Refinancing a home loan in arrears
Get a better deal on your home loan even if you're in arrears.
If you haven't been able to keep up with your mortgage repayment schedule and have an overdue debt, your account is in arrears. Most borrowers fall into this situation when they run into some financial challenges and are unable to meet their financial obligations. This can affect any loans that you may want to apply for in the future, as well as your credit history.
One of the ways to help fix this situation is to consider refinancing your loan. This will see you extend the term of your home loan to lower your repayments, or simply refinance to get a more competitive interest rate, lower fees and better features.
Can you refinance a home loan which is in arrears?
It's possible to refinance your home loan even if it is in arrears, but depending on your credit file it might not be an easy task. Your options can be to refinance it with your existing lender, or move to a different lender.
Refinancing your mortgage can help you control the situation, though you may not be able to get this service from major banks or well-known lenders. Instead, you will need to contact lenders who specialise in bad credit lending, or a mortgage broker who handles similar cases. Your options, if you're eligible, might also be limited as you will not qualify for the lower interest rate home loans that are available (because your interest rate is a reflection of your riskiness). Refinancing may also mean an extension of the length of your loan term, which means you’ll be paying it off for longer than expected, with more interest.
You might also be subject to certain conditions including higher interest rates, Lenders Mortgage Insurance (LMI, this is charged if you are borrowing more than 70-80% of the property’s purchase price), and risk fees. All these are the new lender’s insurance against the risk that they are taking by assuming your loan.
Refinancing with bad credit
Borrowers with their mortgage in arrears are considered to have bad credit, but so are those that have financial problems in the past. These days there are more loan options for those with bad credit, even if the penalty of these loans is higher interest rates and fees.
The best way to deal with bad credit is to minimise using your credit card and applying for other loans, and be diligent when it comes to paying off what you need to pay. A regular savings fund will give you a boost if you plan to refinance, as it shows you are being doing what you can to be financially responsible.
Being delayed on your mortgage payments is not the end of the world. There are things you can do to get back on track. Refinancing is one option, but before you do that, it might be a good option to talk to you current lender to see if they have options for you.
Speak to a lender about your refinancing options
What happens if your home loan continues to be in arrears?
The way lenders deal with mortgage in arrears vary, but the general process is pretty similar. Most lenders will send you a notice or a letter if you've missed a repayment twice in a row. You can respond by letting the lender know why you've fallen behind on your payments and when you can make your next due. If there's no response from you in any form, the lender will send you a default notice, which usually gives you up to 30 days to update your payments.
If you still fail to settle the payment, the lender will issue a statement saying that they will repossess your property. They will then apply for a writ or order for the repossession, and they will inform you of when this will happen. A 'Notice to Vacate' will be given to the borrower, and a sheriff will be sent to facilitate this, including changing the locks if necessary.
Any activity that deals with financial anomalies or difficulties will affect your credit rating, which then will affect any future loans that you may wish to apply for.
What should you consider before refinancing a home loan in arrears?
Refinancing to another lender is often the first option many take if they have a mortgage in arrears. Refinancing means getting a new loan to help you with your existing loan. Some people regularly refinance their homes, but some choose to do so when they’re having difficulties with their current one.
While this presents many opportunities for helping you get your finances back in order, it's a good idea to ask your current lender if they have other options for you. Most lenders have a ‘hardship team’ that is dedicated to helping borrowers who are having difficulty paying their dues by giving them better options with their payments. They can recalculate your loan and help you make plans for your payment so you won’t have to worry about defaulting or losing your property. This also applies to any loan that you have availed and are having difficulty keeping updated.
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