Refinancing when unemployed
Refinancing your mortgage while unemployed is challenging, but it may be possible if you have an alternative means to repay the loan.
Unemployment can be a vicious cycle. You can’t refinance without a job and without a job, you can’t afford your home.
Although many borrowers see refinancing as an attractive opportunity to trim their monthly repayments, qualifying for a new loan is very difficult if you're unemployed and you can’t prove your serviceability potential.
However, there are some specialist lenders that may approve your application if you can demonstrate that you have genuine savings or equity, or if you apply with a guarantor to provide security for the loan.
What you should consider
- Finance options. If you’re unemployed, you need to realistically consider which finance options will best suit your situation. You may be interested in a low doc basic home loan with competitive interest and no ongoing fees, or you may want to find a loan that allows you to borrow with a guarantor as security for the loan.
- Length of unemployment. While unemployment is not ideal, you need to think about the length of time that you are likely to be unemployed, and plan your finances accordingly. The amount of time that you're unemployed may be out of your control if, for example, you have been made redundant. If this is the case, you should ensure that the lender knows that you're actively seeking work. You can do this by providing them with evidence of your application with a recruitment agency, for example. However, if the reason is within your control and you intend to return to the workforce- for instance, if you’ve left your job to pursue your studies for 6 months but your employer has granted permission for you to return- you should also notify the lender of this situation.
- Serviceability potential. In order to refinance your mortgage, you’ll need to build a strong case for your ability to repay the mortgage. If you don’t have a source of stable income, you’ll need to show the lender that you have adequate savings, equity, a monetary gift, shares, government benefits (if applicable) or another income source that will service the loan.
How to improve your chance of being approved
- Mortgage broker. If you intend to switch your home loan to a new lender you should speak with a mortgage broker to help you understand your borrowing capacity. Mortgage brokers can draw upon their network of lenders and put your application in front of a lender that’s more likely to review your application.
- Consider niche lenders. If you don’t use a mortgage broker and you decide to approach a new lender yourself, consider specialist lenders or building societies as these lending institutions may have more lenient criteria compared to more conservative lenders.
- Clear existing debt. Before approaching a new lender, request a copy of your credit file and be proactive about clearing your name of debt. For instance, this may involve contacting your phone supplier and requesting a payment plan to ensure that you pay your bills in full and on time.
- Evidence of genuine savings. A lender will be more inclined to approve your application if you can prove that you have the financial means to repay the loan. Generally, the lender will review your income sources to determine whether or not you are capable of servicing the loan. They may request to see evidence of regular deposits into a savings account to show that you have financial discipline, so make sure that you have this information handy.
- Consider a guarantor or cosigner. If you can refinance to a joint application, consider borrowing with your partner or a cosigner. This combines two different income sources which raises your capacity to service the loan. It also considers the credit history of both borrowers, so make sure you both have good credit history.
- Large deposit. If you have the savings, try to borrow with an loan-to-value ratio (LVR) that is less than 80% to avoid paying lender’s mortgage insurance (LMI). This means you’ll need to come up with a 20% deposit.
- Government assistance. If you’ve been made redundant, you can lodge a claim with Centrelink to receive the Newstart Allowance and depending on your situation, you can receive around $600 per fortnight. If you’re a single parent, you may be eligible for the Family Tax Benefit Part A and B, or if you’re at retirement age, you can apply for the Australian Aged Pension. Find out which government benefits are accepted by home loan lenders.
- Job seek. As mentioned above, 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.
Speak with a mortgage broker about your personal situation
How to go about refinancing if you're unemployed
- Assess your needs. If you’re unemployed, you need to carefully consider your lifestyle and financial needs. Does refinancing make financial sense? What are your refinancing objectives? Can you commit to your mortgage repayments? How will you manage your debt?
- Speak to your lender. Most borrowers don’t realise that they can negotiate their interest rate with their existing lender. Simply make the phone call to your bank as they may be willing to negotiate a more competitive rate. The home loan market is competitive and saturated and most banks are willing to negotiate to retain your business. You may also want to approach your lender to see whether they will allow you to apply for a repayment holiday to ease financial pressure. However, if you’re after a different loan type or varied features, then it may be time to switch.
- Calculate refinancing cost. The most important stage of refinancing is to carefully estimate the switching cost to ensure that you will reap significant cost-savings. You may need to pay a discharge fee, which could range from $150 to $350, as well as government charges to exit your current mortgage. If you have a fixed rate, you’ll need to pay a break cost. With your new loan, you’ll need to pay upfront costs such as application fees or legal fees charged by the new lender. You can use our switching cost calculator to get an estimate of your total refinancing costs. Remember to consult your trusted accountant or financial planner to help you through this stage.
- Compare home loans. Compare loans above or speak with a mortgage broker to consider the type of loan that will best match 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. A mortgage broker has a network of lenders on their panel so they can help find a good deal and even negotiate the mortgage terms on your behalf.
Before signing on the dotted line, make sure you carefully consider the cost and risks of refinancing your mortgage while you're unemployed. It’s essential that you speak with mortgage brokers, an accountant and financial planner to discuss your financial options in detail.
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