What to Know When Refinancing Home Loan with a Bad Credit Score

While a good credit score can make refinancing your home loan more accessible, financial difficulty can lead to a bad credit score.

Refinancing with bad credit can be difficult, but it’s not impossible. You just need to know your options. 

So, if you’re looking at refinancing your mortgage with bad credit, here’s some helpful information that can make the process a little easier.

What is Bad Credit?

A credit score is a numerical score that indicates your trustworthiness as a borrower.

Bad credit means lower credit scores. It is an indication of negative listings on your credit file. This could be due to various factors, such as:

In sum, any action that signals bad borrowing habits will affect your credit score. 

Can You Refinance a Home Loan if You Have Bad Credit?

Bad credit is a significant challenge when refinancing your home loan in Australia. Some specialist lenders will approve your refinance application, although it may not come with the same low-interest rate or loan term compared to those with an excellent credit history.

At the outset, lenders will check your credit score to assess the risks associated with your bad credit refinance. Depending on their lending criteria and credit check findings, your bad credit refinance application may have the possible outcomes listed below:

  1. Approval: In the best-case scenario, certain lenders may agree to refinance your loan balance with favourable terms.
  2. Refusal: If your rating is very low, your credit provider may reject your application outright
  3. Approval with an Exorbitant Interest Rate: Your non-conforming approves your loan application. Nonetheless, to offset the risk of your mortgage, they will offer you significantly higher interest rates that are unsuitable for your financial situation.

What is the Lowest Credit Score You Can Have to Refinance Your Mortgage?

In Australia, everyone is entitled to get a free report on their credit score once every three months or within 90 days of being refused a loan. So knowing your credit history can provide insight into your debt status.

Australia has three credit reporting bodies in Australia, each with a different scoring system. This overview will help you understand where you stand:

Equifax Credit Score Scale

The Equifax credit score range is classified as follows:

  1. 0 - 459 (Below Average Score): You need to improve your score to get approved for a loan.
  2. 460 - 660 (Average Score): Credit repair is required to help you get approved for a loan.
  3. 661 - 734 (Good Score): Credit repair can significantly boost the chances of getting a loan. It would help if you had at least this score for getting approved for a loan.
  4. 735 - 852 (Very Good Score): This rating is suitable for applying for a loan.
  5. 853 - 1,200 (Excellent Score): This is the topmost and most suitable credit ranking for applying for a loan.

Illion Credit Score Scale

  1. 0 (Zero): A zero rating means you have no credit history.
  2. 1 - 299 (Low): Indicates that you may have defaulted on loan repayments and/or made numerous loan/credit card applications leading to multiple credit inquiries.
  3. 300 - 499 (Scope for Improvement): This range does not always imply a negative credit rating. Young borrowers with a much shorter credit history or who have applied to specialist lenders who offer loans to high-risk borrowers get scored in this range.
  4. 500 - 699 (Good): A good credit score will likely get approved for most new credit applications.
  5. 700 - 799 (Great): While there may have been some credit inquiries regarding your file, your overall repayment record is good. And so are you are your chances of getting approved.
  6. 800 - 1000 (Excellent): Borrowers with a long credit history usually score within this range. It’s also an indication that bills/loan instalments are settled on time and that credit is handled in a disciplined manner.

Experian Credit Score Scale

  1. 0 - 549 (Below Average): A credit score that is lower than average will most likely be considered a poor credit score by your relevant credit provider.
  2. 550 - 624 (Fair): A fair credit score indicates the opportunity to improve your financial situation by making positive changes. This includes clearing up any mortgage arrears, repayments of personal loans and any bills in your name on time.
  3. 625 - 699 (Good): A good score indicates that you’re a relatively safe candidate when seeking a loan.
  4. 700 - 799 (Very Good): A very good score is a desirable score indicating you are low to very low risk.
  5. 800 - 1,000 (Excellent): Being well above the average, you are the most preferred category.

To summarise, you should aim for the highest credit score possible. Your credit score is one of the critical factors which your lender will consider when assessing your application and borrowing capacity for credit.

How to Refinance a Home Loan with a Bad Credit Score?

Bad credit doesn’t automatically disqualify you from refinancing your home loan. Many non-traditional lenders are willing to offer refinancing options to home buyers with bad credit.

This guide will help you understand the process and what to expect when mortgage refinancing with bad credit.

Assess Your Credit History

Read your credit report to know how your lender will perceive your loan application. Credit reports will provide you with information flagged against you, such as your current credit limit, existing credit cards and late mortgage repayments. 

Knowing your credit rating issues can help you solve the problems and enhance your chances of getting a reasonable rate when you refinance your home loan with bad credit.

Do Your Research

Before commencing the application process, research and figure out if refinancing your home loan with bad credit is worth the time, money and effort.

Work out the numbers if you want to switch from your current lender to a home loan with a lower interest rate. Though you may pay less interest, the ongoing fees and other charges may work out costlier than your existing loan. If you’re on a fixed-rate loan, the break fees to leave it can be very expensive. For more information on these expenses and fees, head to our home loan refinance cost guide.

