Can You Get a Home Loan Soon After Financial Hardship?

How Australian lenders assess hardship arrangements

Recent financial hardship does not always prevent a home loan approval. Learn how Australian lenders assess hardship arrangements, repayment history, cleared debts, explanations and lower-LVR applications.

Experiencing financial hardship does not create a permanent ban on obtaining another home loan.

It can significantly reduce the available lender options, particularly where the hardship arrangement ended only recently.

A borrower may have experienced temporary repayment difficulties because of illness, separation, reduced income, excessive unsecured debt or another identifiable event. They may since have sold a property, cleared their debts and restored their financial position.

Those improvements are important. They do not immediately remove the hardship information or repayment history that a new lender may see.

The application will usually be assessed around four questions:

1. What caused the hardship?
2. Has the cause been permanently resolved?
3. Has the borrower demonstrated satisfactory conduct since then?
4. Is the proposed new loan affordable without recreating the previous problem?

Related research: Can You Get a Home Loan After a Financial Hardship Arrangement?

What is a financial hardship arrangement?

Financial hardship occurs when someone cannot meet a repayment obligation under a loan or other credit facility.

A lender may agree to temporarily or permanently change the borrower’s repayment obligations. This can include:

• reducing repayments;
• pausing repayments;
• extending the loan term;
• capitalising missed amounts;
• moving temporarily to interest-only repayments; or
• establishing another payment arrangement.

A temporary arrangement is recorded differently from a permanent variation, but both may appear as financial hardship information on a consumer credit report.

Using an approved hardship arrangement is generally preferable to allowing debts to fall into uncontrolled arrears. It does not mean a future lender must disregard the event.

Does financial hardship appear on a credit report?

Yes.

A credit report may show:

• repayment history information;
• missed or late payments;
• temporary hardship arrangement indicators;
• permanent variation hardship indicators;
• defaults;
• credit enquiries; and
• current and recently closed consumer credit accounts.

A temporary financial hardship arrangement is generally shown against each affected repayment. A permanent variation is recorded when the changed arrangement begins.

Financial hardship information remains on the credit report for one year. Repayment history information can remain for two years, while a separately listed default generally remains for five years.

This means selling the property and closing the affected loan does not immediately remove the history.

Does a hardship arrangement lower your credit score?

The hardship indicator itself cannot be used by a credit reporting body to calculate a consumer’s credit score.

A lender can still see the hardship information and consider it when deciding whether to approve a new application. The report will not explain why the borrower entered hardship, so the applicant may need to provide that explanation directly.

Other information associated with the period may affect the overall credit assessment, including:

• missed payments before the arrangement began;
• unpaid debts;
• defaults;
• multiple recent credit applications;
• overdrawn accounts; and
• continuing high credit limits.

The difference between a managed hardship arrangement and repeated unaddressed arrears can be important.

Will recent hardship cause an automatic decline?

It depends on the lender policy.

Among the 22 credit-impairment lender policies reviewed, mainstream lenders generally apply tighter restrictions to current or very recent hardship. Some specialist lender policies provide pathways for borrowers with recent arrears or adverse credit where the cause can be explained and the new loan remains suitable.

Examples of the different approaches include:

ANZ

ANZ’s lender policy treats an account under a hardship arrangement within the previous three months as an indicator of unsatisfactory conduct or financial difficulty.

That does not necessarily mean every application is automatically declined, but it moves the application into a more detailed credit assessment.

The policy also examines:

• current arrears;
• arrears lasting 30 days or more;
• repeated late payments;
• dishonours;
• over-limit activity; and
• other indicators of continuing financial stress.

An applicant who left hardship only a few weeks earlier is therefore unlikely to be treated as having fully re-established satisfactory conduct.

ME Bank

ME Bank’s lender policy requires satisfactory credit history and states that there must be no current financial hardship arrangement with ME Bank or another financial institution.

A completed arrangement may be treated differently from a current arrangement, but the repayment history and circumstances will still be investigated.

Gateway Bank

Gateway’s lender policy states that arrears exceeding 30 days or hardship arrangements within the previous 24 months are generally unacceptable.

Its policy allows some limited arrears scenarios, but recent hardship creates a substantial restriction even where the proposed LVR is relatively low.

Bankwest

Bankwest applies detailed account-conduct requirements.

