The Pros and Cons of a Mortgage with a Default

A credit default does not permanently block you from getting a home loan.

Lenders treat defaults differently depending on the type, amount, age and whether it has been paid. Some lenders will consider applications from borrowers with defaults under $1,000 that are more than 12 months old and fully satisfied. Others have specialist policies designed for borrowers with more serious credit issues. What matters is understanding which lenders will consider your situation and what conditions apply.

How Lenders Assess Defaults on Your Credit File

Lenders assess defaults by reviewing your credit report, which lists any unpaid accounts referred to collection agencies or formally recorded as overdue. Defaults remain on your credit file for five years from the date they were listed, regardless of whether you have since paid them. The key factors lenders examine are the type of default (utility, telco, credit card or loan), the amount, how recently it was listed, and whether it has been paid or remains outstanding.

Most major banks will decline applications automatically if a default appears on your file within the past 24 months, or if the total value of defaults exceeds $500 to $1,000 depending on the institution. Non-major lenders and specialist lenders apply different criteria. Some will accept a single paid default under $1,000 that is at least 12 months old. Others will consider multiple defaults or larger amounts if you can demonstrate a clear reason for the default, evidence of financial recovery, and a consistent repayment history since the event.

Consider a buyer in Camberwell with a single $800 telco default from 18 months ago that has been paid in full. A major bank may automatically decline the application, but a non-major lender might approve the loan with a slightly higher interest rate or lower loan-to-value ratio, typically requiring a 15% to 20% deposit instead of the standard 10% for a borrower with a clear credit file.

The Impact of a Default on Your Borrowing Capacity

Your borrowing capacity measures how much a lender is willing to lend based on your income, expenses, existing debts and credit history. A default reduces your borrowing capacity in two ways. First, it limits the pool of lenders who will consider your application, and second, lenders who do approve your loan may apply stricter serviceability requirements or charge higher interest rates, which directly reduce the amount you can borrow.

Lenders willing to approve borrowers with defaults often apply a serviceability buffer that is higher than the standard 3.0 percentage points set by APRA for most borrowers with clear credit. They may also reduce the maximum loan-to-value ratio, requiring a larger deposit. For a borrower purchasing in Camberwell's established housing market, this can mean the difference between affording a property at the suburb's median or needing to adjust your budget or consider a different location.

In our experience, borrowers with a default who can demonstrate 12 to 24 months of clean repayment history on all current commitments, including rent, utilities and any remaining debts, are more likely to be approved and to secure terms closer to standard lending criteria. Having a larger deposit also improves your chances significantly.

Which Lenders Will Consider a Mortgage with a Default

Non-major lenders and specialist lenders dominate this space. They include regional banks, credit unions, and non-ADI lenders who assess applications manually rather than relying solely on automated credit scoring systems. Each lender has its own credit policy, and these policies change regularly based on the lender's risk appetite and funding position.

Some lenders will accept one or two paid defaults under $1,000 if they are older than 12 months. Others will consider larger defaults or more recent defaults if the borrower can provide evidence of extenuating circumstances, such as a period of unemployment, illness, or family breakdown, and can show they have since stabilised financially. A few specialist lenders will approve loans for borrowers with defaults still listed as unpaid, though the interest rate will be higher and the maximum LVR lower, often capped at 70% to 80%.

As an example, a buyer with two paid defaults totalling $2,400 from two years ago, now holding steady employment and a 20% deposit, may be approved by a non-major lender at a variable interest rate marginally above the standard owner-occupied rate. The borrower may also need to agree to more frequent account reviews or maintain an offset account as part of the approval conditions. Access to the right lender depends on matching your circumstances with the lender's current policy settings, which is where working with a broker familiar with low doc loans and non-standard lending becomes valuable.

Fixed Rate or Variable Rate with a Default

Both fixed and variable rate products are available to borrowers with defaults, though availability depends on the lender and the severity of your credit history. Variable rate loans are more commonly offered by lenders in this space because they provide greater flexibility for both the borrower and the lender. If your financial situation improves, you can make extra repayments or refinance to a lender with lower rates without incurring break costs.

Fixed rate loans can provide certainty over your repayment amount for a set period, typically one to five years. Some non-major lenders offer fixed rates to borrowers with minor defaults, particularly if the default is paid and older than 18 months. However, lenders who accept more serious credit issues typically offer variable rates only.

If you are approved for a fixed rate loan, consider whether the rate being offered is competitive compared to the variable rate product from the same lender. In some cases, the fixed rate may be higher than the variable rate by 0.5% to 1.0%, which reduces the benefit of fixing unless you expect rates to rise significantly during the fixed period. If you are uncertain which structure suits your situation, discussing your circumstances with a broker who understands refinancing options can help you assess whether locking in a rate now or maintaining flexibility is the right approach.

Improving Your Chances of Approval

The strongest applications share three characteristics: a clear explanation of what caused the default, evidence of financial stability since the default was listed, and a larger deposit. If your default resulted from a one-off event rather than ongoing financial mismanagement, lenders are more willing to consider your application. Providing a written statement that explains the circumstances, along with supporting documents such as a redundancy letter, medical certificate, or evidence of relationship breakdown, can help the lender understand the context.

Demonstrating financial stability means showing consistent income, regular savings, and a clean repayment record on all current commitments for at least 12 months. Bank statements that show regular savings deposits, no dishonours or overdrafts, and controlled discretionary spending strengthen your application significantly. If you have other debts such as personal loans or credit cards, paying these down or closing accounts you no longer use can also improve your borrowing capacity.

A larger deposit reduces the lender's risk and increases the likelihood of approval. While some lenders will approve borrowers with defaults at 80% LVR, requiring a 20% deposit, others may require 25% or 30% depending on the value and age of the defaults. Saving a larger deposit also reduces the amount you need to borrow, which in turn reduces your monthly repayments and makes your application more affordable under the lender's serviceability assessment. Camberwell buyers with defaults who can demonstrate genuine savings and a clear recovery path are regularly approved for home loans, particularly when working with a broker who knows which lenders are currently active in this segment.

What Happens If You Are Declined

If your application is declined, the most important step is to avoid making multiple applications in quick succession. Each application results in a credit enquiry being recorded on your credit file, and multiple enquiries within a short period signal to lenders that you are being declined elsewhere, which further reduces your chances of approval.

Instead, take time to understand why you were declined. Request a copy of your credit report from a credit reporting body such as Equifax, Experian or illion to confirm what information the lender saw. Check that all defaults listed are accurate and that any paid defaults are marked as satisfied. If you find an error, you can request a correction through the credit reporting body or the creditor who listed the default.

If the decline was due to insufficient deposit, focus on building your savings over the next six to twelve months. If it was due to serviceability, consider reducing your expenses, paying down other debts, or waiting until your income increases. If it was due to the default itself, waiting until the default is older or fully paid may improve your position. In some cases, borrowers are declined because they applied to the wrong lender. A broker can help you identify which lenders are most likely to approve your application based on your specific circumstances, reducing the risk of further declines and additional enquiries on your file.

Call one of our team or book an appointment at a time that works for you. We work with a panel of lenders who consider applications from borrowers with defaults, and we can help you understand your options and put together the strongest possible application.

Frequently Asked Questions