 2-3 years.
• Standard property: You must be buying a low risk property type. The property must be in a popular metro area, capital city or a major regional centre with a high population. You can use the postcode location guide to check your location’s risk level.

Keep in mind, if you don’t qualify for a low interest rate with your bad credit mortgage, you may be in a position to refinance your home loan with a major lender and at a more competitive interest rate in 2-3 years time, or after you’ve shown evidence of perfect repayments for your financial commitments over a period of 12 months.

Refinance your bad credit home loan back to a bank

Ultimately, a bad credit home loan is designed to be a short term solution for financing the purchase of a property.

However, you’re eligible to refinance out of a bad credit home loan and move back to a major bank or lender once you can meet standard bank criteria, meaning:

• Your home loan is currently at an LVR of 80% or less. Although rare, some banks may even consider 90% LVR.
• You’ve paid all of your defaults and they are no longer appearing on your credit file.
• You can provide full evidence of your income using payslips, tax returns and/or an accountant’s letter. If you’re unable to provide full income evidence then you may be able to get a low doc loan.
• Your repayments for the last 6 months have been perfect.

If you’re unable to refinance your bad credit home loan, you can still get a mortgage broker to help you refinance to a cheaper specialist lender before refinancing to a major bank.

Should I wait for my credit to clear to get better interest rates?

Unless you absolutely don’t want to miss out on a great interest rate deal when buying your dream home, it’s recommended that you wait for your credit file to clear. This way you’ll have a better chance of qualifying with a major bank at a sharper interest rate.

You can improve your credit score through credit repair, which is essentially removing disputable, unfair or contestable listings from your credit file such as:

• Overdue accounts and court listings.
• Defaults, judgments and clearouts.
• Crossed or linked files.
• Multiple identities, and more.

Unfortunately, there aren’t any free services available that can repair your credit file. Without the help of a professional, you’ll find it difficult to contest a default by asking your lender to remove it.

A specialist mortgage broker can help!

Our mortgage brokers specialise in bad credit home loans. They can help you build a strong application with a lender that’s right for your situation.

Although getting you approved is our number one priority, we always set up a home loan with the intent of refinancing you back to a prime lender in around 2 to 3 years’ time when your credit history is clear.

On top of that, if we see that we can get you a reduced interest rate, we will always negotiate hard for you.

Call 1300 889 743 or fill in our free assessment form and one of our specialist mortgage brokers will let you know how we can help.