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Refinancing your home loan with bad credit

Collage of a hand holding a credit card over a house.

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

How does your credit score affect your home loan?

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.

Why good credit matters in refinancing

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.

How does a bad credit score affect refinancing?

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.

What is a bad credit score for a home loan?

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

800 - 1,000
800 - 1,000
853 - 1,200
700 - 799
700 - 799
735 - 852
625 - 699
500 - 699
661 - 734
550 - 624
300 - 499
460 - 660
Below Average
1 - 549
1 - 299
1 - 459

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

How do you get bad credit?

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.

Why should I refinance, even with bad credit?

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.

6 steps to refinancing with bad credit

Collage of a couple refinancing their home loan.

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.

5 steps to improve your credit score for refinancing

  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.

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Jack Dona
Jack Dona
Money writer

Jack is degree-qualified in communications and creative writing, with a talent for simplifying financial jargon. His approach helps consumers make better decisions. Jack is RG146 certified in generic knowledge and uses flair to make finance interesting.