With the number of Australian bankruptcies predicted to soar after September, the ability of those affected to purchase property is set to be severely impacted.
Challenging at the best of times, the real estate acquisition process takes on a new dimension in the midst of such dire financial circumstances.
The good news is, filing for bankruptcy doesn’t mean permanent exclusion from the market. But, not surprisingly, timing is everything.
“It’s not possible to buy property after you’ve filed for bankruptcy,” explains Bankruptcy Trustee and Jirsch Sutherland Partner Stewart Free. “As an undischarged bankrupt, you cannot acquire real estate as it will form part of your bankrupt estate.”
However, Free says this situation changes immediately once an affected party has been discharged from bankruptcy. Of course, that’s not to say that loan acquisition will be an easy process.
“In most cases, an undischarged bankrupt’s credit rating will still show that they had recently gone through bankruptcy, so they may find it challenging to obtain a home loan from a tier 1 bank immediately after discharge,” he explains. “That means they’ll either have to get a home loan from a secondary lender – usually with higher interest rates – or wait approximately six to seven years after their discharge date when their credit rating has improved.”
When it comes to securing a home loan following bankruptcy, involving a specialist lender can be vital.
“Customers who are looking to purchase a home following bankruptcy require a lender with a skilled credit team who can assess their situation based on their individual circumstances to help them get back on their feet,” explains Daniel Carde, General Manager for Distribution of non-bank lender Resimac. “Specialist lenders play an important role for customers who fall outside traditional mortgage insurance and lending guidelines – whether it be as a result of illness, marriage breakdown, small business failure etc.
“For many customers, they have been set back by a significant life event and were previously likely to be good at managing their finances. It’s important [they] understand the situation is not permanent and that with good conduct, it won’t be long before they’re back on their feet and they’ll have a much wider variety of financial options available to them.”
Carde says Resimac offers a range of loan products designed for customers who have previously declared bankruptcy and been discharged, including those whose discharge has only been very recent.
“The difference between our Resimac Prime and Specialist product range comes down to the interest rate and fee structure – also known as risk-based pricing,” he says, adding that a customer can borrow up to 90% for the purchase of an owner-occupied home. “The loan products themselves are otherwise identical in terms of loan features from the customer’s point of view, and we conduct the same throughout credit assessment for every customer.”
Steady income crucial
According to Free, the ability to demonstrate a steady income is crucial for anyone looking to secure a property loan following bankruptcy.
“From my experience, undischarged bankrupts are generally able to obtain home loans if they are able to show a history of savings,” he explains. “This is all subject to the lending criteria imposed by the lender.”
Free says there will probably also be other challenges. For instance, bankruptcy records remain on an individual’s credit ratings for six to seven years. And although this period may differ depending on the agency involved, the bankruptcy itself will always show on the National Personal Insolvency Index. Credit scores will also need to be rebuilt.
“The best way to build your credit score is to build a savings history and avoid credit checks,” says Free. “This can be done by minimising loan or credit card applications.”
Although discharged bankrupts may be eligible to jump back on the property ladder with immediate effect, Free says allowing some water to pass under the bridge can be beneficial.
“The more time that passes from the date you are discharged from bankruptcy, the more successful you’ll be in obtaining finance from a tier 1 lender,” he says. “A longer savings history will also improve your position. Additionally, if you’re in a position to do so, joint borrowing with a person not previously bankrupt may also aid your success in obtaining a loan.”