Refinancing your home loan with bad credit

Interest rate hikes have dialled up the pressure on borrowers over the past couple of years. As a result, many have been keen to refinance their home loans and escape rising repayments. 

But if it’s been several years since you first took out your mortgage, it’s possible many important parts of your home loan application may have changed – including your credit score. 

Lenders consider various factors when assessing your home loan application, including your credit score. A higher credit score indicates reliability in repaying debts, enhancing your chances of getting approved. While it’s not the only part of your mortgage application, it plays a crucial role.

Having good credit when refinancing your mortgage can significantly impact your chances. It shows lenders that you meet your financial obligations and that your reason for refinancing is to secure a better deal, not to escape a bad situation.

If you’ve received a bad credit report, it can impact your ability to successfully refinance. However, it's not the end of the road. Understanding and improving your credit score can enhance your chances of getting approved.

Different reporting bodies have varying scoring systems, but generally, a score below 500-600 is considered ‘bad’ for home loan applications.

Credit score ranges by reporting body

A credit score below ‘good’ can be a red flag to lenders.

Credit scores can be affected by:

• Missing or ignoring bills.
• Defaulting on debts.
• Opening too many lines of credit.

A history of timely payments and minimal new debts typically results in better credit scores. Even minor defaults, like not paying a bill over $150 for 60 days, can stay on your report for up to five years, impacting your refinancing prospects.

Refinancing can offer benefits like:

• Lower interest rates.
• Reduced or fewer fees.
• Debt consolidation.
• Better loan features, such as an offset account.

Even with bad credit, refinancing can help manage your mortgage repayments more effectively.

If you have bad credit, your home loan refinancing process comes with a few extra steps:

1. Assess your credit score: Understand your current score and how you got there.
2. Improve your credit score: Take steps to clean up your credit score.
3. Evaluate your debt-to-income ratio (DTI): Aim for fewer debts to improve your DTI.
4. Shop around: Compare home loan features and interest rates.
5. Prepare your application: Gather all necessary paperwork.
6. Apply: Submit your application with all required documents.

1. Know your score: Request a free credit report from agencies like Experian or Equifax.
2. Correct errors: Fix any inaccuracies in your report.
3. Pay down debts: Focus on reducing outstanding debts (e.g. credit cards, HECS debts).
4. Timely payments: Set up automatic payments or direct debits.
5. Consolidate credit: Lower credit card limits and avoid new debts.

Improving your credit score can significantly impact your refinancing application, making lenders more likely to approve your loan.

By following these steps and taking responsibility for your financial health, you can improve your chances of refinancing your home loan, even if your credit score is less than perfect.

Subscribe to our weekly newsletter Moneyzone for financial tips & tricks straight into your Monday inbox.