If you have a bad credit history you may feel as though you stand out like a black sheep when it comes to finding a home loan.
A bad credit report doesn’t always mean you’ll be shunned by lenders. If you are considering a switch to help you manage debt, or to switch to a home loan that better suits your needs, here are the steps to help you with the process.
Speak to a home loan expert about refinancing options if you're credit impaired
|Pepper specialises in providing fair home loans to those who are credit impaired - from small defaults all the way up to discharged bankruptcies. They also cater to self-employed borrowers.||Refinancing||Enquire|
|Freedom Loans||Freedom Loans have over a decade in experience in helping Australians with bad credit to obtain the best possible home loan they qualify for. They can help you even if you’ve been declined elsewhere and assist borrowers who are full time, part time, casual or self employed.||Purchasing, Building, Refinancing||Enquire|
How to refinance if you have bad credit
Refinancing with bad credit is a more complicated process than a standard refinance. Here are some tips to get you started:
- Get a copy of your credit report. Knowing what you look like to lenders is the first step in tackling a bad credit history and you can do this by obtaining a copy of your credit report with Veda. This will give you an idea of the things a lender will look at when considering you as a customer. You can see your current credit limits, number of credit cards and any late payments which have been reported from any bills or loans on which you have missed payment.
- Take control of your credit cards and spending. Just as you would curb your spending in the lead up to applying for a new home loan, you shouldn’t go crazy on your credit cards if you are considering refinancing your home loan. Also don't make any new credit card applications because even a rejected application will show up on your credit report.
- Always make home loan repayments and other bill payments on time. Even though you may have several default payments in your credit history, that is no reason to give up on being financially responsible in the future. Always be organised and in control of your bills so they are paid ahead of time to avoid the risk of late payments as days lost in processing the transaction. Also, consider the repayment history you have on your current loan and whether your loan has been in arrears or any late payments.
- Consider speaking to a specialist lender. Specialist lenders such as Pepper evaluate borrowers not on the number of defaults and the amounts of each of these defaults, but how long ago you made these mistakes. Specialist lenders recognise that you may have become credit impaired due to life events, such as divorce, illness or loss of a job, and are willing to offer loans to help you own your home and pay off existing debts. You can fill out the form above to speak to an expert from Pepper about a home loan.
- Be honest with your refinance lender. Whether you think you do, or know that you have bad credit, it is always important to be honest and upfront about your financial past. It may also be helpful to use a lender who doesn’t evaluate you immediately using a credit scoring system when assessing you for a home loan. You may want to see a lender that assesses you in person first. This way you can talk to your potential lender and explain to them why you may have bad credit and the steps you’ve taken to address it.
- Show that you have enough equity or savings to borrow less than 80% LVR. This avoids the need for Lender’s Mortgage Insurance (LMI) for high documentation loans and means you’re a lower risk to to the lender.
- Consider visiting a mortgage broker. A mortgage broker will let you know what loans you are eligible or ineligible for. They can also point you in the right direction and even help you throughout the process all the way to settlement.
- Consider repairing your credit. There are a few places that specialise in repairing credit files for those who have bad credit. Although the fees are quite hefty, you may find that you end up saving more on your loan because you can get a lower interest rate.
How to successfully manage your home loan switch to avoid more bad credit
You need to also know how to manage the bad credit debt you already have, and how to avoid making the same mistakes and getting into the same situation in the future. To manage a bad credit refinance successfully:
- If you are consolidating bad debt, keep your new loan separate. It is possible to refinance your home loan to consolidate bad debts such as credit cards or personal loans so they attract the same low interest rate as your home loan. However, to successfully manage this sort of bad credit refinance you should keep your refinance loan split so you make separate payments to your home loan and your consolidated debts.
- Don't rely on refinancing as a regular way to get out of trouble. While you will be able to justify the entry and exit fees on refinancing a loan to consolidate debt or to move to a better home loan deal, these fees will add up if you continue to rely on refinancing as a way to manage your bad debt.
- Don't choose features which will tempt you. If you know you have trouble with managing finances then features such as a line of credit, which allows you to withdraw up to the value of the equity in your home, may tempt you to spend more. Similarly, if the refinance loan you choose has free redraw you may tempted to withdraw the extra repayments.
There is no shame in asking for assistance if you have bad credit and need to refinance your home loan to better manage your finances. Just make sure your bad credit refinance will really work for you rather than tempt you to spend more.