Refinancing your home loan can be an effective strategy to make your finances more manageable, but what if your credit score is low? A poor credit score can make refinancing more challenging, so it’s crucial to understand its impact on your available options.
At Freedom Loans, we believe in empowering you with the knowledge needed to better prepare for a successful bad credit home loan refinance in Australia. In this blog post, we discuss how bad credit affects your refinancing options and what you can and should do when refinancing with a bad credit score.
How Does a Bad Credit Score Affect Your Refinancing Application?
A poor credit score can greatly affect your ability to refinance your home loan. It can lead to stricter lender criteria, higher interest rates, limited loan options, and increased fees.
Stricter Lender Criteria
When refinancing with a bad credit score in Australia, you will face stricter lender criteria. Lenders consider you a higher-risk borrower, so they will require a higher minimum credit score, more comprehensive documentation, and proof of stable income. Additionally, they may demand larger deposits or greater equity in your home, often 20% or more. These stricter criteria aim to mitigate the perceived risk, making it more challenging to secure favourable refinancing terms compared to borrowers with good credit.
Higher Interest Rates
Lenders typically charge higher interest rates on refinanced mortgages for borrowers with bad credit due to the increased lending risk. This can significantly impact your monthly repayments and the overall amount you pay over the life of the loan. The higher interest rates can negate some of the potential benefits of refinancing, making it crucial for you to carefully evaluate whether the financial savings justify the refinance despite the higher rates.
Limited Loan Options
Bad credit can restrict your refinancing options, as fewer lenders may be willing to approve loans for high-risk borrowers. This limitation means you might not have access to the most competitive rates or favourable terms available in the market.
Increased Fees
Refinancing with bad credit often involves higher fees, such as application, valuation, and administrative costs. These additional costs, which can potentially make refinancing more expensive for you, are another consequence of lenders’ need to manage the increased risk of lending funds to individuals with poor credit histories.
Lower Credit Score
When you apply for refinancing, a hard inquiry is made on your credit report, which may cause your credit score to drop temporarily. If you submit multiple applications in a short timeframe, the cumulative effect can lower your score even more. It’s essential to limit your refinancing applications and work on improving your credit score to mitigate these negative impacts and improve your chances of approval.
Is There Any Way to Refinance With Bad Credit?
Yes, there are actually a number of ways to refinance with a bad credit rating. You can approach specialist lenders or your current lender, and also consider having a co-signer.
- Current Lender: It may be a good idea to start with your current lender when refinancing. Since you’re an existing customer, you and the lender have an established relationship, which can work in your favour. If you have a history of making timely payments, your lender might be more inclined to offer favourable refinancing options to retain your business.
- Specialist Lenders: Specialist lenders can be an ideal option if you have bad credit, as they often cater to borrowers in your situation. Unlike major banks, these lenders evaluate each application individually, allowing for more flexible terms and personalised solutions. They understand the nuances of bad credit and can provide tailored loan products to meet your needs.
- Co-signers: Adding a co-signer with a good credit score to your loan application can significantly enhance your chances of approval. The co-signer acts as an additional layer of security for the lender, which can help you get more favourable loan terms, such as lower interest rates or better repayment conditions. This approach can help you secure the refinancing you need while you work on improving your credit score.
What Factors Should You Take Into Consideration When Deciding to Refinance?
Despite the unfavourable effects of bad credit on your refinancing options, if you plan carefully, refinance benefits can still outweigh them. Consider the following factors when seeking to refinance with bad credit:
- Interest Rates: Understand that you might face interest rates higher than those offered to borrowers with a good credit score. Estimate whether the benefits of refinancing outweigh these costs.
- Fees and Costs: Be aware of any upfront fees involved in mortgage refinancing, such as application fees, valuation fees, and settlement costs. These can add up and negatively affect your financial situation.
- Loan Terms: Evaluate the new loan terms carefully. Look at the loan duration, repayment structure, and any additional features like offset accounts or redraw facilities that might benefit you.
- Debt Consolidation: If you’re dealing with multiple debts, refinancing to consolidate them into a single loan can simplify your finances and possibly reduce your overall interest payments.
- Credit Score Improvement: Consider whether you can delay refinancing until you improve your credit score. Paying down debts, making timely payments, and correcting mistakes on your credit report can boost your credit score, potentially securing you better refinancing terms.
- Debt-to-Income Ratio: A successful refinance that lowers your monthly payments can improve your debt-to-income ratio, making you more attractive to future lenders.
- Payment History: Continuing to make timely payments on your refinanced loan builds a positive payment history, which is the most crucial element of your credit score.
Final Thoughts
While a bad credit home loan refinance in Australia is more complex than the usual refinancing process, it is achievable with the right approach. Carefully weigh its impacts and factors, improve your credit score where possible, and consider all available options to find the best refinancing solution for your situation.
Ready to take control of your refinancing options despite bad credit? Contact Freedom Loans today and let our mortgage experts help you.
1300 364 751