Refinancing with bad credit can be more challenging, but a less-than-perfect credit history does not automatically mean you cannot refinance your home loan. The options available will depend on what is recorded on your credit file, your current repayments, income, expenses, equity and the lender assessing your application.
If you are considering refinancing, our refinancing service can help you understand which lenders may consider your circumstances and whether refinancing is likely to improve your overall position.
The important thing is not to submit multiple applications hoping that one will be approved. Understanding the issue first, and approaching suitable lenders in the right order, can be particularly important when your credit history is already causing concern.
Can you refinance a home loan with bad credit?
Potentially, yes.
Australian lenders do not all assess credit histories in exactly the same way. A mainstream lender may decline an application that another lender is prepared to consider, while specialist or non-bank lenders may have different policies for borrowers with previous credit problems.
The outcome can depend on factors including:
- what is recorded on your credit report;
- how recent the credit issue is;
- the type and amount of any defaults or missed repayments;
- whether outstanding debts have been repaid;
- your current repayment history;
- your income and employment circumstances;
- your existing debts and credit limits;
- the equity in your property;
- the amount you want to refinance; and
- whether you can demonstrate that the new loan is affordable.
A past credit problem therefore needs to be considered as part of your complete financial position rather than viewed in isolation.
What does bad credit mean when refinancing?
“Bad credit” is a broad term. Two borrowers who both believe they have bad credit can have very different circumstances.
Your credit history could include issues such as:
- late or missed repayments;
- defaults;
- multiple recent credit applications;
- overdue accounts;
- high credit-card limits or other debts;
- financial hardship arrangements; or
- more serious adverse credit events.
Some issues may be relatively minor or historical, while others may significantly reduce the number of lenders willing to consider an application.
Before refinancing, it is therefore useful to understand exactly what appears on your credit report rather than assuming your credit position is either good or bad.
Why lenders look closely at repayment history
Refinancing involves applying for a new home loan, so the new lender needs to assess whether the proposed loan is suitable and whether you appear able to make the repayments.
A lender may review your recent home loan statements, other debt repayments, income, living expenses and credit history as part of that assessment.
A recent pattern of missed mortgage repayments can make refinancing more difficult. On the other hand, an older credit problem combined with a strong recent repayment history may present a different risk profile.
This is one reason it is important to assess the full application before approaching a lender.
Your property equity can also matter
Your credit history is not the only factor.
Lenders also consider the amount you owe compared with the value of the property. This is generally expressed as the loan-to-value ratio, or LVR.
For example, if a property is worth $1,000,000 and the outstanding home loan is $650,000, the LVR would be approximately 65%.
A borrower with substantial equity may have different refinancing options from someone whose home loan balance is close to the property’s current value.
The lender will normally rely on its own valuation rather than simply accepting an estimated property value provided by the borrower.
Specialist and non-bank lenders may offer additional options
If a mainstream bank will not accept the application, it does not necessarily mean there are no refinancing options.
Australia has specialist and non-bank lenders that may consider applications outside standard bank credit policies.
However, a specialist solution should not automatically be treated as equivalent to a standard home loan. Depending on the borrower and product, there may be differences in:
- interest rates;
- application or establishment fees;
- ongoing fees;
- maximum LVR;
- loan features;
- credit-history requirements; and
- exit or refinancing strategy.
The question is therefore not simply whether a lender will approve the refinance. It is whether the proposed new loan makes financial sense once the costs, rate, features and longer-term implications are considered.
Should you refinance debt into your home loan?
Some homeowners consider refinancing because they also have credit cards, personal loans or other higher-interest debts.
Consolidating debts into a home loan can reduce the number of repayments you need to manage and may reduce the interest rate applying to some debts. But there is an important trade-off.
If a short-term debt is moved into a home loan and then repaid over many years, the total interest paid could be higher even if the interest rate is lower.
Using your home as security for consolidated debt also changes the risk associated with those debts.
Debt consolidation should therefore be assessed using the total cost and proposed repayment strategy, not simply the new monthly repayment.
Steps to take before applying to refinance with bad credit
1. Check your credit report
Start by finding out what lenders are likely to see.
