If you refinance to a debt consolidation mortgage and your application is rejected, here are some ways to get your finances back on track.
Many Australian borrowers refinance to a debt consolidation mortgage as a means of lowering their repayments by amalgamating their debts into one manageable sum. This can be a useful strategy if the debt consolidation loan is structured correctly, but there may be cases when you don't qualify for a refinance debt consolidation mortgage with a new lender.
If you do not satisfy the new lender’s eligibility conditions for whatever reason -- perhaps you do not have sufficient income to repay the loan or you have a poor credit history-- you should take action to get your finances under control. These include rethinking your financial behaviour, minimising your current debt, re-organising your personal and mortgage debt, liquidating your assets or finding someone to "go guarantor" (once you’ve cleaned up your credit file).
1. Apply for a mortgage repayment arrangement
According to the National Consumer Credit Protection Act 2009, you have the right to apply for a home loan repayment arrangement if you are experiencing financial hardship. Discuss your situation with your lender to see if you can work out a repayment schedule that will better suit your servicing ability.
You may also want to think about applying for a repayment holiday to reprieve you of your mortgage repayments for a short period of time so you can focus on repaying your other debts and improving your credit history.
2. Liquidate your assets
If a debt consolidation mortgage is not a viable option, you may want to consider selling your assets-- such as your home or investment property-- to help manage your financial responsibilities. If you default on your repayments for a secured mortgage, your lender has the right to take repossession of your property so you may want to liquidate your assets to avoid this from occurring.
You can use our calculator to estimate the costs of selling your home.
3. Change your behaviour
If your debt consolidation refinancing application has been rejected, it may be time for a financial health check. Australian legislation states that banks must lend to borrowers responsibly and that they cannot lend you funds if they believe the product is unsuitable for you.
As a result, you should ask the lender why your application was rejected so you can better understand your debt status and behaviour. Your application may have been denied if you have defaults on your credit report (e.g. overdue payments of 60 days or more) or you do not satisfy the lender’s serviceability conditions (e.g. not enough genuine savings).
Request a copy of your credit file to see how you can build up a better credit history and rectify the situation. Make sure you pay your bills on time and develop a regular savings pattern by depositing into a savings account regularly.
You may want to speak to a financial adviser or accountant to understand how you can manage your debt more effectively in lieu of mortgage debt consolidation.
4. Reduce your existing debt
Most people decide to consolidate personal debt into their mortgage if they have recognised that they need to reduce their repayments, or if they are experiencing financial difficulty. As a result, you should be proactive about minimising your existing debt level.
Contact your credit providers, such as your credit card provider, to negotiate a new payment plan that will help you meet your repayments on time and in full.
You may also want to call your current lender or bank to see if you can negotiate your interest rate as this may ease the financial pressure of the interest portion on your home loan repayments.
Alternative finance options
Find a guarantor
Before you consider approaching lenders again, it’s advisable that you review your financial situation, shrink your existing debt and build your savings.
Once you’ve taken measures to improve your financial well being, you may want to consider opting for a refinancing home loan. In doing so, you can strengthen your application by finding a guarantor for the loan as this can increase your borrowing power but just make sure that you borrow within your means.
No frills home loan
Being rejected for a refinancing debt consolidation loan can be tough, but if you take the time to assess your financial health and take measures to improve your credit history, you can consider alternative options such as opting for a standard variable rate home loan with minimal ongoing fees, or finding a lender that waives the application fee. This will allow you to focus on meeting your repayments to free yourself from debt sooner.
Fixed-rate home loan
A fixed-rate home loan may also help you to eliminate uncertainty of your repayments and reduce your market risk so you can budget more effectively.