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

How can I qualify for a joint home loan if my partner has bad credit?

As a couple, it's entirely possible that the credit scores of you and your partner could affect your financial future, especially if you apply for a joint home loan. When applying for a joint home loan, if one has bad credit, there may be steps that can help you to qualify even with bad credit, including:

  • Saving for a higher deposit, ideally 20 per cent or more. Keep in mind:  a borrowed amount of less than 80 per cent of the property value also saves the cost of Lender's Mortgage Insurance (LMI).
  • Consistent employment records, regular savings habits, and an economical lifestyle can help prove financial stability and responsibility. These can improve your chances of approval even if there are some negative marks on a credit report.
  • Delaying your decision to buy a property until your partner’s credit score improves. Alternatively, you may want to consider a solo application.

While these tips may assist, if you find this overwhelming, consider consulting an expert advisor who can offer personal guidance based on your financial situation.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What happens if I don’t know my monthly repayments?

Your repayments should appear on your bank statements or your internet banking. If you make weekly or fortnightly repayments, make sure you convert them to monthly calculations.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

Why do I need to enter my current mortgage information?

We use your current mortgage details to calculate the potential savings if you were to change lenders, and also to help us point you to loans that may meet your needs.

For example – if you live in the house you own, we’ll make sure we show you the owner-occupier rates, which are typically cheaper than investor rates. Or if you have less than 20% equity in your property, then we won’t show you the deals that require a greater amount of equity.

How does it work? What are the steps involved?

To check your rate, start by entering your contact details and home loan information at ratecity.com.au. We’ll compare your current home loan to other options in our database, and let you know how much you could save by refinancing.  

If we can’t beat your current rate, you can claim a $100 gift card by confirming your home loan details with us.*