How to refinance after bankruptcy

Bankruptcy doesn’t have to stop you from refinancing your home loan. Here’s how to get a new mortgage that fits your needsRefinancing after bankruptcy 2

Bankruptcy stays in your credit history for seven years, which means it can impact your finances and borrowing capability for a long time – even if you went bankrupt due to circumstances beyond your control.

If you’ve been declared bankrupt and you want to refinance your home loan, there are specialist lenders available who can offer the right loan for your requirements. But there are a few potential pitfalls to avoid, so it’s important to research all the options available before you decide to switch lenders.

If you’re a discharged bankrupt looking to refinance your mortgage, it’s highly recommended that you seek help from an accountant and financial planner. The Australian Securities and Investments Commission (ASIC) offers free online financial and legal counselling.

Can I refinance my mortgage if I’m a discharged bankrupt?

If you have a sound financial history, refinancing your home loan is a relatively simple process. You can approach your lender to see if you can get a better deal. If your lender is not willing to negotiate, then you can start hunting around for flexible features and more affordable repayments with another lender.

If you’ve filed for bankruptcy in the past, the process is a little more difficult. If you’re an undischarged bankrupt, the vast majority of lenders will not offer you finance, so applying for a home loan before you have discharged your bankruptcy status is not recommended.

If you’ve been discharged from bankruptcy, there are more options available, but you’ll still need to look for specialist loan providers who offer mortgages to borrowers with bad credit. Unfortunately, this area of the home loan industry can attract some unscrupulous operators, so it’s important to shop around for a lender with a strong track record of ethical lending and looking after its customers.

Discharged bankrupt? Chat to a mortgage expert at Pepper Money and finance your home or investment purchase

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In most cases, home loans for discharged bankrupts will come with higher interest rates than regular loans.

How can I refinance if I’m a discharged bankrupt?

  • Compare home loans. Once you’ve found a number of suitable lenders, you can compare the refinance options available. Remember that the bankruptcy history in your credit file will make it hard for you to access a loan with the same terms as those available to borrowers with strong credit histories.
  • Match loans with needs. It’s then time to start comparing the loan refinancing options available from different lenders and how they meet your needs. You may want to opt for a no-frills standard variable rate home loan or a loan with minimal ongoing fees. Features such as an offset and redraw facility may be useful as it can help you reduce the amount of interest you pay over the life of the loan.

Finally, remember that every application for a loan will appear on your credit file. If you unsuccessfully apply for refinancing with multiple lenders, it will be viewed negatively by lenders you approach in the future. Take the time to research, seek professional help and find the right loan for you before submitting your refinance application.

How to compare home loans after bankruptcyRefinance after bankruptcy

You should look at the following features when comparing your home loan refinancing options.

  • The lender. Before you even look at any refinancing loans, look at the products and services offered by each lender. Do they have loans that will suit your needs? Do they have a history of providing reliable mortgage options and do they have a reputation for being trustworthy?
  • Interest rate. The interest rate you receive will have a huge bearing on how much the loan will cost over its life, so remember to look at the comparison rate available from different lenders. You will need to scout for a competitive interest rate to lower your monthly repayments, but you may also want to consider a fixed or split rate home loan for stability and to reduce your interest rate risk. Because you’ll be classed as a high-risk borrower, the interest rate you receive will be higher than on a normal loan.
  • Fees and charges. Some banks and non-bank lenders have a bad reputation for slugging borrowers with unexpected fees and charges, so check the full schedule of fees that apply to your loan. You may want to consider a home loan with minimal ongoing fees so you can focus on meeting your repayments.
  • LVR. LVR stands for loan-to-value ratio, which is expressed as a percentage and represents the amount you borrow relative to the value of your property. As a general rule, discharged bankrupts will only be able to access loans with a lower LVR than those available to borrowers with good credit histories.
  • Low doc. Borrowers who are self-employed or otherwise unable to provide the usual proof of income when applying for a home loan may need to apply for a low doc loan. Some lenders do offer these types of loans to discharged bankrupts.

How can I improve my chances of approval?

Here are some steps you can take to improve the likelihood of your application for refinancing being approved.

  • 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 power. 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.
  • 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.

Brian refinances his home loan

Refinance after bankruptcy case study

When the Global Financial Crisis (GFC) hit Australia during 2008 and 2009, Brian’s exporting business went under and he was forced to declare bankruptcy. Despite the stress and financial pressure of the situation, Brian was determined to regain control of his finances.

He set about rebuilding his business from the ground up. With a steady income to rely on, he then set his mind on creating a solid financial CV. He was declared a discharged bankrupt after three years and one day and he soon established a strong repayment history to his name.

After two more years of financial stability, Brian decided it was time to refinance his home loan. Rather than rushing into things, he carefully compared the features and services of a wide range of lenders who specialise in helping discharged bankrupts. After finding three suitable lenders, he started looking more closely at the refinance options available from each one.

Brian eventually found a lender that could offer him a competitive rate, minimal fees and flexible repayment options. He applied to refinance his loan and quickly received approval. With a far more affordable home loan in place, Brian is now able to begin the process of taking control of his finances now and well into the future.

Refinancing your home loan after bankruptcy can help you get your finances back on track, but make sure to compare your options and seek professional help so that you end up with the best loan for your needs.

Images: Shutterstock

Belinda Punshon

Belinda is a journalist here at Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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