Getting a Home Loan with a Default on Your Credit File

A default on your credit file doesn't mean lenders won't approve you.

It means you'll need to show why it happened, what's changed since, and how you've managed credit afterward. Some lenders see a paid default from two years ago differently to an unpaid one from last month. The approval depends less on the existence of the default and more on the context around it.

What Lenders Actually Look at When You Have a Default

Lenders assess the type of default, when it was listed, whether it's been paid, and how you've managed other credit since. A $200 phone bill default from three years ago that's been settled carries less weight than a $5,000 unpaid personal loan default from six months ago. The pattern after the default matters more than the listing itself.

Consider a buyer applying with a single paid utility default from eighteen months earlier. The default was listed after a billing dispute that went unresolved while they were overseas. They paid it within three months of returning, and since then they've maintained a credit card, car loan, and rental payments without issue. That borrower is far more likely to be approved than someone with a recent unpaid default and no supporting credit history.

Most lenders set thresholds around default type, value, and age. Some will approve borrowers with defaults under $1,000 if they're older than 12 months and paid in full. Others will consider higher-value defaults if there's a clear explanation and strong repayment conduct since. Non-major lenders often have more flexibility than the big four, particularly where the rest of your borrowing capacity is solid and you can demonstrate genuine savings.

How Much Deposit You'll Need with a Default on File

You'll typically need a deposit of at least 10% to 20%, depending on the lender and the severity of the default. LMI providers are less willing to cover loans for borrowers with credit impairments, so even if you're approved, some lenders won't offer LMI at standard rates. That often means you'll need a larger deposit to bring the loan to value ratio down to 80% or below.

If your default is paid and over two years old, you may still access loans above 80% LVR with some non-major lenders, though the interest rate will usually be higher and product choice more limited. If the default is unpaid or recent, most lenders will require 20% deposit as a baseline. Schemes like the Australian Government 5% Deposit Scheme generally require a clear credit file, so defaults can rule out that option unless they're very minor or very old.

Which Lenders Will Approve a Home Loan with a Default

Non-major lenders and specialist lenders are more likely to approve applicants with defaults than the major banks. Each lender has its own credit policy. Some will overlook a single default under $500 regardless of when it was listed. Others will consider multiple defaults if they're all telecommunications-related, paid, and older than 24 months.

In our experience, borrowers often assume they need to wait years before applying. That's not always the case. If the default is explained, paid, and your credit conduct since has been strong, there are lenders who will assess you now rather than making you wait. The interest rate might be 0.3% to 0.5% higher than a borrower with a clean file, but that gap narrows or disappears once the default ages beyond a certain point or falls off your file entirely.

We regularly see approvals where the applicant has one or two paid defaults, a 15% deposit, steady income, and no other adverse credit events. The key is matching your situation to the lender whose policy fits.

How to Structure Your Application When You Have a Default

Provide a written statement explaining the default, including the reason it occurred, what you did to resolve it, and how you've managed credit since. Lenders want to see that the default was an exception, not a pattern. If it was due to a one-off event like a relationship breakdown, job loss, or genuine billing error, say so and provide supporting evidence where possible.

Attach proof that the default has been paid, such as a receipt, bank statement, or letter from the creditor confirming the debt is settled. If the default is still unpaid, paying it before you apply will open up more lender options, even if the listing remains on your file for five years from the date it was recorded.

Your credit report will also show any accounts you've managed well since the default. If you've had a car loan, credit card, or buy-now-pay-later account with a perfect repayment history over the past 12 to 24 months, that works in your favour. It shows lenders you've learned from the default and that your current financial behaviour is reliable.

What Happens If Your Default Is Still Unpaid

You'll have far fewer lender options if the default remains unpaid. Most lenders treat an unpaid default as a current risk, even if it's several years old. Paying the debt won't remove the listing from your credit file, but it does change how lenders assess you. A paid default signals that you've taken responsibility and cleared the obligation.

If the debt is in dispute or you believe the default was listed incorrectly, you can lodge a complaint with the credit reporting body or the original creditor. If the default is removed, your home loan application becomes far more straightforward. If it's upheld, you'll need to decide whether to pay it or wait until it's old enough that more lenders will overlook it.

Interest Rates and Loan Features with a Default

Borrowers with defaults usually pay a higher interest rate, particularly in the first year or two. The rate loading depends on how recently the default was listed, whether it's been paid, and how many defaults appear on your file. A single small paid default might attract a rate 0.2% to 0.4% above standard variable rates. Multiple unpaid defaults or defaults over $5,000 can push the loading higher or result in a decline.

You'll also have access to fewer product features. Offset accounts, redraw facilities, and split loan structures are often available, but some lenders restrict these features on loans assessed under non-standard credit policy. Fixed rate options may also be limited, with some lenders offering variable rate products only to applicants with credit impairments.

Once the default is older or falls off your file entirely, you can refinance to a lender with lower rates and better features. Defaults remain on your credit file for five years from the date they're listed, so the impact reduces over time even if the listing is still visible.

Can You Use a Guarantor to Offset a Default

A guarantor can help you get approved if they have a clean credit file and sufficient equity in their own property. The guarantor doesn't need to guarantee the full loan amount, just enough to reduce your LVR to a level the lender will accept. That might mean guaranteeing 10% to 20% of the purchase price, depending on your deposit and the lender's policy.

Guarantors take on significant risk, so this option works when there's a strong relationship and clear repayment capacity on your side. The guarantor's liability usually reduces or ends once you build enough equity to refinance without their support. Some lenders will still decline an application if the borrower's default history is too recent or severe, even with a guarantor in place.

Rebuilding Your Credit Position Before You Apply

If your default is recent or unpaid, waiting six to twelve months and actively rebuilding your credit can open up more lender options and lower rates. Pay all bills on time, keep credit card balances low, and avoid applying for new credit unless necessary. Each credit application leaves an enquiry on your file, and multiple enquiries in a short period can raise concerns with lenders.

Order a copy of your credit report from Equifax, Experian, or illion so you know exactly what lenders will see. Check that all listings are accurate and that any paid defaults are marked as satisfied. If you're planning to apply within the next few months, avoid changing jobs or taking on new debt, as stability in employment and credit conduct strengthens your application.

Once you're ready to apply, speaking with a broker who works across multiple lenders gives you access to the policies and products that suit your situation, rather than guessing which bank might say yes.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions