May 23, 2019 | 08:03 AM

28.05.2008What to do when you have a poor credit record

Defaults often have a valid reason

Sudden events can sometimes knock people off their feet, which can often lead to loans being neglected and subsequently a default being recorded. “We are well aware of the unforseen difficulties that life throws up from time to time and we are here to assist people get back on their feet and start moving in the right direction again,” says Mark Roberts, Director of Freedom Home Loans, a broker who specialises in non-conforming loans.

Roberts has helped out many clients over the years, and has seen many valid reasons for past defaults. One of the most common reasons is divorce, where neither partner will take responsibility for their liabilities. “This can be a very stressful and emotional time and the financial day-to-day things that have been intertwined are forgotten in the emotional turmoil,” says Roberts. The resulting default means that traditional lenders are reluctant to extend a loan to either party.

Other common cases are self-employed applicants, who often hit hard times because of inconsistent cash flow when starting up their business, leading to credit impairment. While their business may be racing along now, a past default could be causing headaches when trying to take a loan with the big banks. Although the bank may not listen to your explanation, a non-conforming broker will, and should be able to procure you the loan you’re after.

Rates & product choices

While it’s true that non-conforming lenders assess the level of risk of the applicant and sets the interest rate accordingly, Mahnken says that it’s a common misconception that applicants will pay a much higher interest rate. Roberts agrees, saying that in fact there are many credit-impaired loans that have rates below the standard variable rates of major lenders, with rates starting from as low as 6.64% p.a. (a CCR of 7.61%p.a.).

What’s more, the range of loan products available is similar. “The only difference…is the interest rate,” says Empey. And products are now available with the types of features that come with the mainstream products offered by banks, such as line of credit, redraw and interest only. “It may surprise a number of people that most of the mortgage options offered by a mainstream lender are also available in the speciality lending area,” says Mahnken.

Wiping the slate clean

The best news for those with defaults is that a person's credit record is wiped clean every five years. Whereas previously you had to wait until your record was cleared of defaults before being able to borrow, you can now clean it while you are paying back your new non-conforming loan. “It is important for people to realise that just because they have had a bad credit rating in the past, doesn’t meant they won’t be able to get finance in the future,” says Mahnken.

Empey points out that Pepper will in fact ignore any bad credit and qualify borrowers for a prime mortgage, provided any credit impairment has been paid and was registered over 24 months prior to the loan application. “These borrowers are generally given the equivalent of a clean slate rating if they maintain a strong repayment history over a two- to three-year period,” says Empey. They can even qualify for a one per cent ‘loyalty bonus’ after three years of good conduct on their home loan.

The most important thing to remember is that you can wipe the slate clean. Roberts has seen people panic and let the situation get to them, but he sees that his role is to help them through this difficult period, relieving them of their financial pressure and stress. “One of the best parts of the job is helping people recover from adversity. Whenever the working day starts to get tough all I have to do is look at the testimonials section on our website,” he says.


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