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A non-conforming home loan, sometimes called a ‘specialist home loan’, is a mortgage for those who fail to meet a lender’s standard criteria for funding. 

It can be the case that a borrower simply doesn’t look ideal on paper. 

Perhaps they work in an insecure industry or have multiple other debts to their name. Maybe they’re self-employed and can’t quite prove their income in the same way a salaried worker can. Or they might have previously declared bankruptcy

In such cases, a non-conforming home loan might be the answer to a person’s home ownership aspirations.

While not every Australian lender will offer non-conforming home loans, there are a few out there offering options for borrowers who mightn’t otherwise fit the mortgage mould. 

However, a non-conforming home loan might not be the answer to all non-conforming borrower’s dreams. They typically come with higher interest rates than standard mortgage products – meaning they often cost more day-to-day.

Who might best suit a non-conforming home loan?

If you’re self-employed, nearing retirement, or recently started a new business or job, you might find yourself in the non-conforming ranks when it comes to home loan applications.

Lenders are quite strict with whom they offer standard home loans to. 

However, individuals with financial situations outside the ‘standard’ boundaries aren’t necessarily 'bad' borrowers. And that’s where non-conforming home loans come into play.

After all, a freelancer who brings in dosh from different sources each week may still be able to repay a mortgage, and their choice of career shouldn’t stop them from purchasing a home.

You might also better suit a non-confirming home loan if you hold additional debts and you wish to consolidate them into a home loan or you have a poor credit history

Other situations in which a non-conforming home loan might be a borrower’s best bet include:

  • If they’re a new Australian resident and can’t verify their previous credit history
  • If they wish to borrow with a particularly high loan-to-value ratio (LVR)
  • If they want to secure a loan against a property or properties that aren’t normally considered appropriate security, such as company title units, studio apartments, serviced apartments, warehouse apartments, or resort-style accommodation

Types of non-conforming loans

There are two main types of non-conforming loans: Bad credit home loans and debt consolidation home loans. 

Bad credit home loan

Lenders assessing a borrower for this type of mortgage product will consider their reliable income as well as their credit history. 

It is important to remember that not all hopeful borrowers with a poor credit history will be a good fit for a non-conforming home loan.

A lender will, of course, want to find out the reason an applicant got into such a situation in the first place.

The lender might also wish to see a person’s circumstances or behaviours have changed in the time since their credit score was damaged. 

After all, a lender will likely wonder why a person who has failed to repay their debts in years gone by now believes they’re a good fit for a mortgage.

Debt consolidation home loan

There is another type of non-conforming home loan out there for those who hold multiple debts and wish to consolidate them into a home loan.

A debt consolidation home loan may allow a borrower to combine all of the repayments from their existing debts into one lump sum by rolling all their owings into a single facility. 

Doing so can be beneficial as it can limit the juggling a person with multiple debts must do and give them some breathing space, as they might be able to extend the time in which they have to pay back a debt. 

It could even see them paying a lower interest rate, as home loans typically provide lower rates than other consumer debt products. 

However, it also means a person may end up repaying what was a short-term debt off over decades, rather than months or years. 

Thus, they could end up paying more in interest over the long term than they otherwise would have.

See also: Is consolidating debt into your mortgage a good idea?

Low doc home loan vs non-conforming mortgage: Spot the difference

In the traditional sense, low doc home loans can be considered non-conforming mortgages. 

They allow borrowers who may not be able to prove their steady income with alternative methods of verifying their earnings. 

However, while both low doc mortgages and non-conforming home loans mightn’t demand copies of an applicant’s tax returns and financial statements, the requirements for an approved low doc home loan are stricter than those for a non-conforming home loan.

Low doc mortgages are almost exclusively the domain of borrowers with unblemished credit histories and those who generally won’t want to borrow with an LVR or more than 80%. 

Low doc home loans

Considering taking out a low doc home loan? Here are some of the most competitive deals on the market right now.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
7.19% p.a.
7.26% p.a.
Principal & Interest
7.24% p.a.
7.27% p.a.
Principal & Interest
7.54% p.a.
7.89% p.a.
Principal & Interest
7.64% p.a.
7.29% p.a.
7.64% p.a.
7.70% p.a.
Principal & Interest
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of .

Is a non-conforming mortgage more expensive than a regular home loan?

Non-conforming home loans are generally more expensive than their regular counterparts as they typically carry higher interest rates. 

How much higher are interest rates on non-conforming loans? Well, that will likely depend on an individual borrower. 

Lenders will normally place higher interest rates on non-conforming home loans due to the fact that non-conforming borrowers often appear (on paper at least) to be a higher risk. 

In considering the financial history or current situation of a non-conforming borrower, a lender might expect they’re more likely to default on their home loan.

Non-conforming mortgage providers might also ask an applicant to provide a larger deposit in order to negate some of the risk it’s perceived to bear in providing a home loan. 

Though, a borrower signing on to a non-conforming home loan today may find themselves able to secure a better deal later on.

If they manage to build up their credit score or pay down some of their additional debts after securing their mortgage, they might find themselves qualified for a standard home loan down the line. 

At that point, they may be able to simply refinance to a typical home loan product and reap the rewards of their financial labour. 

What other costs are involved with non-conforming home loans?

When seeking out a home loan product, most borrowers put weight on the interest rates on offer. 

However, some lenders charge additional fees that can increase the cost of a mortgage exponentially. 

The fees on non-conforming home loans can be higher than those on traditional mortgage products.

If possible, try to choose a lender that is upfront about any extra charges.

It might be worth paying particularly close attention to any exit fees in case you want to refinance to a standard home loan or different non-conforming home loan product down the track.

On a more positive note, some non-conforming lenders might reward a borrower for improving their credit score or improving their financial skills by lowering their interest rate.

For all those reasons, it’s important to delve beyond the interest rate when comparing home loan products to ensure you’re getting a competitive deal. 

Final thoughts on non-conforming home loans 

If you have experienced financial troubles in the past, a non-conforming loan could help you rebuild your credit rating and purchase your dream property. 

After all, non-conforming home loans exist to extend the promise of property ownership to those who are rejected by conforming lenders. 

If you're considering a non-conforming home loan, it might be beneficial to first reflect on strategies to strengthen your financial habits and ensure a stable financial future. 

Choosing a product that aligns with your financial goals, rather than one with options that include tempting features like lines of credit or credit cards, could help maintain your financial discipline.

Photo by Mulyadi on Unsplash