Equity Mortgage: Unveiling the Path to Refinancing with Bad Credit Using Home Equity

Wednesday, May 22, 2024 Refinance

Do you have a bad credit rating? Imagine transforming this financial obstacle into a valuable opportunity by refinancing with an equity mortgage. Leveraging a home equity loan in Australia can significantly enhance your financial situation and give you more control over your finances.

In this guide, Freedom Loans will answer essential questions about refinancing with bad credit, including how to use your home equity effectively. We’ll provide practical steps and tips to help you navigate the process, even with a less-than-perfect credit history.

Can You Refinance with a Bad Credit Rating?

Yes, it is possible to refinance your home loan with a bad credit rating, although it may be more challenging. Traditional lenders might be reluctant, but fortunately, specialist lenders have options for borrowers with poor credit histories.

To improve your chances of successfully refinancing with bad credit, consider the following steps:

1. Get a Copy of Your Credit File: When refinancing with a bad credit rating, obtaining a copy of your credit file is an essential first step. This file contains a comprehensive overview of your credit history, including your current credit limits, number of credit cards, and any late payments reported. By reviewing your credit file, you gain insight into how potential lenders perceive your financial situation. This understanding is crucial, as it helps you address any negative marks and better prepare for the refinancing process.
2. Take Control of Your Debts: Take control of your debts by proactively repaying any existing personal debts, such as utility or credit card bills. If you struggle with repayments, negotiate a new payment plan with your providers. Create a structured plan to pay off as many debts as possible and close each facility once repaid to prevent accruing new debts. Showing potential lenders that you’re responsibly managing your debt can improve your credit rating and enhance your chances of securing a favourable refinancing deal.
3. Visit a Mortgage Broker: Visiting a mortgage broker can significantly help you with refinancing, especially when you have a bad credit rating. A licenced mortgage broker will discuss your borrowing needs in detail and guide you through the application process. They also have access to a wide panel of lenders and can identify those who are more likely to consider your application positively despite your impaired credit status.
4. Speak to Specialist Lenders: Unlike traditional lenders, specialist lenders can offer refinancing options tailored for individuals with bad credit. They focus less on your number of defaults and more on the context of your credit issues, such as life events like divorce, illness, or job loss. They are often willing to provide loans to help you manage existing debts and achieve homeownership.
5. Aim for an LVR Below 80%: Aiming for a loan-to-value ratio (LVR) below 80% can significantly improve your chances of refinancing approval. Lenders view borrowers with an LVR under 80% as lower risk, which can avoid the need for lender’s mortgage insurance (LMI). To achieve this, you may need to demonstrate sufficient equity or savings. Showing that you have a clear plan to manage and repay any remaining debts also reassures lenders of your financial stability and commitment to improving your credit situation.

Can I Use the Equity in My Home to Refinance?

Yes, you can leverage your home equity to refinance. Your equity is the difference between how much your home could sell for today (market value) and how much you still need to pay on your mortgage (loan balance) – it basically shows how much of your home you truly own. Normally, lenders will let you borrow up to 80% of your property’s value, using this equity to secure a new loan. An equity mortgage can provide the funds needed for various financial goals, including consolidating debt or making home improvements.

Below are the steps to access your home equity:

1. Calculate Your Equity: Know how much equity you have by first determining the current market value of your property. This can be done through an independent property valuation or by comparing recent sales of similar homes in your area. Next, subtract your home loan’s outstanding balance from this market value. For example, if your home is valued at $650,000 and you owe $400,000 on your mortgage, your equity is $250,000. Understanding your equity is crucial, as it represents the portion of your home that you fully own and can use towards refinancing.
2. Research Lenders: Once you know your equity, the next step is to look for potential lenders that offer favourable terms for refinancing. Compare interest rates, fees, and loan features from various banks, credit unions, and non-bank lenders. Online comparison websites and mortgage calculators can help you estimate potential savings. You might want to consider lenders that specialise in bad credit loans, as they offer more flexible terms. Thorough research ensures you find a lender that best suits your financial situation and refinancing needs.
3. Prepare Documentation: Gather proof of identity, such as your driver’s licence or passport, and income documentation, including payslips, tax returns, or business activity statements if you are self-employed. You will also need a copy of your current mortgage statement, council rates notice, and records of other assets and liabilities. Evidence of your property’s value, such as a recent valuation report, is also required. Having all documents ready and organised will streamline the application process and improve your chances of a successful refinance.

Can I Refinance My Home Equity Line of Credit (HELOC)?

Yes, refinancing a HELOC is possible. If your current HELOC terms are no longer favourable, refinancing can help you secure a better interest rate or convert it to a fixed-rate mortgage.

Here’s how to refinance a HELOC:

1. Evaluate Your Current HELOC: Start by thoroughly evaluating your current HELOC. Review its terms, including the interest rate, repayment schedule, and any fees associated with it. Check the remaining balance and the draw period to understand your financial obligations and the potential impact of refinancing. Assess whether your current HELOC meets your financial needs or if a new HELOC or different type of loan would be more beneficial.
2. Compare New Offers: Next, compare new refinancing offers. Research different lenders, considering their refinancing options’ interest rates, terms, fees, and any special features. Use online comparison tools and seek advice from mortgage brokers if necessary. Comparing multiple offers ensures you get the most favourable terms and conditions for your new HELOC or alternative loan.
3. Submit Your Application: After selecting the best refinancing offer, gather all necessary documentation. This typically includes proof of income, credit reports, property valuation, and details of your current HELOC. Make sure that all information is accurate and complete to avoid delaying the approval process. Submit your application, and the lender will then review it for approval. If it’s approved, the lender will proceed with the refinancing, allowing you to transition from your current HELOC to the new loan with better terms.

Improving Your Chances of Approval

Here are some tips to help increase your chances of getting your HELOC refinance application approved:

• Maintain Steady Employment: Maintaining steady employment is crucial when refinancing your HELOC, as lenders prefer borrowers with a stable income. Ensure you have been in your current job for at least six months – ideally longer – before applying. Steady employment demonstrates financial stability and reliability, which are key factors in a lender’s decision-making process. Providing evidence of consistent income through payslips and employment contracts will further support your application.
• Demonstrate Good Repayment History: Consistently make on-time payments on your existing loans and debts to show lenders that you are a responsible borrower. Ensure that you do not have any missed or delayed payments, as these can reduce your creditworthiness. Providing documentation of your repayment history can reassure lenders that you can manage and repay the refinanced loan.
• Save a Deposit: Having a deposit demonstrates that you have financial discipline and reduces the lender’s risk. Aim to save at least 20% of your property’s value, as this not only strengthens your application but can also help you avoid LMI. Showing that you have savings indicates that you are prepared to contribute your own funds towards the refinance.
• Limit Loan Applications: Avoid multiple loan applications within a short period, as each application you make is recorded on your credit file, and multiple applications within a short period can be seen as a sign of financial distress. Focus on researching and selecting the best lender for your needs before applying, and consider seeking advice from a mortgage broker to find suitable options. By submitting fewer, well-prepared applications, you present yourself as a more reliable and desirable candidate for refinancing.

Final Thoughts

Refinancing with bad credit is challenging but feasible with the right approach – by leveraging home equity, you can achieve the financial flexibility you need.

Follow the advice above and consult with mortgage professionals like Freedom Loans to improve your chances of securing a favourable refinancing deal.