Bankruptcy can stay on your credit file for up to seven years, but this doesn't have to stop you from getting a home loan
Bankruptcy can happen for many reasons, many of which might not be your fault.
Unfortunately, your credit file doesn't list the reasons behind your bankruptcy, meaning you could find it very difficult to get any sort of home loan even once you're discharged.
Because these listings stay on your credit file for seven years, this can put your dreams of owning a home on hold.
Luckily, there are now a range of specialist lenders willing to offer home loans, some of which will consider borrowers who have been discharged from bankruptcy for as little as one day. While these can come with higher rates and fees, they're an option to help you get into a home or refinance an existing loan without having to wait so long.
Discharged bankrupt? Don't apply for another home loan until you've spoken to one of these lenders
Declaring bankruptcy has certain repercussions. You will be an ‘undischarged bankrupt’, meaning that you are still undergoing the process of bankruptcy. A trustee will be nominated by the Australian Financial Security Authority (AFSA) to manage your financial affairs until the period of bankruptcy ends. A discharged bankruptcy means that you are no longer bankrupt. Bankruptcy usually lasts for three years, but may be extended depending on certain conditions or as determined by the trustee. A permanent record of the bankruptcy will be on the National Personal Insolvency Index (the NPII). Your credit report will also be strongly affected, because reporting agencies keep record of it for up to seven years.
Your spending power will be limited, and most of your assets, particularly property, can be sold. You are restricted from managing a company or holding certain public positions and income past a certain limit will have contributions deducted from it. Travel overseas is prohibited unless allowed by the trustee.
Some specialist lenders offer home loans to discharged bankrupts, but usually with different and stricter terms and conditions, owing to the borrower’s history of bad finances. These products usually require a larger deposit, so you may need more than the standard 20% of the purchase price. These loans also usually have higher interest rates compared to regular home loans.
Approval for discharged bankrupts varies differently for every lender. Some provide discounts and lower rates, depending on the circumstances of your bankruptcy and the current state of your finances, as well as good rental history (if applicable). The timeframe between your discharge and loan application may also affect the outcome. At least two years is recommended.
While most banks and financial providers choose not to offer loans to discharged bankrupts (particularly the bankruptcy ended recently), there are those that cater specifically to this niche. Some offer regular loans with slightly different rates and conditions, while others also offer low income home loans.
What should you watch out for when applying for a home loan as a discharged bankrupt?
When your credit has been damaged following a bankruptcy, you have to be more cautious when it comes to your finances. In particular, you have to be prudent when it comes to applying for a home loan.
When choosing a lender, look for one that not only offers loans to discharged bankrupts, but also one that has a good track record and reputation. This ensures that your application will have a higher chance of approval and that you will be offered terms that are fair, even though rates are generally offered at a premium for these kinds of loans. Being cautious also helps because there are some questionable credit lenders in the market, all of whom wouldn't think twice about offering unreasonable rates.
One thing you must remember is that you should not apply to more than one lender at a time, and try not to apply to another lender immediately after a denied application. Every application for a loan, regardless of the reason, appears on your credit file. This shouldn't be a problem if you only apply for a loan once in a while. However, serial borrowing is viewed negatively by lenders, all of whom review your credit history at application. If you've already gone through several loan applications and have been denied, there are still ways you can clear up your enquiry history.
The good news for discharged bankrupts is that there are still a few different kinds of loans available for them. These will be dependent on the lender you choose, but the loans you can generally choose from include:
- Basic home loans: These are standard home loans that are an option for those who are looking for a budget-friendly loan. With discharged bankrupts, however, many extra features such as a pre-purchase approval may not be available.
- Low doc loans: Low doc loans are options for people who cannot provide any proof of income, such as recent tax returns or other financial documentation. Instead, borrowers are asked to declare their annual income, and in turn are required to pay a higher interest rate. These are usually ideal for self-employed individuals or freelancers.
- Package home loans: These types of home loans usually offer additional services aside from the loan itself, such as credit cards or transaction accounts.
How to compare specialist home loans
Certain factors can affect your choice of home loan provider. First, you have to ensure that the lender offers home loans to discharged bankrupts, and preferably has a good track record. Remember, every application shows up in your credit history, and if you get rejected it will show up on your credit file.
The second factor would be the loan's interest rates. Don't expect very low interest rates as a discharged bankrupt, unless you have a large deposit set aside for a down payment or have been diligent in paying your bills since your discharge.
Another factor you may want to consider are the fees that the lender will charge on top of the interest rates. Then there are the features that come with these loans. Some lenders offer extras such as revolving credit lines, offset accounts, or all-in-one accounts. However, most loans available to discharged bankrupts are basic, no-frill loans, meaning limited additional features.
Here are a few things to keep in mind when considering applying for a home loan for discharged bankrupts.
- You can still get a loan. While getting a loan as a discharged bankrupt can be challenging, it’s still possible. Pick a provider that has a good track record and ask them about their lending services to discharged bankrupts.
- The longer you've been discharged, the better. This is particularly true if you've been doing what you can to rebuild your finances during that time. It gives lenders the assurance that you are financially responsible and can pay back your home loan.
- Paying your bills on time helps. If you've been diligently paying your bills after your bankruptcy has been discharged, it's a good sign for the lenders and they will be more likely to approve your home loan.
- You have to wait until you are discharged. While most lenders have different guidelines for their loans, the majority will not lend funds to anyone who is still bankrupt. This is to avoid the possibility of adding to your financial trouble and also because they have no guarantee of being repaid the loan.
- Higher interest rate. While discharged bankrupts can get a loan, the interest rates will generally be higher than regular home loans. Lower rates are possible, but you may need to have a higher amount deposited in your bank account, or a higher deposit.
- Record of bankruptcy. Your record of bankruptcy will be stored up for seven years after your discharge, and your name will forever be on the National Personal Insolvency Index (NPII). This will be a factor when lenders take a look at your financial history.
Frequently Asked Questions
How long after my discharge before I can apply for a loan?
Most lenders allow discharged bankrupts to borrow just as soon as their term finishes. In some cases, others have a minimum number of years before they can apply for a loan, and a minimum deposit may be required. As mentioned, the longer time you have been discharged, the better.
I want to set aside money for a down payment before I apply for a loan. How much would I need?
It depends what sort of loan you are applying for. For home loans, it would be ideal to have at least 20% of the home's purchase price as your deposit amount. This puts you in a safe range, and increases your chance of getting the loan approved.
How much can I get as a discharged bankrupt?
The amount you can borrow varies for each lender, but most are in agreement that discharged bankrupts can borrow 60 - 80% of the property’s purchase price.