Refinancing a home loan for bad credit

Refinancing a home loan for bad credit

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?

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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

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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.

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Learn more about home loans

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.