How to refinance after bankruptcy
Bankruptcy makes it hard to refinance your home loan, but if you've been discharged from bankruptcy you have options.
While you're still declared bankrupt it's almost impossible to refinance your mortgage. But even once you're discharged very few lenders will consider your application. Your best option is to look for specialist loan providers who offer mortgages to borrowers with bad credit.
In most cases, home loans for discharged bankrupts will come with higher interest rates than regular loans.
How do I refinance after my bankruptcy is discharged?
Your first step is to work out if you're discharged and whether you need to notify your lender about it. Credit agencies must keep a record of any bankruptcies on your file either five years from the date you become bankrupt, or two years from the end of your bankruptcy (of the two periods, whichever is the latest).
Your bankruptcy normally lasts for three years and one day, starting from the day you file your statement of affairs.
If you are still bankrupt then you won't be able to refinance. If you're discharged and still within the notification period mentioned above you will need to tell your lender (they will find out anyway when they check your credit history).
The refinancing process itself is the same for any borrower, but you'll need to look for specialist bad credit lenders. 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.
The refinancing process for discharged bankrupts
- Compare lenders. 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?
- 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. 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.
- Look for a low 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.
- Loot at the 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.
- Don't apply for multiple mortgages. 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.
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.
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 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.
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.
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