< Read the previous guide in our refinancing guide series: The 7 steps to refinancing your home loan
So far we’ve covered the end-to-end process of refinancing, and for most people it’s fairly straightforward. But what if your situation is a bit outside the norm?
Refinancing in certain circumstances can be a bit tricky. Fortunately, no matter what your situation, there are likely to be lenders out there willing to give you a chance. Here are some common tricky refinancing situations.
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Don't give up just because a financial problem is making it hard for you to refinance.
If you’ve had some bad marks on your credit file since taking out your home loan, it can seriously narrow your options when you look to refinance.
Fortunately, there are lenders that specialise in situations just like yours.
Specialist lenders can help credit-impaired borrowers, even if you have defaults or judgments. Some specialist lenders will even allow discharged bankruptcies.
Now, the downside is that you’re likely to pay a higher rate than you would with a traditional lender. If you’re currently with a mainstream lender and you’ve racked up some bad credit marks, refinancing to a specialist lender is unlikely to lower your rate.
However, there may be times when it’s wise to take on the higher rate. For instance, if you need to extend your loan term to get back on top of your repayments, then refinancing to a specialist lender may be your best option.
There are a few things you’ll want to do when you’re refinancing with bad credit. First, you’ll want to get a copy of your credit file to assess how bad the damage is. The great news is that you can access your credit file for free. You can even do it without leaving finder.com.au. If you want a free copy of your credit file, head here.
Once you’ve got your credit file in hand, go through it and make sure it’s accurate. It’s possible it may have defaults and judgments recorded incorrectly, so if you think a listing has been made in error, make sure to contact the credit provider to get it sorted out. Alternatively, there are businesses that specialise in credit repair that can help you get incorrect listings removed in exchange for a fee.
The next thing you’ll want to do is get on top of your existing debt. If you’re having trouble making payments, contact your creditors to set up a payment plan. Most companies will be willing to work with you to negotiate payments you can manage.
Finally, you’ll want to speak to a specialist lender. You can find some specialist lenders in the table below.
Specialist lenders will assess your case on an individual basis and work with you to find the best refinancing outcome for your circumstances.
If you’ve been struggling to meet your debt obligations, it’s highly likely you’ve had trouble paying your home loan as well.
If you’re falling behind on home loan repayments, the first and absolutely most crucial step you must take is to contact your current lender. Be honest with them about the difficulties you’re facing and see if they’ll be willing to negotiate a hardship plan to get you back on track. You may even be able to refinance with your current lender to get a longer loan term and reduce your repayments.
If this isn’t an option, however, you might want to look to other lenders for help. The same specialist lenders who help borrowers with bad credit are often also willing to help people whose home loan has fallen into arrears.
Once again, you may find yourself paying a higher interest rate. Also, if your loan term is extended it means you’ll be paying more in interest over the life of the loan. However, if the options are either paying more in interest or defaulting on your home loan, the choice is pretty clear.
This is probably the most difficult refinancing situation to find yourself in. Negative equity means that your home has fallen in value, and you now owe more than it’s worth.
This is a rare situation in Australia, where house price growth has been robust, but it’s not unheard of. If you took out a home loan with a high loan-to-value ratio (LVR) and you’re in an area where house prices have fallen, you could find yourself facing negative equity.
Unfortunately, you’re highly unlikely to find a lender willing to refinance your home loan. This is because lenders require at least some measure of equity to serve as a deposit on a home loan. So this means your options are limited to negotiating with your current lender.
Fortunately, you can get yourself out of negative equity and back into the refinancing market by making just a few changes to your financial habits.
First, you’ll need to start making extra repayments on your home loan. This can be a big ask if you’re already struggling. An easy way to get ahead is to switch to fortnightly repayments. This won’t have you significantly out-of-pocket, but will add up to an extra monthly repayment every year.
Confused? Here’s how it works. When you make your monthly repayments, you’re paying 12 instalments a year. Now, let’s say your monthly repayment is $2,300. That means over the course of a year, you make repayments equalling $27,600.
If you switch to fortnightly repayments, your monthly repayment will be halved to $1,150. You’ll pay 26 instalments. Over the course of the year, this adds up to $29,900, or an extra month of repayments.
Using this strategy won’t hurt your hip pocket too much, but it will help you to get out of negative equity more quickly.
Once you’re back in positive territory, your refinancing options will open up and you can begin hunting for a better deal. For now, unfortunately, you’ll have to put off refinancing.
Even if your situation is a bit outside the mainstream, you may still have refinancing options. There are lenders out there who specialise in situations just like yours. But, even if you can’t find another lender willing to help, you can always negotiate with your current lender to get yourself back on track.
Check out the other parts in this guide
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