Refinancing your home loan when you have bad credit

Reasons for refinancing with bad credit

Refinancing your home loan can give you access to lower interest rates, more features or even access to more funds. You can also refinance to another 30 year loan term, reducing your monthly repayments but increasing the cost over the life of the loan.

If you're struggling with bad credit and it's impacting your financial situation, lowering your interest or your monthly repayments might be what you need to help manage your finances.

But you might find it more difficult to get a new home loan with a bad credit score. There are a few steps to take to find a product for you and to get your credit file back on track.

How to refinance if you have bad credit

When you have a poor credit rating, you'll need to apply for what's known as a non-conforming loan. Your eligibility to refinance to a non-conforming loan is in part determined by your property's current loan-to-value ratio as lenders look at the existing equity you have. The more equity you have in your property (in other words, the more of your property that you own), the less of a risk the lender will see you.

Most lenders will require that you have a minimum of 20% equity in your property. This means your LVR is under 80%, which is the benchmark where lenders perceive you as less risky. Having equity of at least 20% will increase your chances of refinancing to a non-conforming lender.

Steps to take when refinancing with bad credit

1. 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 that have been reported.
2. Take control of your debts. The next step is to be proactive about repaying any existing personal debts that you have. If you're having trouble meeting your credit card or utility payments, contact your provider to negotiate a new payment plan. Create a plan to pay off as many personal debts as you can, and importantly, close each facility as they're repaid, so you don't create new debts.
3. 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 consider your application in a positive light, given your impaired credit status.
4. 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 they are willing to offer loans to help you own your home and pay off existing debts.
5. Aim to borrow less than 80% LVR. This avoids the need for lender’s mortgage insurance (LMI) and means you’re a lower risk to the lender, which boosts your chances of a loan approval. Try to show the lender that you have a plan to repay any other debts, too, so they can see you're on a pathway towards a better financial future.

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How to compare bad credit home loans

When deciding on the best non-conforming home loan to fit your specific lifestyle, there are certain factors that will help determine which loan is best for you.

• Interest rate. Bad credit home loans generally have a higher interest rate, which is why it's so important to compare home loans to ensure you're getting the best deal.
• Comparison rate. Always check the comparison rate because it represents the true cost of your home loan. Since you're already paying a higher interest rate, you don't want to pay higher fees.
• Fees. Another aspect to take into account is the amount of fees that you will have to pay. For instance, does your potential loan provider have any hidden fees or are they upfront about their extra charges? It's crucial for you to know this information so that you won't be surprised with any additional expenses.
• Repayments. When selecting the most appropriate lender, you must be well versed in the loan repayment schedule. This will allow you to be more organised and know exactly when all of your monthly payments are due.

Expert insight: Why credit really matters for your home loan

"Refinancing a mortgage can help you save on interest costs and bump up your savings capacity, but if your credit isn't perfect your options can sometimes be limited. Understanding your position is the first step in putting a plan in place to get to where you want to be. "

Ben Nash

Financial adviser & founder, Pivot Wealth

What to avoid when choosing your bad credit home loan

• Consolidating all of your debt into the loan.

You can refinance your home loan to consolidate bad debts such as credit cards or personal loans. The benefit of this is that you're paying a home loan interest rate on those debts which would be lower than you were paying.

But you don't want to pay those debts off over 20-30 years because the interest will rack up. Instead, you should split your refinance loan so that you make separate payments for your home loan and your personal debts. Make sure you choose a loan that allows extra repayments too.

• Choosing 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 a free redraw facility you may be tempted to withdraw the extra repayments.

• Applying for multiple mortgages.

Every application for a loan will appear on your credit file. This will be viewed negatively by lenders. While you're refinancing you shouldn't apply with multiple lenders. Take the time to research, seek the help of a mortgage broker and find the right loan for you before submitting your refinance application.

How can I improve my chances of approval?

• Discharge your bankruptcy. Your chances of being approved for refinancing are vastly improved if you've been released from your bankruptcy status. This usually takes a minimum of three years (more information on reaching discharged bankruptcy status is available from the Australian Financial Security Authority). Generally speaking, the longer you've been discharged, the better your chances of being approved.
• Save a deposit. Having a deposit of 20% or more saved can be hugely beneficial when applying for a new home loan, and it can also help when refinancing an existing loan. Being able to provide evidence of financial stability and security can improve your borrowing capacity. A deposit of 20% or more may also mean that you can avoid paying lenders mortgage insurance (LMI).
• Demonstrate repayment history. A lender will be much more likely to offer you the financing you need if you can prove a history of making loan and debt repayments on time.
• Provide proof of employment history. If you can provide evidence of a long and steady history of employment, a lender is much more likely to view your refinancing application in a favourable light.
• Don't apply for too many loans. Serial loan application is looked upon negatively by lenders. Every application you make is included in your credit history, so be selective about the lenders you approach.

Frequently asked questions about refinancing your home loan with bad credit

• What's the lowest credit score you can have to refinance your house?

  There's no hard and fast number that your credit score should be for you to be able to refinance. But the lower credit score band you're in the harder it will be to get a new home loan, even if you already have one. Ideally you'd want above 700, but you may be able to get approval with a score between 500 to 699. Credit reporting bureau Equifax says that anything below 500 will make it harder to get credit.

• What's a bad credit score?

  What constitutes a bad credit score depends on what credit reporting bureau you're looking at. Here's a guide for the 3 bureaus in Australia:

  Experian: 0 to 549 is a bad credit score
  Equifax: 0 to 459 is a bad credit score
  Illion: 1 to 299 is a bad credit score

• What's a bad credit score?

  What constitutes a bad credit score depends on what credit reporting bureau you're looking at. Here's a guide for the 3 bureaus in Australia:

  Experian: 0 to 549 is a bad credit score
  Equifax: 0 to 459 is a bad credit score
  Illion: 1 to 299 is a bad credit score

• What's the best home loan for bad credit?

  If you're looking for the best home loan or to refinance an existing home loan with bad credit, you probably need to go to a non-conforming lender. These are still reputable, licensed lenders who are happy to take on riskier borrowers. In return you may have to pay a higher interest rate.

Written by

Richard Whitten

Senior Money Editor

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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

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Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

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