Get a better home loan deal even if you're credit impaired.
A bad credit report doesn’t always mean you’ll be declined by lenders for a refinance home loan.
While having a bad credit rating is not ideal particularly if you want to refinance, there are some specialist lenders that will still review your application.
However, you'll need to make a conscious effort to improve your credit rating and take control of your debt. This may involve demonstrating to the lender that you have enough equity or savings to borrow less than 80% loan-to-value (LVR) ratio.
If you're thinking of refinancing to secure a better rate, features or to consolidate debt, here are some steps to help you with the process.
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How to refinance if you have bad credit
Refinancing with bad credit can be difficult so here are some tips to help you get started:
- Get a copy of your credit file. Accessing your credit file will help you understand how you look from the lender's perspective. 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 that you have and any late payments which have been reported.
- Take control of your debt. The next step is to be proactive about trimming any existing debt that you have. If you're having trouble meeting your credit card or utility payments, consider contacting your provider to negotiate a new payment plan to ensure that you pay your bills or repayments in full and on time.
- Visit a mortgage broker. A licensed mortgage broker can discuss your borrowing needs with you in detail and help you with the application process. They will be able to draw upon their panel of lenders to find one that's more likely to review your application given your impaired credit status.
- Speak to a specialist lender. Specialist lenders evaluate borrowers not on the number of defaults and the amounts of each of these defaults, but how long ago you made these mistakes. They 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.
- 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 the lender. Try to show the lender that you have enough equity or savings to maintain an LVR below 80%.
How to manage your home loan switch to avoid more bad credit
You need to know how to manage the bad debt you already have to avoid getting into the same situation again. To manage a bad credit refinance successfully:
- Keep debt consolidation loans 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 for your home loan and your consolidated debts. Otherwise, you'll be paying your credit cards and personal loans off over 20 - 30 years with your home loan which will drive the total cost with interest up much higher.
- Don't rely on refinancing as an outlet. 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. It is recommended that you review your home loan regularly to ensure that you're getting a good deal, but refinancing to manage bad credit is not always an effective option.
- Don't choose features that 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 facility 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 mortgage will benefit you financially.Back to top