Home loan declined in 2026? What credit-impaired borrowers can actually do

20 July 2026 · Credit-impaired lending · 6 min read

If you've applied for a home loan recently and come away with a decline, or an approval for far less than you expected, you're not imagining a tougher lending environment. The number of new home loans fell 6.2 per cent to 139,794 in March quarter 2026, according to data released today by the Australian Bureau of Statistics (ABS), with falls recorded across all borrower types this quarter, following strong growth throughout 2025 and cash rate rises in February and March. First home buyers weren't spared either — the number of first home buyer owner-occupied loans fell 4.3 per cent (-1,349 loans) in March quarter 2026. Meanwhile the Reserve Bank has held its ground: at its most recent meeting the Board decided to leave the cash rate target unchanged at 4.35 per cent, a pause that came following the three increases in the cash rate target since the beginning of the year, which have left financial conditions... now tighter than they were. The next decision is due in the Monetary Policy Decision · 10–11 August 2026 window.

Fewer approvals across the board is one thing. But if your credit file already carries a mark — a missed repayment, a default, a paid-out debt collector's judgment — this kind of tightening is the moment lenders get more selective, not less. So what does a credit impairment actually mean for your chances of getting a home loan right now, and what can you do about it?

Why lenders are pulling back generally, not just on riskier files

It's worth separating two things that are happening at once. First, higher rates have mechanically reduced how much everyone can borrow, because lenders assess new applications against today's rate plus a serviceability buffer, not against some future cut. Second, and more specific to 2026, the average home loan size is now 9.0 per cent higher than a year ago, which tells you the borrowers who are still getting through the door tend to have stronger, cleaner applications — bigger deposits, steadier income, tidier credit files. When the overall pool of approvals shrinks, lenders naturally have less appetite to carry extra risk on top, and a credit impairment is exactly the kind of extra risk mainstream bank credit policies are built to filter out.

That doesn't mean the door is closed. It means the path usually runs through a different type of lender, and a more deliberate application.

What actually counts as "credit impaired"

The term covers more ground than people expect. It can include a default listed on your credit file (even a small unpaid utility or telco bill that went to collections), a history of missed loan or credit card repayments, a court judgment, a Part IX debt agreement, or a discharged bankruptcy. Some of these are relatively minor and time-limited; others are more serious and take longer to work through. What they have in common is that a mainstream bank's automated credit scoring will often decline the application outright, regardless of how strong the rest of your financial position looks.

Why a bank decline isn't necessarily the final answer

Specialist and non-bank lenders exist specifically to look past a single blemish and assess the full picture — how old the impairment is, whether it's paid or unpaid, how large it was, and what's changed in your circumstances since. A default from three years ago tied to a genuine hardship period reads very differently to a lender than an unpaid, escalating pattern of missed payments in the last six months. This is one of the reasons working with a mortgage broker matters in a market like this one: a broker who regularly places credit-impaired home loans knows which lenders will actually consider your file, rather than you working through a stack of declines from lenders whose policies were never going to fit your situation.

Illustrative example

The following is an illustrative example only, not a real case or a promised outcome. Consider a borrower — call her Priya — who had a $1,800 default listed against her name two years ago, from a phone contract she disputed and left unpaid during a period of unemployment. The default was eventually paid out, but it remains visible on her credit file. Priya has been in stable full-time work for the past 18 months and has saved a 15% deposit. A mainstream bank's automated system declines her application on the default alone. A specialist lender, assessing the full circumstances — the default's age, the fact it's paid, her subsequent 18 months of clean repayment history, and her deposit — may take a different view. Every lender's policy differs, and nothing here should be read as a guarantee of approval for any particular borrower.

What you can do before you apply

A few steps tend to make the biggest difference. Pull your own credit report first, so nothing surprises you or your broker mid-application. Where a default is unpaid, consider clearing it if you can — a paid default is generally viewed more favourably than an unpaid one. Be ready to explain, briefly and honestly, what happened and what's changed. A larger deposit reduces the lender's risk and widens the pool of lenders willing to consider your file. And use tools like our borrowing power calculator to get a realistic sense of what you might be able to service before you put in a formal application, since multiple credit enquiries in a short period can themselves affect your file.

If your credit history is tangled up with an ATO debt rather than a consumer default, the considerations are a little different — we've covered that scenario in our guide to home loans with an ATO tax debt. And if refinancing rather than a fresh purchase is the goal, our refinancing hub is a useful starting point.

Common questions

Can I get a home loan with a default on my credit file?
It depends on the type, size, age and status of the default, along with the rest of your financial position. Mainstream banks often decline automatically, but specialist and non-bank lenders assess these applications individually, so speaking with a broker who works in this space is generally worthwhile before assuming you have no options.

How long does a default stay on my credit report?
In Australia, most defaults remain on your credit file for up to five years from the date they were listed, regardless of whether you later pay them out. Paying a default doesn't remove it, but it is generally viewed more favourably by lenders than one left unpaid.

Will a bigger deposit help if I have a credit impairment?
A larger deposit reduces the loan-to-value ratio a lender is exposed to, which can open up more lending options and potentially better terms, though it isn't a guarantee of approval on its own — lenders still weigh the impairment itself alongside your income and overall serviceability.

Do specialist lenders charge higher interest rates for credit-impaired borrowers?
Specialist lending products are often priced differently to mainstream owner-occupier loans, reflecting the additional risk being taken on. Rates and terms vary significantly between lenders, which is exactly why comparing options with a broker's help matters rather than assuming one rate or one lender's policy applies across the board.

General information only — not credit advice. Credit assistance is provided by a licensed mortgage broker.