Where lenders mortgage insurance is involved, debts being refinanced generally need to show consistent repayment history without arrears, late payments, reversals, late fees or default charges.

For non-LMI applications, limited isolated arrears may be considered under the lender policy. The treatment becomes more restrictive where self-employed income is used.

Specialist lender policies

Specialist and non-bank lenders may use product tiers based on the severity and recency of the credit issue.

For example:

• La Trobe Financial states that credit impairment may be considered on a life-event basis;
• RedZed provides different tolerances for mortgage and unsecured debt arrears across prime, near-prime and specialist products;
• Resimac has products allowing different levels of mortgage arrears and adverse credit; and
• Pepper has separate prime, near-prime and specialist parameters, including products that may accommodate recent arrears.

These pathways usually involve different rates, fees, maximum LVRs and verification requirements. Acceptance under a policy does not mean the loan will be suitable for the borrower.

Does selling the previous home and clearing the debts help?

Yes.

Paying out the affected home loan and clearing unsecured debts can materially improve the application.

It may demonstrate that the borrower has:

• identified the cause of the problem;
• taken decisive action;
• removed unaffordable commitments;
• reduced monthly expenses;
• avoided further arrears;
• retained equity after the sale; and
• restored positive cash flow.

A lender will still want to determine whether selling the property resolved the underlying problem or merely cleared the immediate debts.

For example, a borrower who sold because they had accumulated several personal loans and credit cards may present a stronger position where:

• every unsecured debt has been closed;
• the credit limits have been cancelled;
• no new debt has been taken out;
• bank statements show positive conduct;
• stable income continues; and
• the proposed new loan is substantially lower than the previous total commitments.

The position is weaker where debts have been repaid but the spending behaviour, income instability or other cause remains.

Does being debt-free remove the credit history?

No.

Closing a debt does not delete its previous repayment history.

A credit report may continue to show:

• when the account was opened and closed;
• its previous limit;
• repayment history;
• hardship information;
• defaults; and
• recent credit enquiries.

The applicant can obtain a free copy of their credit report every three months and should check that repaid debts are correctly shown as closed or paid.

Incorrect information can be disputed with the credit provider or credit reporting body. Correct adverse information generally cannot be removed simply because the debt has since been paid.

Does a 75% LVR improve the chances?

A lower LVR helps, but it does not override recent hardship.

At 75% LVR, the borrower contributes or retains approximately 25% equity in the property. This may reduce the lender’s potential loss if the property must be sold.

It may also mean:

• lenders mortgage insurance is not required;
• the application falls within a more flexible non-LMI policy;
• fewer high-LVR restrictions apply; and
• the borrower has demonstrated a meaningful financial contribution.

The lender must still be satisfied that the repayments are affordable.

Lenders consider income, living expenses, other commitments and credit history when assessing an application. A lender cannot approve a regulated consumer loan where its assessment indicates the borrower would be unable to meet the repayments without substantial hardship.

A lower LVR addresses security risk. It does not remove repayment risk.

How much time should pass after hardship?

There is no universal waiting period.

The required period may depend on:

• whether the arrangement was temporary or permanent;
• how recently it ended;
• whether repayments were met under the arrangement;
• whether arrears existed before or after the arrangement;
• the lender being approached;
• whether lenders mortgage insurance is required;
• whether a specialist product is being considered;
• the cause of the hardship; and
• how much satisfactory conduct has since been demonstrated.

Possible policy positions include:

• no current hardship arrangement;
• no hardship within the previous three months;
• no recent hardship or arrears within 12 months;
• no hardship within the previous 24 months; or
• case-by-case consideration based on the life event.

A borrower only a few weeks out of hardship has very little post-hardship conduct to show.

Waiting several months may allow the borrower to demonstrate:

• regular savings;
• stable income;
• controlled spending;
• no new debt;
• sufficient money after settlement; and
• consistent payment of rent or other commitments.

This does not mean waiting always produces approval. It means the lender has more evidence of the borrower’s current financial behaviour.

What explanation will the lender require?

A strong explanation should be factual, specific and supported by evidence.

It should cover:

1. what happened;
2. when the difficulty began;
3. which debts were affected;
4. what assistance was agreed with the previous lender;
5. whether the agreed hardship repayments were maintained;
6. what changed to resolve the problem;
7. which debts have now been repaid;
8. why the problem is unlikely to recur; and
9. why the new loan is affordable.

