How to Get a Home Loan with a Default on Your Record

A default on your credit file makes most mainstream lenders apply tighter criteria or decline your application altogether.

Lenders treat defaults as a signal of credit risk, and while some will still consider your application, they often impose stricter conditions such as a larger deposit, higher interest rates, or additional supporting documentation. The type of default, its size, when it was listed, and whether it has been paid all influence how lenders assess your application. Some lenders have hardline policies that exclude applicants with any default in the past five years, while others evaluate each case individually and may lend if the rest of your financial position is solid.

What Counts as a Default and How Long It Stays on Your File

A default is listed on your credit file when you fail to make a payment of $150 or more and the creditor follows the required process under the Privacy Act.

The default remains on your credit file for five years from the date it was listed, regardless of whether you pay it. A telecommunications default from three years ago, a utility bill from 18 months ago, or an unpaid fitness membership can all appear on your file and affect your application. Paying the default does not remove it, but it does update the status to "paid," which most lenders view more favourably than an unpaid listing. Multiple defaults or a pattern of missed payments will narrow your options further than a single listing from several years ago.

Which Lenders Will Consider Your Application

Most major banks will decline or heavily restrict applications where a default has been listed in the past two to three years, particularly if the default remains unpaid.

Non-major lenders, specialist lenders, and some credit unions assess defaults with more flexibility, especially if the default is older, has been paid, or relates to a specific life event such as illness, separation, or a business downturn. In our experience, lenders who operate outside the top tier will often look at the full context rather than applying a blanket policy. Consider a buyer who had a $2,500 telecommunications default listed 18 months ago during a period of unemployment. The default has since been paid, the buyer has been employed full-time for 12 months, and they have saved a 15% deposit with consistent bank statements showing no further missed payments. A specialist lender approved the home loan application at a variable rate 0.4% higher than the standard market rate, with standard loan features including an offset account. The loan settled without requiring lenders mortgage insurance because the deposit exceeded 20%.

How Much Deposit You'll Need

A larger deposit reduces the lender's exposure and improves your chances of approval, particularly when a default is present.

While some buyers without defaults can borrow with a deposit as low as 5% using the Australian Government 5% Deposit Scheme, most lenders assessing an application with a default will require at least 10% to 15%, and many prefer 20% or more to avoid the need for lenders mortgage insurance. LMI providers often apply their own overlays when a default is listed, and even where the lender is willing to proceed, the insurer may decline cover or apply a higher premium. Saving a 20% deposit removes that obstacle entirely and opens up more lenders. Genuine savings held for at least three months are preferred, though some lenders will accept gifted deposits or equity from another property if the rest of your application is strong. If you're applying through the Australian Government 5% Deposit Scheme, defaults are assessed on a case-by-case basis by the participating lender, not by Housing Australia directly.

How Interest Rates and Loan Features Are Affected

Borrowers with a default on their file are often offered variable or fixed rate home loans at a margin above standard advertised rates.

The rate loading typically ranges from 0.25% to 0.80% depending on the lender, the size and age of the default, and the strength of your overall application. Some specialist lenders price all of their products at a higher baseline rate to account for the additional risk, so the loading may not be itemised separately. Loan features such as offset accounts, redraw facilities, and the ability to make extra repayments are usually still available, though some lenders restrict portability or split loan structures. Fixed rate products are less commonly offered to applicants with recent defaults, and where they are available, the rate discount is often smaller. In a scenario like this: a buyer with a single paid utility default from two years ago and a 20% deposit was offered a variable rate home loan at 6.59% when the lender's standard owner-occupied variable rate was 6.19%. The loan included a linked offset account and allowed unlimited additional repayments without penalty. The buyer refinanced to a lower rate 18 months later once the default aged further and their repayment history was established.

What You'll Need to Strengthen Your Application

Lenders assessing an application with a default will scrutinise your income stability, savings history, and conduct on existing accounts.

Provide at least three to six months of bank statements showing consistent income, no dishonours, and no further missed payments. If you have other credit accounts such as a credit card, personal loan, or buy now pay later facility, demonstrate that those accounts are being serviced on time. A letter of explanation outlining the circumstances that led to the default, what has changed since, and how you have addressed the issue can support your application, particularly if the default was the result of a one-off event rather than ongoing financial mismanagement. Lenders may also request evidence of rental payment history, employment stability, and proof that any outstanding debts have been paid or are being managed under a payment plan. If your application is declined by one lender, that does not mean all lenders will decline it. Each lender applies different criteria, and working with a mortgage broker who understands which lenders assess defaults more flexibly will save time and improve your outcome.

Timing Your Application

The older the default, the less weight it carries in a lender's assessment.

If your default was listed recently and your financial position has since stabilised, you may be approved now, but waiting an additional six to twelve months can open up more lenders and reduce the rate loading you're offered. If the default is already three or four years old and your conduct since then has been solid, apply now rather than waiting for it to fall off your file entirely. Lenders look at trajectory, not just the presence of a default. A borrower who had a default listed during a period of unemployment but has since been employed for two years, saved a deposit, and maintained all other accounts in good standing will generally be viewed more favourably than someone whose default is older but whose bank statements still show irregular income or frequent overdrafts. Where you are in that five-year window matters less than what you have done since the default was listed.

Call one of our team or book an appointment at a time that works for you. We work with lenders across Australia who assess applications with defaults, and we'll structure your application to give you the most options available.

Frequently Asked Questions