Refinancing your mortgage can be a powerful financial tool, offering the opportunity to lower your interest rate, reduce your monthly payments, or even unlock equity in your home. But for borrowers with bad credit, the process of refinancing can seem daunting. High interest rates, limited options, and the perception of risk by lenders often stand in the way. However, even with less-than-perfect credit, there are strategies to help you refinance and secure a better mortgage rate. In this guide, we’ll walk you through practical refinancing strategies that can help you lower your mortgage rate despite bad credit, empowering you to take control of your financial future.
Bad Credit and Its Impact on Mortgage Rates
In Australia, your credit score plays a significant role in determining your mortgage options. A credit score below 500 is generally considered bad, and many lenders may see you as a high-risk borrower. As a result, you’re more likely to face higher interest rates compared to those with better credit scores. Lenders view a low credit score as a signal that you may have had difficulty repaying debts in the past, leading to steeper terms on any loan product.
But bad credit doesn’t have to mean the end of the road. While traditional banks may be more cautious, there are still lenders and strategies that can help you refinance even with a poor credit score. Let’s explore these methods further.
Can You Refinance with Bad Credit?
One of the biggest misconceptions is that refinancing isn’t an option for those with bad credit. The truth is, refinancing is possible, but the key lies in understanding your options and preparing yourself for what lenders are looking for. In Australia, non-bank lenders and specialist brokers, such as Freedom Loans, cater specifically to individuals with credit challenges.
Alternative lending markets offer more flexibility, which may include non-conforming loans or low-documentation (low-doc) loans, where traditional banks may turn you down. Moreover, even with a bad credit score, the state of the property market and your home’s equity can play a significant role in determining your refinancing eligibility. In the following sections, we’ll break down strategies you can employ to improve your chances.
Key Refinancing Strategies for Lowering Mortgage Rates with Bad Credit
1. Improve Your Credit Score Before Refinancing
While this might sound obvious, the first and most effective strategy is improving your credit score before you even consider refinancing. This can take time but yields the best results in terms of securing a lower rate.
- Pay off existing debts: Focus on paying down any high-interest debts like credit cards, which can have an immediate positive impact on your credit score.
- Correct errors on your credit report: Obtain a copy of your credit report from a provider such as Equifax or Experian and dispute any errors.
- Limit new credit applications: Applying for multiple new credit lines can negatively impact your score, so be strategic with any new credit inquiries.
Taking these steps to improve your score over six months to a year can significantly improve your refinancing options. When your credit improves, you may be able to access better interest rates.
2. Consider a Low-Doc or Non-Conforming Loan
For individuals with bad credit, a low-doc loan or non-conforming loan may be a viable option. These loans are designed for borrowers who may not meet the stringent lending criteria of traditional banks.
- Low-doc loans: Require less financial documentation and are particularly helpful for self-employed individuals. However, they tend to carry higher interest rates.
- Non-conforming loans: Tailored for borrowers with bad credit. These loans come with more flexible requirements but also may involve a slightly higher risk.
These options may cost more than a traditional loan upfront but can offer a pathway to refinancing. Once your credit improves, you can always refinance again under better terms.
3. Use a Guarantor to Secure a Better Deal
A guarantor can be a game-changer if you have bad credit. Having a close family member guarantee part of your loan reduces the risk for lenders, making them more likely to offer a lower interest rate. The guarantor offers their own home or equity as collateral to secure your loan.
However, it’s crucial to have open communication with your guarantor and ensure that both parties understand the obligations and risks involved. If you default on the loan, the guarantor could be liable to repay it.
4. Shop Around for Lenders Specialising in Bad Credit
When you have bad credit, it’s more important than ever to compare multiple offers. Not all lenders treat bad credit the same way. Alternative lenders and brokers, like Freedom Loans, often have relationships with non-bank lenders who offer more flexible terms for borrowers with credit challenges.
While banks may decline your application outright, a specialist lender may be more understanding and provide solutions tailored to your situation. Working with a broker can also give you access to lenders who are more open to negotiation and creative loan structures.
5. Lengthen the Loan Term
Another strategy is to extend the loan term. By lengthening the time you have to repay the mortgage, your monthly payments will become more manageable, even if the interest rate isn’t dramatically reduced. This can be especially helpful if you’re struggling with high repayments due to your credit score.
The downside is that you will end up paying more in interest over the life of the loan, but the short-term benefit of affordability can help you improve your credit and refinance later with better terms.
The Role of Equity in Refinancing
When you refinance, your home’s equity plays a vital role in determining your new loan terms. Equity is the difference between the value of your home and the amount you still owe on your mortgage.
- Build equity: One way to improve your chances of securing a lower rate is by building more equity in your home. You can achieve this by making additional repayments or simply waiting for the property value to increase.
- Use equity: Lenders may be more willing to offer favourable terms if you have considerable equity in your property because it reduces their risk. Equity can sometimes offset bad credit by improving your overall loan-to-value ratio (LVR).
Government Schemes and Support for Refinancing with Bad Credit
The Australian government offers schemes that can help individuals with bad credit achieve more favourable mortgage terms. For example, the First Home Loan Deposit Scheme (FHLDS) provides support for first-time buyers, which could help when refinancing. Although this scheme primarily benefits new homebuyers, those refinancing after purchasing their first home can still benefit indirectly from the government’s support in other programs.
Working with a Mortgage Broker to Secure the Best Deal
If you’re concerned about refinancing with bad credit, working with an experienced mortgage broker can be invaluable. Brokers like Freedom Loans have access to a range of lenders, some of whom specialise in helping borrowers with credit issues. A broker will help you navigate the refinancing process, negotiate on your behalf, and present you with options that fit your unique financial situation.
Conclusion
Refinancing your mortgage with bad credit may seem challenging, but it’s far from impossible. With the right strategies, such as improving your credit score, exploring low-doc or non-conforming loans, using a guarantor, and working with a specialist lender, you can achieve a lower mortgage rate and regain control of your financial situation.
At Freedom Loans, we’re committed to helping Australians overcome financial hurdles and find the best refinancing solutions, no matter their credit history. If you’re considering refinancing, contact us today to explore your options and secure the best deal possible for your circumstances.
1300 364 751