A default on your credit file doesn't close the door on home ownership, but it does shift which lenders will consider your application and on what terms.
Most major banks step back when they see a default listed, particularly if it's recent or unpaid. Non-major lenders, specialist lenders and some credit unions take a more detailed view. They look at when the default occurred, whether it's been paid, what caused it, and how you've managed credit since. A single utility default from three years ago that's been paid carries less weight than multiple unpaid defaults from the last twelve months.
If you're in South Perth and you're weighing up whether to apply now or wait until the default ages off your file, the answer depends on your deposit size, the default amount, and how long ago it happened. Defaults remain on your credit file for five years from the date of the default, not the date you paid it. Waiting doesn't always improve your position if property values are rising faster than your savings.
How lenders assess a home loan application with a default
Lenders categorise defaults by amount, age, type and whether they've been paid. A default under $500 is often treated as administrative, particularly if it's a utility or phone bill that was paid once you became aware of it. A default over $1,000 triggers closer scrutiny. A default over $5,000, especially if it relates to another credit product like a personal loan or credit card, is treated more seriously.
Most lenders draw a line at unpaid defaults. If you're applying with an outstanding default, expect your application to be declined by major lenders and subject to higher interest rates or lower LVRs with non-major lenders. Paying the default before you apply improves your position, even if it remains listed on your file.
The type of default also matters. A single Telstra or AGL default from two years ago is viewed differently to a default on a car loan or a Buy Now Pay Later product. Lenders assume that missing a payment on a structured credit product indicates either cash flow problems or difficulty managing commitments.
Which lenders will consider your application
Major banks typically decline applications where a default has been listed in the last 24 months, though some will consider defaults under $500 if they're older than 12 months and paid. Most major lenders won't touch a default over $1,000 that's less than three years old.
Non-major lenders, including regional banks and credit unions, take a more flexible view. Many will consider applications with paid defaults under $5,000 that are at least 12 months old, provided your credit conduct since the default has been clear. Specialist lenders go further and will assess applications with multiple defaults or larger amounts, though the interest rate premium and LVR restrictions increase accordingly.
If you're applying through the Australian Government 5% Deposit Scheme, the participating lender you choose will apply their own credit policy on top of the scheme's eligibility criteria. Some participating lenders are more accommodating of past credit issues than others. A mortgage broker in South Perth who works across the panel can identify which lenders are most likely to approve your application based on your specific default history.
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How a default affects your interest rate and loan features
A paid default that's more than two years old may not affect your interest rate at all if you're applying through a non-major lender with a strong deposit. A default that's more recent, unpaid, or over $2,000 will typically push you into a higher rate bracket. Expect to pay between 0.25% and 1.5% above the lender's standard variable rate, depending on the severity and recency of the default.
Loan features are also restricted. Offset accounts, redraw facilities, and the ability to make extra repayments without penalty are often unavailable on loans approved with a default on file. Some lenders will offer these features once you've made 12 to 24 months of on-time repayments, but that's not guaranteed at the outset.
If you're looking at a split loan structure to manage rate risk, not all lenders will offer that option to borrowers with defaults. You may be limited to a single variable rate product until your repayment history with that lender is established.
Deposit size and LVR restrictions with a default
Deposit size becomes more important when you have a default on file. A borrower with a 20% deposit and a single paid default from 18 months ago will find more lenders willing to approve the application than a borrower with a 10% deposit and the same default.
LMI is harder to obtain if you have a default. Some LMI providers won't insure loans to borrowers with defaults at all. Others will insure them but only up to a maximum LVR of 85% or 90%, depending on the default amount and when it was paid. If you're applying with less than a 20% deposit and you have a default on file, expect the list of available lenders to narrow significantly.
Consider a buyer in South Perth with a 15% deposit who has a paid default from 14 months ago. A major bank is unlikely to approve the application. A non-major lender may approve it, but the LVR cap could be set at 85%, meaning the buyer would need to increase their deposit to 15% plus costs, or wait until the default is older. A specialist lender might approve the loan at 90% LVR, but the interest rate could be 1% higher than the buyer would pay with a clear credit file.
Whether to wait or apply now
Waiting for a default to age off your file improves your interest rate and lender options, but it delays your entry into the property market. If you're renting in South Perth and property values are increasing, the cost of waiting may outweigh the benefit of a lower rate.
Run the scenario both ways. If you apply now with a default on file, you might pay a higher rate for the first two to three years, but you're building equity in a rising market. If you wait two years for the default to drop off and property values increase by 8% per year, you've missed out on that capital growth and you're starting from a higher purchase price.
Once you've made 12 to 24 months of on-time repayments, you can refinance to a better rate and access loan features that weren't available when you first borrowed. Many borrowers with defaults take this path: they accept a higher rate initially to get into the market, then refinance once their credit file has improved and they've demonstrated consistent repayment behaviour.
How to strengthen your application
Pay the default before you apply. Even if it stays on your file, a paid default is always viewed more favourably than an unpaid one. If you're unable to pay it in full, contact the creditor and negotiate a payment arrangement or settlement. Some creditors will agree to mark the default as satisfied if you pay a reduced amount. Get that agreement in writing before you pay.
Close any credit accounts you're not using. Each open credit card, Buy Now Pay Later account, or personal loan reduces your borrowing capacity, even if the balance is zero. Lenders assume you could draw on that credit at any time, so they factor the potential repayment into their serviceability calculation.
Avoid applying for new credit in the six months before you apply for a home loan. Each credit enquiry is recorded on your file, and multiple enquiries in a short period suggest financial stress. If you've recently applied for a car loan, personal loan, or credit card, wait at least three months before applying for a home loan.
Gather evidence of your repayment history since the default. Bank statements showing regular rent payments, utility bills paid on time, and consistent savings behaviour all help to demonstrate that the default was an isolated event rather than part of a broader pattern.
If you're self-employed or have irregular income, be prepared to provide additional documentation. Lenders take a more conservative view of income when assessing applicants with defaults, so two years of tax returns, recent BAS statements, and accountant-prepared financials may all be required, even if the lender would normally accept less.
Call one of our team or book an appointment at a time that works for you. We'll review your credit file, identify which lenders are most likely to approve your application, and work through whether applying now or waiting will put you in a stronger position.
Frequently Asked Questions
Can I get a home loan with a default on my credit file?
Yes, but your options depend on the default amount, age, and whether it's been paid. Non-major and specialist lenders are more likely to approve applications with defaults than major banks, particularly if the default is older than 12 months and has been paid.
How long does a default stay on my credit file?
A default remains on your credit file for five years from the date it was listed, not from the date you paid it. Paying the default doesn't remove it from your file, but it does improve how lenders view your application.
Will a default affect my interest rate?
It depends on the default amount, age, and lender. A paid default over two years old may not affect your rate with some non-major lenders. Recent or unpaid defaults typically add 0.25% to 1.5% to your interest rate.
Should I wait for the default to drop off my file before applying?
Not always. If property values are rising, the cost of waiting may outweigh the benefit of a lower interest rate. Many borrowers with defaults enter the market at a higher rate and refinance to a lower rate once they've established a repayment history.
Do I need a larger deposit if I have a default?
Usually, yes. Lenders and LMI providers often cap the LVR at 85% or 90% for borrowers with defaults, meaning you'll need a larger deposit than a borrower with a clear credit file. A 20% deposit significantly improves your lender options.
