Bankruptcy is more common than a lot of people think. In 23/24 there were 7,580 bankrupt estates finalised according to the Australian Financial Security Authority (AFSA).
Although it may seem like it at the time, bankruptcy isn't the end of the world. It can sometimes end up a great way to start over after experiencing serious financial hardship.
If you're looking for a home loan, having a bankruptcy on your record obviously isn't great, but it doesn't mean you won't be able to get a mortgage.
What’s the bankruptcy process?
After declaring bankruptcy you are officially deemed an 'undischarged bankruptcy' This usually lasts for three years and means you're in the process of bankruptcy or insolvency. The Australian Financial Security Authority (AFSA) will appoint a trustee to oversee the assets you own and pay your debts back as best possible. During this period you cannot travel overseas without your trustee's permission, can own only limited assets, and typically cannot apply for credit products like home loans.
Once this period ends you become a 'discharged bankruptcy'. This means you are released from your bankruptcy and free from the restrictions imposed on you, including applying for a home loan. However, your name will still be permanently recorded on the National Personal Insolvency Index (NPII).
How long after going bankrupt can I get a home loan?
Although you can technically get a home loan once you are classified as discharged bankrupt, it’s not recommended you immediately start applying for loans. Your bankruptcy will continue to show up on your credit report for two years from when your bankruptcy ends or five years from the date you became bankrupt, whichever is later. It’ll take time to rebuild your credit rating so it’s recommended you wait at least two years before applying for a home loan.
AFSA may also be monitoring your financial behaviour in the period of discharged bankruptcy. In some cases, you can’t manage a company in this period, and failure to comply with AFSA may result in penalties such as an extension on the bankruptcy period or even imprisonment.
How to apply for home loans after bankruptcy
Home loans can be more difficult to obtain after going bankrupt. Lenders want to be confident you will be able to repay the loan and seeing a bankruptcy on your credit file will hinder your chances of being approved. Lenders will sometimes check the NPII but in any case you'll have to notify them of your bankruptcy.
Major lenders often won’t lend to people who have gone bankrupt before and if you previously had a home loan with a lender when going bankrupt, they are unlikely to lend to you. It’s often recommended you seek out a specialist lender more willing to lend to people with sub-par credit histories. Examples may include:
Pepper Money
Liberty Financial
As you’re considered a higher risk borrower, your mortgage is likely to be different from a regular mortgage. These differences include:
Higher interest rates: Lenders will generally charge higher rates on higher risk customers, while it's also likely bad credit home loan lenders will have higher rates than others. Despite this you should still try to shop around to ensure you’re getting a fair go. If you’re not very confident, consider consulting a mortgage broker.
Stricter eligibility requirements: As you’ve gone bankrupt, lenders may require more information from you when applying for a loan, as well as imposing stricter benchmarks than they normally would.
A higher loan-to-value ratio (LVR): Borrowers can get a loan with deposits as little as 5% for some loans these days, but the traditional benchmark is a 20% deposit to avoid Lenders Mortgage Insurance (LMI).
More fees: Many mortgages try to attract borrowers by waiving fees or offering them at low cost. After going bankrupt, this is unlikely to happen, and you may be subject to more fees which are more expensive.
It’s because of these factors it’s recommended you wait two years before applying for a loan. Doing so can help you prove to a lender you can service the loan by building up good credit behaviour. This will also give you time to save up for the larger deposit which may be required by the lender.
Types of home loans you can get after bankruptcy
If you’re in the mortgage market after bankruptcy, you might have more chance applying for the following types of home loan:
1. Basic home loans
A basic home loan is a simplified fixed or variable rate mortgage that does away with all the bells and whistles often attached to home loans in exchange for a lower rate and fees. For example, a basic home loan may not have an offset account and instead may have a discounted interest rate.
2. Low doc home loans
Low doc home loans are fixed or variable rate mortgages which require little documentation to apply compared to normal home loans. Often used by the self-employed, low doc home loans typically only require you to declare your annual income in exchange for a higher interest rate. Borrowers who have gone bankrupt are usually already subject to this anyway.
3. Package home loans
Package home loans allow you to combine your mortgage with other banking products like credit and debit cards or insurance and charge a higher flat annual fee in exchange for a lower interest rate. A bank that's reluctant to write you a home loan might be persuaded by the lure of getting your business elsewhere.
How to improve your credit rating
If you’ve gone bankrupt, improving your credit rating could be a great way to increase your chances of getting approved for a home loan. Here are some do’s and don’ts when it comes to improving your credit rating:
Dos:
Make credit repayments on time, consistently
Make bill payments on time, consistently
Consolidate debts
Cancel your credit card or lower your limit
Don’ts:
Apply for lots of loans and cards
Max out your credit cards
Savings.com.au’s two cents
For many households bankruptcy ends up being a soft reset, a second chance to do things properly. It will more than likely make it harder to get a home loan, but there could still be options out there. Try to improve your credit rating to the best of your ability and consider consulting a financial adviser.
This article was initially written by Alex Brewster in 2021.