Managing your finances is never easy, but this can prove especially challenging if you’ve had problems with bad credit in the past. Whether you’re doing it tough due to financial problems from circumstances beyond your control, or if you’re trying to make up for money mistakes you’ve made in the past, a bad credit score can cast a long shadow over your future financial dealings, including refinancing a home loan.
But that doesn’t mean it’s impossible to refinance a home loan and ease your financial stress if you have bad credit. With a bad credit mortgage from a specialised lender, you may be able to get your finances back under control, and even refinance back onto a more typical mortgage further down the track.
How you can end up with bad credit
If you have any of the following in your credit history, banks and other lenders may be less confident about lending to you:
- Defaults – on home loans, personal loans, or even credit cards and utility bills)
- Outstanding debts – owing money on a car loan, personal loan or credit card
- Declined loan applications – if one financial organisation decides not to risk lending to you, others may follow suit
- Bankruptcy – stays on your credit history for 7 years
While some of these factors are more applicable to borrowers who are entering the property market (e.g. bankruptcy), any of these black marks that appear on your credit history after you’ve successfully taken out a home loan may affect your ability to refinance that mortgage further down the track.
How bad credit can affect your refinancing prospects
Refinancing a home loan essentially means swapping out your existing mortgage for an all-new one, with interest rates and features that better suit your finances. Even if you successfully applied for a home loan in the past doesn’t mean you’re automatically eligible for a new one, especially if you no longer have good credit.
Most lenders reserve their best mortgages for borrowers they feel are most likely to pay back the loan and the interest. To a lender, an “ideal” borrower is one that can demonstrate both security (based on savings and/or equity), and non-risky behaviour (based on credit history).
If your finances come up short in either of these areas, you may not satisfy the lending criteria for the mortgage offers with the lowest interest rates and the most flexible features. Even if you’ve built up enough equity in your existing loan to avoid paying Lender’s Mortgage Insurance (LMI) when refinancing, if you’ve previously defaulted on a repayment and gone into arrears, or you’ve taken on additional debts such as personal loans, you may be deemed too much of a financial risk to be offered a low-interest refinancing package.
Can you refinance and get a better rate when you have bad credit?
A significant percentage of people who refinance their mortgage do so in order to get a better deal on their property’s interest rate. But if your current home loan’s interest rates were established when you previously applied with good credit, you’re unlikely to qualify for a better one if your credit has since gotten worse.
Sometimes, it’s a better option to wait to refinance until you’ve had a chance to clear up some of your credit issues. Problems such as past defaults and bankruptcy can take up to 7 years to clear from your credit history, but it may be able to resolve some other credit issues in the shorter term. Paying off or reducing outstanding debt can often help, as can keeping a clean repayment record on your current loan.
How refinancing can help you manage your finances when you have bad credit
If you’re looking into refinancing options because you’re struggling to afford your current mortgage repayments alongside credit card debts, personal loans and other expenses, then there may be refinancing options that can help you. These options may not necessarily lower your interest rate or shrink your mortgage repayments, but they could let you consolidate your other debts into your mortgage, so your home loan repayment is the ONLY one you need to manage. These bad credit loans for debt consolidation can be much simpler and more affordable in the short term than making separate repayments for each debt each month, each one at a different (and often high) interest rate.
To refinance to a bad credit loan for debt consolidation, you may wish to investigate the specialised non-bank lenders. Some of these lenders are specialists in nonstandard loans such as bad credit mortgages, and may be flexible enough to provide a refinancing package that suits your financial situation. The interest rates on these loans can often be on the higher side, but when you prepare your monthly budget, you may find you’re paying less per month than what you did when you were paying all of your debts separately.
Refinancing from a bad credit loan back to a standard loan
Because refinancing to a specialised bad credit home loan often means paying a higher-than-average interest rate, you probably don’t want to keep paying one of these loans for longer than you have to. Once you’ve been paying one of these loans for long enough to reduce your credit risk to lenders, you may want to refinance from your bad credit loan back onto a more typical mortgage.
To help establish yourself as a safer credit risk, it’s important to pay every instalment on your bad credit mortgage on time for at least 6 to 12 months. If you’re able to make additional payments onto the loan, that can help too. Also, try not to take out any new loans while you’re paying back a bad credit mortgage, and don’t let yourself fall back into debt – consolidating your credit card debt into your mortgage isn’t an excuse to max out your card again!
Even when you’re coming off a bad credit loan, if you’re able to establish that you’re a relatively safe financial risk, then even a bank may be willing to help you refinance your mortgage onto a better interest rate and relieve a bit of that financial pressure.
Compare refinancing offers, and seek professional advice
Remember that whether you have good credit or bad, refinancing a mortgage isn’t something to be taken lightly. Comparing the available options at RateCity can give you a better idea of what offers are available and which lenders are worth approaching, but it’s usually worth also consulting a professional financial adviser, who can give you help that takes your specific financial circumstances into account.