Check the information on your credit report and, if something appears incorrect, investigate the appropriate process for having inaccurate information corrected.
2. Review your recent home loan repayments
Your existing mortgage repayment history can be particularly important.
If repayments have recently been missed or made late, it may be worth understanding how that affects your lender options before submitting a new application.
3. Review your other debts and credit limits
Credit cards, personal loans, car finance, buy now pay later commitments and other liabilities can affect borrowing capacity and lender assessment.
Even an unused credit-card limit can be relevant because a lender may assess the potential liability rather than only the current balance.
4. Estimate your current property equity
Understanding the approximate value of your property and current loan balance helps establish your likely LVR.
A lender will still perform its own valuation, but an initial estimate can help identify whether a proposed refinance is realistic.
5. Compare the total refinancing cost
Consider more than the advertised interest rate.
Depending on the existing and proposed loans, refinancing costs may include discharge fees, application or establishment fees, valuation costs, government charges and other lender costs.
The savings or other benefits of refinancing should justify the cost of switching.
6. Avoid unnecessary credit applications
Applying to numerous lenders is not the same as comparing numerous lenders.
A mortgage broker can investigate lender policies and potential options before deciding where an application should be lodged. This can be especially useful where the credit history requires explanation.
When waiting to refinance may be the better option
Sometimes the most appropriate strategy is not to refinance immediately.
Depending on the circumstances, waiting may provide time to:
- establish a stronger recent repayment history;
- reduce other debts;
- close unnecessary credit facilities;
- build additional equity;
- resolve errors or outstanding issues on a credit report; or
- improve the overall affordability of the proposed loan.
The objective should be to improve your financial position, not merely obtain approval from a different lender.
How a mortgage broker can help with bad-credit refinancing
Refinancing with credit issues can require more lender-policy research than a straightforward refinance.
CBM Mortgages can review your circumstances, discuss the reason for the credit issue and compare suitable refinancing options from lenders available through our panel.
This can help establish:
- which lenders may consider the credit history;
- whether your income and current commitments meet serviceability requirements;
- how your property equity affects the options;
- the likely costs of switching;
- whether a specialist lender needs to be considered; and
- whether refinancing now is preferable to improving the application first.
The right outcome may be a mainstream refinance, a specialist solution, improving the application before refinancing, or deciding that the existing loan is currently the better option.
Frequently asked questions
Can I refinance my home loan with bad credit?
Potentially. The options depend on the type and age of the credit issue, your recent repayment history, income, expenses, debts, property equity and the policies of the lender assessing the application. Some specialist and non-bank lenders may consider circumstances that do not fit standard bank policies.
Will one default stop me from refinancing?
Not necessarily. Lenders may consider the amount, type and age of the default, whether it has been paid, the circumstances surrounding it and your more recent repayment conduct. The effect of a default can therefore vary between lenders and borrowers.
Can refinancing help me consolidate other debts?
It may be possible to consolidate eligible debts when refinancing, subject to lender approval and sufficient equity and borrowing capacity. However, extending short-term debt over a longer home-loan term can increase the total interest paid, so the overall cost and repayment strategy should be considered carefully.
Should I apply to several lenders if I have bad credit?
Submitting multiple applications without first checking lender policies may not be the best approach. Comparing lenders is useful, but ideally the policy research should occur before applications are lodged so you can identify lenders that are more likely to consider your circumstances.
Is refinancing with bad credit always worthwhile?
No. A refinance should improve your overall position or achieve a clear objective. A higher rate, substantial switching costs or a longer loan term could outweigh the benefits. In some cases, improving your financial position before refinancing may produce a better result.
Want to understand your refinancing options?
CBM Mortgages can review your current home loan, credit circumstances and property equity, then compare refinancing options that may suit your situation.
Disclaimer: This article provides general information only and does not constitute personal financial, legal, tax or credit advice. Lending policies, interest rates, fees and eligibility requirements can change and vary between lenders. Consider your individual circumstances and obtain appropriate professional advice before refinancing or making changes to existing debts.