A vague explanation such as “temporary financial issues” gives the assessor little basis to distinguish a resolved life event from an ongoing problem.

Supporting evidence may include:

• a settlement statement from the property sale;
• loan closure letters;
• personal loan and credit card closure statements;
• hardship correspondence;
• medical or employment evidence where relevant;
• current payslips;
• updated bank statements;
• a budget showing the new position; and
• evidence of savings retained after settlement.

Sensitive medical or personal information should only be supplied where it is relevant and with the borrower’s informed agreement.

Will the lender need statements for repaid debts?

Potentially.

The credit report may show the repayment history, but the lender may request statements to understand:

• when arrears began;
• how far behind the account became;
• whether payments were made under the hardship arrangement;
• whether interest and fees were capitalised;
• how the account was cleared; and
• whether the debt is now closed.

Specialist lender policies may require six or 12 months of mortgage statements, depending on the product and whether the previous loan was non-conforming.

A payout letter alone proves the debt was discharged. It does not necessarily explain the preceding conduct.

What other factors strengthen the application?

A recent-hardship application is generally stronger where:

• income is stable and verifiable;
• the cause of hardship was a one-off event;
• all debts linked to the problem have been cleared;
• there are no payday-loan or repeated buy-now-pay-later transactions;
• the applicant has retained savings after the previous sale;
• the proposed repayments are materially lower;
• the purchase is within a conservative budget;
• the applicant has no recent unsuccessful credit applications;
• the deposit does not rely on new unsecured debt; and
• the applicant can demonstrate a financial buffer after settlement.

The lender may also compare the proposed housing cost with the borrower’s current rent or previous mortgage repayment.

What can weaken the application?

Concerns may remain where:

• the hardship arrangement ended very recently;
• the applicant is purchasing again immediately after saying they would wait;
• unsecured debts have been repaid but not closed;
• new credit enquiries have appeared;
• the new loan is similar to or larger than the previous debt;
• the borrower has no savings buffer after settlement;
• the explanation does not match the credit report;
• the cause was ongoing overcommitment rather than a single event;
• income has reduced or become less secure; or
• the property purchase is emotionally driven and outside the borrower’s planned budget.

A rapid return to home ownership is not automatically unsuitable. The lender will expect a credible explanation of why the new position differs from the one that led to hardship.

Example: purchasing shortly after a hardship-related sale

Consider a household that experienced mortgage hardship after carrying several unsecured debts.

The borrowers sell their home and use the proceeds to repay:

• the home loan;
• two personal loans;
• several credit cards; and
• a vehicle loan.

They retain enough money for a 25% deposit on another property and have stable employment.

The positive factors include:

• a lower proposed LVR;
• no remaining consumer debt;
• reduced monthly commitments;
• a clear reason for the original hardship; and
• enough equity to complete the purchase.

The concerns include:

• the hardship arrangement ended only recently;
• there is little evidence of post-hardship repayment behaviour;
• the new purchase may recreate a large housing commitment; and
• the credit report will continue to display the relevant history.

One lender may require a longer period of satisfactory conduct. Another may consider the application under a specialist product. A third may decline because its lender policy excludes hardship within a set period.

The main point

Recent financial hardship does not permanently prevent someone from obtaining another home loan.

An application made only weeks after hardship ended is likely to receive close scrutiny, even where the previous property has been sold and all debts have been cleared.

The strongest application will demonstrate:

• a specific and resolved cause;
• complete repayment or closure of problematic debts;
• stable current income;
• conservative new borrowing;
• sufficient equity and savings;
• accurate disclosure; and
• evidence that the previous financial pressure will not be recreated.

The appropriate lender and timing depend on the complete credit history, not solely the current debt balance or proposed LVR.

General information disclaimer

This article contains general information only and does not take into account your objectives, financial situation or needs. It does not constitute financial, legal, credit or debt-management advice.

Lender policies, interest rates, maximum LVRs, credit-scoring models and acceptable repayment-history requirements can change without notice. Previous hardship, cleared debts or a lower LVR do not guarantee loan approval.

A new loan application creates a credit enquiry and may affect future applications. Consider obtaining a copy of your credit report and speaking with an appropriately licensed mortgage broker before applying. Anyone experiencing financial difficulty should contact their lender’s hardship team or an independent financial counsellor.