TL;DR Summary
Paid defaults are viewed more favourably than unpaid defaults, but neither will be accepted by major banks. Specialist lenders may accept paid defaults under $1,000 that are 12+ months old. The age of your most recent default is as important as the type. Always pay outstanding defaults before applying and use a specialist broker to find the right lender for your exact situation.
Defaults Don't Automatically Mean Rejection
One of the most misunderstood aspects of the Australian home loan market is the role of credit defaults. Many people with defaults on their file assume they can never get a mortgage — but that's not accurate. The reality is more nuanced: defaults affect which lenders you can access and on what terms, but specialist lenders assess the full picture.
Understanding the difference between paid and unpaid defaults — and how lenders read your credit file — can help you plan your application strategically. Also see our guide on home loan with defaults for a full breakdown of your options.
What Is a Credit Default?
A credit default is a listing placed on your credit file when:
- A debt of $150 or more is overdue by at least 60 days
- The creditor has sent you a written notice (the "default notice") advising you to pay
- At least 14 days have passed since the notice was sent
Once listed, a default remains on your credit file for 5 years from the date it was first recorded, regardless of whether you pay it. Common creditors who list defaults include banks, finance companies, telcos (phone carriers), utilities (energy, water), and debt collectors.
Paid Defaults vs Unpaid Defaults
The most important distinction for lenders is whether a default has been paid (settled) or remains outstanding:
| Factor | Paid Default | Unpaid Default |
|---|---|---|
| Removed from credit file? | No — stays 5 years | No — stays 5 years |
| Major bank eligibility | Generally no | No |
| Specialist lender eligibility | Possible (conditions) | Harder — needs explanation |
| Lender perception | More favourable | Less favourable |
| Credit score impact | Moderate | High |
Some major banks may decline home loans for applicants with defaults on file, even where they have been paid. Non-bank specialist lenders can use a more nuanced assessment that looks at the type, age, amount, and context of the default.
Free Credit Assessment
What thresholds do specialist lenders use?
Get a free assessment to understand your eligibility based on your specific defaults.
Lender Thresholds: What Specialist Lenders Actually Accept
Non-bank specialist lenders use risk-based models that consider the specific details of your defaults. Policies vary between lenders, so treat the following as general guides only:
- Paid defaults under $1,000 — often acceptable to specialist lenders, particularly if they are 12+ months old and from telco or utility creditors
- Unpaid defaults over $500 — usually require a detailed written explanation and evidence the debt is being addressed
- Multiple defaults within 12 months of application — this is a major red flag for most lenders and will significantly limit your options
- Mortgage defaults — the most serious category. Most lenders require 2+ years clear from the most recent mortgage default before considering any application
- Large single defaults ($5,000+) — require strong mitigating circumstances and are assessed case-by-case
Hard Credit Enquiries
Every time a lender does a full credit check on your application, a "hard enquiry" is recorded on your credit file. Multiple hard enquiries in a short period (often called "rate shopping") can further damage your credit score and make lenders wary. Always use a broker to identify the right lender before any formal application is submitted.
The Age of Defaults Matters Enormously
Time is your best ally when dealing with credit defaults. The age of a default significantly affects how lenders interpret it:
- A 4-year-old paid default for $400 is far less damaging than a 6-month-old unpaid default for $400
- Most specialist lenders want to see at least 12 months since the most recent default
- After 2 years of clean credit post-default, your options expand significantly
- After 5 years from the default date, it is removed from your credit file entirely
This means that if your most recent default is 6 months old, waiting another 6–12 months while maintaining clean credit could significantly change your eligibility. Talk to our team to understand whether waiting makes sense in your situation.
How Deposit Size Interacts With Defaults
Deposit and credit history are the two biggest levers in a specialist assessment, and they move in opposite directions. A bigger deposit can make some lenders more willing to consider credit damage, and may reduce the rate premium.
- Smaller deposit: Some lenders may consider a small, old, paid default. Heavier credit impairment can require a larger deposit.
- Mid-sized deposit: Can open up more near-prime specialist products, and some paid defaults may become workable.
- Larger deposit: Often helps with impaired credit, can avoid LMI, and may give access to a wider range of specialist lenders, including some borrowers with multiple paid defaults, Part IX agreements or more recent defaults.
- Very large deposit: May allow some lenders to consider unpaid defaults, discharged bankruptcy or heavier impairment that others would decline.
