Can you refinance with a bad credit rating? You’ve probably heard or experienced that it can be extremely difficult to refinance your mortgage if you have bad credit. But don’t let it discourage you from exploring your options – the key is to be well-prepared and make informed decisions.
In this article, Freedom Loans will help you achieve that by walking you through the essential considerations and steps of the refinance application process when you have a poor credit rating.
What Are the Factors to Consider Before Refinancing?
Before refinancing, make sure to consider the following factors to determine whether proceeding with it is a good idea:
- Stability and Commitment: Evaluate your stability in terms of income, employment, and personal circumstances. Consider your credit score, outstanding debts, and overall financial goals. In addition, since refinancing is a significant financial commitment, ensure you’re prepared to honour the obligations associated with the new loan.
- Impact on Credit Score: Understand how refinancing can affect your credit score. While applying for a new loan can temporarily lower your score due to credit inquiries, timely payments on the new loan can eventually improve your creditworthiness.
- Long-Term Financial Impact: Assess the long-term implications of refinancing, including total interest savings, monthly payment changes, and overall affordability. Consider whether refinancing will contribute to your improved financial stability.
- Costs vs Potential Savings: Know the costs associated with refinancing, including interest rates, application fees, appraisal fees, and potential prepayment penalties. At the same time, assess the potential savings associated with the process. Calculate whether the potential savings outweigh the expenses to determine if refinancing would be worth it.
What Are the Steps for Refinancing with Bad Credit?
How easy is it to remortgage with bad credit? Refinancing a home loan when you have bad credit involves several steps to improve your chances of approval and find a suitable loan option. Here’s a breakdown of the process:
- Assess Your Credit Score: Get a copy of your credit report from one of the three major credit reporting agencies in Australia. Review it to understand your current credit situation and identify areas for improvement.
- Improve Your Credit Score: Take proactive steps to increase your credit score, such as paying off outstanding debts, lowering credit card balances, and making timely bill payments. Improving your creditworthiness can enhance your chances of securing favourable refinancing terms.
- Consult a Mortgage Broker: Seek guidance from a licenced mortgage broker who can provide tailored advice based on your financial situation and credit history. They can help you navigate the complexities of refinancing and identify lenders willing to work with bad credit borrowers.
- Shop Around for Lenders: Seek lenders that specialise in bad credit home loans, as they may be more lenient in their assessment, looking beyond just your credit score. When choosing among these lenders, compare factors such as interest rates, fees, and loan terms to find the best one for your situation. Nevertheless, you can also consider approaching your current lender to discuss refinancing options, as they may offer favourable terms due to your existing relationship.
- Submit Your Refinance Application: Prepare all necessary documentation, including your proof of income, asset statements, and debt obligations. Complete the refinancing application accurately and thoroughly to expedite the approval process.
Can You Refinance with a 500 Credit Score?
Refinancing with a credit score of 500 in Australia can be challenging but not impossible. Most lenders prefer borrowers to have at least a fair credit score, which typically means a score of around 620 or higher. However, some lenders, especially non-bank and specialist lenders, might consider applications from those with lower scores. If you have a credit score of 500, you may face higher interest rates and more stringent lending criteria. It’s crucial to demonstrate stability in other aspects of your financial profile, such as consistent income and manageable debt levels, to improve your chances of approval.
Other Considerations When Refinancing
In addition to the points above, here are other things you need to know and consider when refinancing, especially if you have a bad credit rating:
- Maintain a Lower Loan-to-Value Ratio (LVR): Aim to borrow less than 80% of your property’s value, as demonstrating higher equity can improve your chances of approval. Borrowing less than 80% of your property’s value can also help you avoid additional costs like Lender’s Mortgage Insurance (LMI), which primarily protects the lender if you default on the loan and your property’s value is insufficient to cover the outstanding debt.
- Avoid Multiple Applications: Limit your number of loan applications to avoid further damaging your credit score. Each application creates a hard inquiry, which can impact your creditworthiness.
- Keep Debt Consolidation Separate: If consolidating debts, consider keeping them separate from your home loan to avoid extending short-term debts over a longer term, which could increase overall interest costs.
- Check the Loan Terms and Conditions: Carefully review the terms and conditions of the new loan offer, especially the interest rate, repayment terms, and any associated fees. Ensure that the refinance offer aligns with your financial objectives and budgetary constraints, and avoid loan features that may encourage overspending, especially if you struggle with managing finances.
Final Thoughts
By following the steps outlined and considering the factors discussed above, you can confidently navigate the refinance application process, even with bad credit.
Don’t hesitate to consult with mortgage brokers like Freedom Loans to help you make the most informed decisions for your financial goals.
1300 364 751