Get a Handle On Your Debts

Make a start at repaying your outstanding personal debts. For example, if your financial difficulty makes paying your credit card or utility bills harder, speak to your service provider and work out an acceptable payment plan.

Your objective should be to clear off as many debts as possible and close the repaid facilities to prevent new debts.

Seek Financial Help

Save money. Providing proof of a regular savings fund enhances your chances of refinancing because it shows a sincere attempt to be financially responsible.

Seeking professional advice from a financial expert can get you on the right track with an action plan to match your objectives while also steering your credit report in the right direction for a refinance.

Find a Lender Who Specialises in Bad Credit

Connect with a specialist or non-conforming lender who knows the ins and outs of refinancing home loans with bad credit. They usually adopt a more holistic, flexible approach and assess your application based on your circumstances.

For example, life events, such as divorce, illness or loss of a job, are beyond your control, but they may have impaired your repayment capabilities. A specialist lender may be willing to offer you a refinance loan product to help pay off existing debts and get home ownership.

You can find these lenders through mortgage brokers or by using Joust Instant Match. Our free product connects relevant lenders that are suitable to your specific financial situation.

Instant Match is a straightforward process that can help you benefit from low-interest rates and great loan terms suited to your requirements.

Apply for a Home Loan Refinance

Once you have improved your credit score, start applying for home loan refinancing with bad credit from multiple lenders. Comparing rates and terms from at least 3-4 different banks or lenders is best. Remember to check the fees they charge as well.

Refinancing a home loan with bad credit can be possible with the right strategy and preparation. Accordingly, head to our how to refinance your home loan guide for useful insights and tips. Here, you can learn more about your options, the process and what to expect.

What to Consider When Assessing Home Loans with a Bad Credit Rating?

Interest Rates 

The lowest interest rates are offered to lower-risk borrowers with good credit ratings, those who put down a significant deposit or home equity. In contrast, a bad credit score indicates you will have to pay a higher interest rate. Therefore, comparing home loans is essential to ensure you’re getting the best deal when you switch to a new loan.

Comparison Rate

The comparison rate represents the actual cost of your home loan. Check the comparison rate of different lenders, so you do not end up paying higher fees and interest rates.

Additional Fees

Keep in mind the amount of fees involved. At the onset, seek clarity if your prospective lender has any hidden fees that you may have to incur later on. Being aware from the start can spare you some unpleasant surprises down the road.

Repayment Terms

Be well-informed about your loan repayment schedule. This will help you organise your finances, especially if you have multiple loans. Knowing when your monthly payment is due allows you to avoid late payments and improve your credit file.

What to Avoid When Refinancing with Bad Credit?

Borrow More than 80% of LVR

Most lenders require borrowers to have a Loan to Value Ratio (LVR) under 80%. This avoids the need for costly Lenders Mortgage Insurance (LMI), which can run into thousands of dollars. It also improves your chances of getting approved. This is because your lender perceives a lower risk in lending to you when you own at least 20% equity in your property.

Extra Home Loan Features

If managing your finances has been challenging, home loan features like free redraw could tempt you to draw out extra repayments. Likewise, a line of credit when refinancing may tempt you to spend more money. 

We recommend avoiding these features, so you avoid falling into further debt.

Merging Debt Consolidation Loans

You may feel tempted to refinance your home loan for debt consolidation so that bad debts, like a credit card, are charged the low-interest rate as your home loan.

Nonetheless, keeping your debt consolidation loans separate from your home loan is advisable. You can make separate payments for your home and personal loans by splitting your refinance loan.

Otherwise, you’ll just be extending all your short-term debts over a longer term. This will significantly increase your total interest costs.

Limit Number of Applications

Applying for a home loan will appear on your credit file, so it’s better to research and compare available options before submitting your application. You should only apply to refinance your home loan if you’re confident that the lender will approve.

Unsuccessfully applying for refinancing with many lenders will impact how they treat your application in future.

How to Get Approval on Home Loan Refinance with Bad Credit?

Discharge Bankruptcy

Your chances of qualifying for refinancing improve once you’ve been discharged from your bankruptcy status. This typically takes at least three years, and the longer you’ve been released, the greater your chances of getting access to refinance.

Provide a Sizeable Deposit

Aim to show a minimum 20% deposit when refinancing an existing loan. The proof of financial stability and security will reassure your lenders about your borrowing capacity. It may also help you avoid paying costly LMI.

Show Good Credit Behaviour

Every lender wants to recover their money. They will, therefore, be more inclined to lend to those with a good credit behaviour history. This means making all repayments on time, not taking out any new loans or credit cards, and maintaining a good relationship with your lender.

Provide Solid Proof of Employment

Providing recent payslips, a tax return, or a letter from your employer confirming your employment status will improve your chances of refinancing your home loan with bad credit.

The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.