If you’ve lost your job, you may want to refinance your mortgage to save money, but make sure you weigh up the pros and cons before switching.
Whether you’ve been made redundant or you’ve decided to quit your job voluntarily, it may be difficult to qualify for a new loan if you can’t show that you have a reliable source of income to service the mortgage.
Switching from a high-interest home loan to a lower rate can translate to savings in lower repayments and features that will better suit your situation.
Refinancing not only saves some borrowers money, it also allows you to take advantage of new product features that may enable you to minimise interest and repay the loan sooner.
It can be a good idea to also speak with a licensed mortgage broker and/or financial adviser before refinancing your home loan.
Can I refinance if I’ve lost my job?
Although you won’t be viewed as a "blue chip" borrower by the lender’s standards, it may be possible for you to refinance your home loan even if you’ve just lost your job. Some specialist lenders may approve your application if you fulfil their eligibility criteria, including asset tests and a credit history check.
However, most Australian lenders favour borrowers that have stable employment--that is, that you’ve been in the same job for at least 12 months- as this represents a lower risk. As a result, you need to be aware that some lenders may not approve your application.
How can I boost my chance of being approved?
- Have enough of an income to service repayments. If you don’t have a steady source of income, you’ll need to prove to the lender that you have enough savings, equity, shares or government benefit to repay the loan. Most lenders prefer that you have at least 6 months of mortgage repayments saved to cover your repayments during the interim until you find another job, or start receiving a government benefit.
- Consider a basic loan. You need to consider which finance options will best suit your situation given that you will not be receiving income for a period of time. You may want to opt for a “no frills” home loan with minimal fees and low interest so you can focus on meeting your periodic repayments. You may also want to think about applying for a guarantor loan to increase your borrowing capacity to avoid paying lender’s mortgage insurance (LMI).
- Be able to show that your situation is improving. You need to think about the length of time that you’re likely to be unemployed as this may influence your application. For instance, if you’ve been made redundant then you may want to show the lender that you’re actively seeking work or attempting to upskill to improve your chance of landing a job.
- Explain why you don’t have a job anymore. Your lender may be concerned about why you decided to leave the workforce so it helps if you offer a detailed reason as to why you left your job (e.g. “higher salary” or “career change”).
What should I consider before refinancing?
- Specialist or niche lenders. Specialist lenders or building societies may have more lenient criteria compared to conservative lenders, so think about applying with these types of institutions to optimise your chance of success.
- Trim debt. Before approaching a new lender, request a copy of your credit file and be proactive about clearing any existing debt that you have. For instance, contact your electricity supplier and request a payment plan to ensure that you pay your bills in full and on time.
- Budgeting. Sit down with an accountant or financial planner to work through your finances and decide how you can manage your living and mortgage expenses given your unemployment status. You may want to find a high-interest savings account as a way to build your savings.
- Be proactive. You should take every step to show the lender that you are actively seeking employment. If you’re receiving a government benefit, you may be required to show that you are looking for casual or part-time work on the side.
- Government assistance. If you’ve been made redundant, or you cannot work due to a family or health situation, you can lodge a claim with Centrelink to receive a government benefit. Find out which government benefits are accepted by home loan lenders.
How can I go about refinancing?
- Identify your needs. If you’re temporarily unemployed, you need to think about your lifestyle and financial needs. Does refinancing make financial sense? What are your refinancing goals? Can you commit to your mortgage repayments? How will you service the loan without a stable income? Can you ask someone to go guarantor?
- Negotiate with your lender. Before you start shopping around for a new home loan, negotiate your current rate with your lender to see whether they will offer a more competitive rate. You should also check to see whether your lender will offer a repayment holiday to lessen your financial stress. However, if you need a home loan with different terms or features, then it may be time to move on from your current lender.
- Do the numbers. Refinancing also makes sense if it improves your financial situation, so you need to crunch the numbers. Remember that you’ll need to pay a discharge fee (typically $150 to $350) to exit your existing loan, as well as upfront charges such as application fees to take out a new loan. You can use our switching cost calculator to estimate your total refinancing costs. Remember to consult your trusted accountant or financial planner to help you forecast the costs involved.
- Compare home loans. Speak with a mortgage broker to consider the type of loan that will best suit your borrowing needs. Maybe you need a standard variable rate home loan with minimal ongoing fees or maybe you're looking for a home loan with no application fee. You may want to lock in your rate with a fixed rate home loan if you don’t want to take a gamble with interest rate rises.
Losing your job can be a challenging and emotional time, but it may also represent an opportunity to reassess your home loan while you’re between jobs. Do your homework, crunch the numbers and speak with professionals to switch to a new home loan that will help you reach your home ownership goals.