If your deposit is short, a guarantor loan can bridge the gap — but the guarantor's own file needs to be clean, and some specialist lenders don't accept guarantors at all. Our broker will tell you up-front which lenders in your tier work with family security.
Serviceability Still Needs To Stack Up
A clean path through the default conversation only matters if the loan is actually serviceable. Specialist lenders apply the same APRA 3% buffer that major banks use — your repayments are stress-tested at your rate + 3%. In practice, that means a loan is assessed as if the rate were three percentage points higher than the actual rate.
For borrowers rebuilding after credit issues, this often matters more than the default itself. We work through:
- Removing unnecessary credit cards — a card limit can be assessed as a monthly commitment, even if you never use it
- Closing BNPL accounts — Afterpay, Zip and similar are now visible on comprehensive credit reports and can reduce borrowing capacity
- Clearing short-term debt first — personal loans and car finance hit serviceability harder per dollar than mortgage debt
- Choosing the right loan structure — Principal & Interest usually wins over Interest Only when serviceability is tight
Use our borrowing power calculator to get a rough number, then let a broker refine it against the specialist lender you're most likely to land with.
The 24-Month Exit Plan Back To Mainstream Pricing
Many borrowers with defaults don't want to stay on specialist pricing forever, and some may not need to. The game plan looks like this:
- Months 0–3: Settle on a specialist loan. Lock in a competitive rate within the specialist tier and set up Principal & Interest repayments on auto-debit.
- Months 3–18: Build a record of consistent repayment conduct. No missed bills, no new credit applications, no BNPL defaults. This is the single most important thing you can do.
- Months 12–24: Watch the age of your defaults. As the newest paid default ages, some lenders may reconsider your file, and over time more mainstream lenders may too.
- Months 18–24: Refinance. A broker revisits the panel, applies to a cheaper lender, and drops you back onto standard pricing. Moving from specialist pricing to standard pricing can reduce your repayments; ask for a written comparison.
This is the strategy that makes a specialist loan worth taking in the first place. The bad credit home loan isn't the destination — it's the stepping stone.
What to Do If You Have Defaults
- Get a free copy of your credit file — order from Equifax (equifax.com.au), Illion (creditreport.com.au), and Experian (experian.com.au). You're entitled to one free copy per year from each
- Check for errors — defaults can be listed incorrectly. If a debt was paid and shows as unpaid, or the amount is wrong, you can dispute it with the credit reporting body
- Pay outstanding defaults — this updates the listing from unpaid to paid, which is viewed more favourably by lenders
- Don't apply broadly — visit our Bank Knockback page to understand your options before making any applications
- Wait if needed — if your most recent default is under 12 months old, waiting may significantly improve your options
- Use a specialist broker — to be matched with the most suitable lender for your exact credit profile. Also see our guide on credit repair before applying
Frequently Asked Questions
No. Paying off a default updates its status from 'unpaid' to 'paid', but the listing itself remains for 5 years from the date it was first recorded. However, paid status is viewed significantly more favourably by lenders than unpaid.
There's no universal limit — lenders assess defaults case by case. Specialist lenders may accept 1–2 paid defaults under $1,000 that are 12+ months old. Multiple defaults, large amounts, or recent defaults significantly reduce options. Our team can assess your specific situation.
Telco (phone company) defaults are generally viewed less seriously because they are common and often result from billing disputes. Credit card, personal loan, and especially mortgage defaults are viewed much more seriously as they indicate issues with larger financial commitments.
A paid default, particularly a small and older one, may be acceptable to some non-bank specialist lenders. The age and paid status are important factors. A broker can assess your full profile to determine your options. Use our borrowing power calculator to get started.
A default is a credit file listing when a debt is 60+ days overdue. A court judgement is a legal finding that you owe money — more serious, as it can lead to wage garnishment. Both affect home loan eligibility, but judgements are viewed more harshly by lenders and may also appear in court record searches.
If you have small unpaid defaults, it can be worth paying them first — moving them from "unpaid" to "paid" may open up more specialist lenders than a slightly bigger deposit would. If the unpaid balance is larger, run the trade-off with a broker: in some cases a bigger deposit with the default left unpaid wins; in others, clearing the file is the better move.
Yes, this can be possible. Non-bank specialist lenders are comfortable with both self-employed income (via BAS, bank statements or accountant letter) and credit impairment on the same file. The deposit requirement and rate premium vary by lender and may be higher than for a PAYG borrower with the same credit profile.
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