What Exactly is a Non-Conforming Loan?
Think of a non-conforming loan as a home loan for people who do not fit the standard lending criteria. These loans are provided by specialist lenders, not the major banks. These lenders do not have to follow the exact same rulebook, so they can be more flexible, similar to the lending approaches discussed in this non-bank lender guide.
In many ways, the loan itself looks familiar. You will still have a repayment schedule, and you can often choose between fixed and variable interest rates. Some products might even offer features like offset accounts.
The big difference is in how the lender sees you. They specialise in working with borrowers who are considered higher risk. To manage this risk, they charge higher interest rates and fees compared to a standard bank loan. Essentially, they provide a chance for people with complex financial stories to still get into the property market, particularly those outlined in this bad credit home loan overview.
Is a Non-Conforming Loan Right for You?
These loans are designed for people who keep hitting walls with traditional lenders. You might be a good candidate if any of these situations sound familiar:
- Your credit history has a few blemishes, like past defaults or a low credit score.
- You have been through bankruptcy, even if it has been discharged.
- You have applied for loans before and been rejected multiple times.
- You are self-employed or have an irregular income that is hard to prove with standard paperwork.
- You have an outstanding debt with the Australian Taxation Office.
- Your financial situation is complex, perhaps with several existing debts.
Traditional banks love stability and a clean history. Non-conforming lenders are more interested in your current ability to repay the loan, even if your past is a bit messy. In some cases, borrowers may also strengthen applications through shared structures similar to those explained in this co-borrowing guide.
How Do These Loans Actually Work?
The mechanics are simple. You borrow money and pay it back with interest over an agreed term, usually 25 to 30 years. The catch is the cost. Because the lender is taking a bigger chance on you, the interest rate will be higher.
The final rate you get can depend on a few things: what you need the loan for, the loan term, and how much you are borrowing compared to the property’s value. Your personal risk profile is the biggest factor. Someone with a high income but minor credit issues might get a rate only slightly above standard. Someone with a more difficult history will face a significantly higher rate, especially when compared with traditional home loan options.
Common Types of Non-Conforming Loans
1. The Bad Credit Home Loan
This is for anyone with a history of poor credit. The lender will want to understand the story behind your credit issues. Their main focus, however, will be on whether you can afford the repayments now. You can expect interest rates to be higher than the market average rates.
2. The Debt Consolidation Loan
Juggling multiple debts? This type of loan rolls all your separate debts into one new home loan. It simplifies your life by turning many payments into a single, monthly repayment. This can help your cash flow in the short term.
3. The Low-Doc Loan
This is a common option for the self-employed, contractors, or freelancers. If you do not have traditional payslips or two years of tax returns, a low-doc loan might be the answer. Instead of full financials, you might provide a declaration from your accountant. The trade-off is often a requirement for a larger deposit.
4. Loans After Bankruptcy
Yes, it is possible to get a loan after bankruptcy. Specialist lenders offer products for people who are rebuilding their financial lives. The costs will be higher to reflect the risk, but it provides a pathway forward for those who can demonstrate a stable, current income.
Understanding the Costs Involved
Non-conforming loans are more expensive. Interest rates can be anywhere from 1% to 5% higher than a standard mortgage rate. On top of that, you need to budget for additional costs, which often include:
- Higher establishment fees to set up the loan.
- Ongoing service fees.
- Almost always Lenders Mortgage Insurance if your deposit is less than 20%.
The Good and The Bad: Weighing It Up
Advantages
- Provides access to home ownership when traditional doors are closed.
- Making regular repayments helps rebuild credit history.
- Flexible assessment processes consider your full financial situation, not just your credit score.
Disadvantages
- Higher interest rates and fees mean paying more over the life of the loan.
- Limited lender options reduce competition and choice.
How a Mortgage Broker Can Be Your Guide
Navigating the world of non-conforming loans is tricky. A specialist mortgage broker like Chatswood Home Loans knows which lenders are more suitable for your specific situation. We can match you with the right lender, help you prepare a strong application, and guide you through the process, which increases your chances of approval.