Do You Know You Can Get a Home Loan with a Default?

A default doesn't close the door on home ownership.

You can still apply for a home loan with a default on your credit file, but the lender pool narrows and the lending criteria shifts. Most major banks decline applications with recent defaults, but specialist lenders and some non-major banks assess the circumstances behind the default rather than rejecting the application outright. The difference between approval and decline often comes down to how the default occurred, whether it's been paid, and how you've managed credit since.

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 at least $150 and the creditor has taken reasonable steps to recover the debt. The default remains on your file for five years from the date it was listed, regardless of whether you pay it. Paying the default changes its status to 'paid' but does not remove it earlier. Lenders can see both paid and unpaid defaults when they assess your application, and most treat unpaid defaults more seriously than paid ones. Defaults under $500 are often viewed differently to defaults over $10,000, and defaults related to essential services like utilities may be assessed more favourably than defaults related to previous loans or credit cards.

How Lenders Assess Applications with Defaults

Lenders divide into two broad categories when it comes to defaults. Major banks typically have automated credit scoring systems that decline applications with defaults listed in the past 12 to 24 months, particularly if the default is unpaid or relates to another credit product. Specialist lenders assess the full context. They want to know what caused the default, whether the circumstances have changed, and how you've managed your finances since. In our experience, a single utility default from two years ago during a period of temporary hardship is treated very differently to multiple unpaid defaults from recent months.

Consider a buyer in Wagga Wagga who had a $900 Telstra default listed 18 months ago after a billing dispute that went unresolved while they were overseas for work. The default has since been paid, and their credit file shows consistent repayment of a car loan and no other missed payments. A specialist lender reviewed the letter of explanation, sighted the paid default, and approved the application at a slightly higher interest rate than the lowest advertised variable rate. The buyer went on to purchase a three-bedroom home near Lake Albert and settled without needing a guarantor.

The Role of LMI and Deposit Size When You Have a Default

Lenders Mortgage Insurance providers also assess your credit file when the loan requires LMI. An LMI provider may decline to insure a loan where the borrower has recent unpaid defaults, even if the lender is willing to approve the loan in principle. This means buyers with defaults often need a larger deposit to keep the loan to value ratio at or below 80 per cent and avoid LMI altogether. Some specialist lenders have in-house LMI arrangements or different underwriting agreements that allow them to approve loans above 80 per cent LVR even when a default is present, but these are the exception rather than the rule. At current median property values in Wagga Wagga, which remain more accessible than in Sydney or Melbourne, a 20 per cent deposit might be more achievable than in other markets, particularly for buyers who have been renting locally and building savings.

Interest Rates and Loan Features with a Default on Your File

A default typically means you won't access the lowest advertised home loan rates. Specialist lenders price for risk, and that pricing appears as a margin above the rates offered to borrowers with clean credit files. The difference might be 0.5 to 1.5 percentage points depending on the number, type, and age of the defaults. You'll still have access to variable rate, fixed rate, and sometimes split rate structures, though interest-only options are less commonly available. Offset accounts and redraw facilities are often included, particularly with non-major lenders who compete on features even when their rates are higher than the major banks. Once the default ages beyond two years and you've demonstrated consistent repayment behaviour, refinancing to a lower rate with a different lender becomes a genuine option.

Paid Versus Unpaid Defaults and Why It Matters

Paying a default improves your approval chances but doesn't remove the listing. Lenders view a paid default as evidence that you eventually met the obligation, even if it was late. An unpaid default signals ongoing disregard for the debt or inability to clear it, and most lenders either decline the application or require the default to be paid before proceeding. If you're planning to apply for a home loan and have an unpaid default, paying it before lodging the application gives you access to a wider range of lenders. Some lenders will approve an application with an unpaid default on the condition that it's paid from the loan proceeds at settlement, but this arrangement is less common and usually only applies to small defaults under $1,000.

Government Schemes and Defaults

The Australian Government 5% Deposit Scheme is administered through participating lenders, and each lender applies its own credit policy. Some participating lenders accept applications from borrowers with older paid defaults, while others do not. Housing Australia does not publish a single credit policy that applies across all participating lenders. If you're a first home buyer in Wagga Wagga and you have a default on your file, it's worth checking with a mortgage broker which participating lenders are most likely to consider your application before you apply. The same principle applies to Help to Buy, where eligibility is determined by the participating lender's credit assessment as well as the income and property price caps set by the scheme.

Building Your Case for Approval

Lenders want to see stability and a clear explanation. If you're applying with a default on your file, prepare a written statement that explains what happened, what has changed, and how you've managed credit since. Supporting documents like payslips, bank statements showing regular savings, and evidence that other debts are being paid on time all strengthen the application. If the default relates to a one-off event like a medical bill or a disputed charge that was later resolved, include that context. Lenders assess character as well as capacity, and a well-documented explanation can be the difference between conditional approval and a decline.

Wagga Wagga's housing market includes a mix of established homes near the CBD, newer estates around Bomen and Brookdale, and rural residential blocks on the town's outskirts. Buyers with defaults on their credit files are still active in all segments of the local market, particularly where deposit size and stable employment support the application. Call one of our team or book an appointment at a time that works for you, and we'll match your situation to the lenders most likely to approve your application.

Frequently Asked Questions