Often people end up with a ‘Part 9 (IX) Agreement’ which is an alternative to bankruptcy, without understanding how this decision may impact their credit rating, and therefore their ability to get a home loan in the future. It doesn’t mean you can’t get a loan ever again, not at all, but it is important to understand what it does mean for your future.
Living in today’s world of materialism certainly comes at a price. Circumstances can also change for people in the blink of an eye, so it’s easy to understand how people get themselves into debt and cannot get themselves out of it. It's also understandable that people want to avoid bankruptcy if they possiblycan.
So what do you do if you find yourself in this situation, should you go bankrupt, or take a Part 9 (IX) Agreement?A good starting place might be to think about what you want to do in your future financially, and when, and then determine which option is the best for you.
When trying to get a home loan, one of the key factors lenders look at first is your credit rating.
So what is your credit score, rating or file?
Australia’s credit rating system is held by independent credit reporting bodies (CRBs) such as Veda, who give you an individual credit score based on if you have any outstanding debts, or ‘defaults’ recorded in your name. Your score or rating, (including all your phone accounts, utilities accounts, credit cards, store cards, personal loans, car loans and home loans) is kept in your ‘credit file’ by these CRBs.
Credit providers (including building societies, utility companies and telecommunications carriers) provide these CRBs with your information about your activities in relation to your credit with them. The credit providers can then obtain a copy of your credit report from the CRBs to help them decide whether to provide you with further credit or to manage credit that has already been provided to you. It is important to note that only credit providers that hold an Australian Credit Licence can disclose repayment history information to a CRB, or access repayment history information in your report. This generally means only ‘default’ information, which is a bill or repayment that is overdue for at least 60 days and is $150 or more, is provided and repayment history is a separate topic.
It is useful to review your credit file prior to applying for a home loan as it will be one of the very first things the lender will check about you, when determining whether to approve your home loan or not, and will determine which lenders will give you a home loan if you do in fact have a ‘bad credit’ history on file.
How do you check your credit rating?
You can check your credit rating by ordering a copy of your score and credit file online from a number of sources such as:
What is a Part 9 (IX) Agreement and will it affect your ability to get a home loan?
A Part 9 (IX) agreement is a binding debt agreement between a debtor (you) and their creditor (the financier, lender), where the creditor agrees to accept a sum of money that the debtor can afford. This then releases the debtor from most of their debts once the payments and obligations are met under the agreement.
These ‘Part 9 (IX) Agreements’ are often proposed as an alternative to bankruptcy. What sometimes is overlooked however, is that proposing a ‘Part 9 (IX) agreement’ is actually an act of bankruptcy. This act then has the potential to impact your financial status and credit rating down the track, especially when trying to apply for a home loan. It is important that you are fully aware of the consequences of proposing a ‘Part 9 (IX) Agreement’ when attempting to repair your credit rating.
What are the consequences of a debt Agreement:
There are significant consequences if you propose a debt agreement. Some are outlined below and more can be found on the AFSA website:
Act of Bankruptcy: It is vital to understand that if you propose a debt agreement you are committing an act of bankruptcy. This means that if your proposal is not accepted, the creditor may use this act by you, to apply to the court to make you bankrupt.
Permanent Public record of insolvency: It also means that your name and other details will appear permanently on the National Personal Insolvency Index (NPII), which is maintained and updated by the Australian Financial Security Authority, and is a public record.
5 years impact on your credit rating: Your ability to obtain further credit may be affected for up to 5 years or longer in some circumstances, as details may appear on credit reporting agencies records. This is the big impact on who will give you a home loan, and will often mean that the mainstream lenders will say no, before they even look further into your financial situation. There is other lenders on our panel who will willingly take you on, but at a price. More on this later.
You still have to pay: You will only be released from most of your unsecured debts when you complete all your obligations and payments. You don’t just ‘get out of paying’ the debt, and the agreement does not release any other people who were on the debt jointly with you.
You have to disclose the agreement: When obtaining future goods and services, including home loans, you have to disclose that you are a party to a debt agreement, including if you are trading under a business name or assumed name.
Can I get a home loan after a Part 9 (IX) Agreement?
Yes. Yes you can get a home loan even if you have a Part 9 (IX) Agreement on your file, but only once you have finished paying off your agreement. That said, this lenders willing to lend to you will do so at a price. This means when you speak with your Mortgage Choice broker you will need to arrange a long term plan where you initially apply for a loan with a sub-prime lender on a higher interest rate, for the short term at least, with the intention of refinancing down the track back to a mainstream lender on a lower interest rate, once your bad credit rating has been cleansed. Here’s what you will need in order for lenders to look at you favourably again after a Part 9 (IX) agreement:
Big deposit: You may be able to borrow up to 90% of the property value, IF you have around 20% of the purchase price as a deposit. The more your deposit, then the better your eligibility to qualify for a standard bank interest rate.
Higher interest rate: You may need to pay a higher interest rate from a sub-prime lender who specialises in bad debt. But think of it as a stepping stone. At least you will be ‘in’ your property, rather than waiting 5 years for your credit file to cleanse itself, during which time property prices will likely increase anyway.
Short term pain for long term gain: The equity you will be building in your property during your time with a sub-prime lender on a higher interest rate, is often better than paying dead money in rent, even if you are paying above the mainstream loans initially. With interest rates at all-time lows, even the sub-prime rates are not that high currently, making taking a sub-prime loan even more manageable as a stepping stone initially, just to get you through the pain until you are able to get back to mainstream lending and make your gains.
Credit Mediation Services – if you are in a position where you think you may need to go down the path of a Part IX Agreement, then it pays to get professional advice to help you navigate that path. There are many companies out there specialising in getting you back on track, check out Credit Mediation Services for example.
Once you have an agreement in place, and time frames to work towards paying your debts off, we can sit down and look at your options in terms of the property market and getting you into a home loan. Until then, sit tight, pay off your debts and get your file clean. I will be happy to help you get into a home loan when the timing is right for you.
Or, for further information on this or any other topic, please contact your Mortgage Choice broker,
Daniel Meade on:
Phone 07 3833 9666,
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Daniel is looking forward to helping you with your home loan options today. Thanks for reading our blog.
This article is for general information purposes only and does not constitute specialist advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances, and specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.