Refinancing with Bad Credit: Understanding the Process in Australia

Owning a home is a significant milestone in financial terms. However, life throws curveballs, and sometimes, those curves can land you with bad credit. This situation can make refinancing your mortgage seem like an impossible dream. But fear not! While it may be more challenging, refinancing with bad credit in Australia is still achievable. This article will guide you through the process, explore your options, and highlight potential solutions.

What is Refinancing, and Why Do It?

Refinancing involves replacing your existing mortgage with a new one, ideally with better terms. This change could mean securing a lower interest rate, extending the loan term to lower monthly repayments, or accessing some of your home’s equity through a cash-out refinance. Refinancing with a lower interest rate can save you tens of thousands of dollars over the life of the loan, freeing up cash for other financial goals.

Challenges of Refinancing with Bad Credit

Let’s be clear: bad credit does make refinancing more complex. Here’s why:

• Stricter Lender Criteria: Lenders view borrowers with bad credit as riskier. This level of risk translates to more stringent eligibility requirements, including higher minimum credit scores and more significant deposits.
• Limited Loan Options: Not all lenders offer bad credit refinance options. You may have fewer options, limiting your ability to find the most competitive rates.
• Higher Interest Rates: Lenders may charge borrowers with bad credit a higher interest rate to offset the risk. This rate can negate some of the benefits of refinancing, so careful consideration is crucial.

Understanding Your Credit Score

The first step is understanding your credit score. In Australia, the two main credit reporting bodies are Equifax and Experian. You can obtain a free credit report from each body once a year to assess your score and identify any errors dragging it down. A good starting point for refinancing with bad credit is generally considered a score above 600.

Improving Your Chances of Refinancing Success

1. Take Stock of Your Financial Situation:

Before diving into refinancing, get a clear picture of your finances, which includes:

• Your current loan balance and interest rate
• Your monthly income and expenses
• Any existing debts
• The value of your home

2. Work on Improving Your Credit Score:

Even a tiny improvement in your credit score can make a big difference. Here are some ways to achieve this:

• Make all your bill payments on time, every time. Payment history is the most significant factor influencing your credit score.
• Pay down existing debts. This effort reduces your credit utilisation ratio (amount of credit used divided by total credit limit), a significant factor in your score.
• Avoid taking on new debt. Every new credit inquiry can lower your score temporarily.

3. Consider a Non-Bank Lender:

While significant banks may be hesitant to offer refinancing with bad credit, non-bank lenders can be more flexible. These lenders often specialise in bad credit loans and may have more options.

Refinancing Options for Bad Credit 

1. Government Refinance Schemes:

The Government offers a few schemes that can assist with refinancing, particularly for low and middle-income earners.

• The First Home Loan Deposit Scheme (FHLDS): While this scheme is primarily for first-time homebuyers, you can use it for refinancing if you purchased your property with a deposit of less than 20%. It can reduce the amount you need to borrow and improve your eligibility for refinancing. 
• The National Housing Finance and Investment Corporation (NHFIC):  The NHFIC works with lenders to offer low-deposit mortgages and help make homeownership more accessible. They may have programs that can assist with refinancing for those with bad credit. 

2. Adding a Co-Borrower:

Teaming up with someone who has good credit as a co-borrower can significantly improve your chances of refinancing approval. The co-borrower’s strong credit history strengthens your application and can lead to better loan terms.

3. Consider a Debt Consolidation Refinance:

A debt consolidation refinance can be a strategic option if you have multiple debts dragging down your credit score and finances. This strategy involves using your home loan to pay off your other debts, potentially including credit cards, personal loans, and car loans. This move can simplify your repayments, free up cash flow, and improve your credit utilisation ratio—all factors that can make you a more attractive borrower for refinancing in the future.

5. Patience and Persistence:

Refinancing with bad credit takes time and effort. Even if you’re initially rejected, keep going. Work on improving your credit score, explore different lenders, and be prepared to negotiate.

Seeking Professional Help

Refinancing with bad credit can be a complex process. Consider seeking help from a qualified mortgage broker like Tigerfinance, which specialises in bad credit loans. A good broker can:

• Assess your financial situation and recommend suitable refinance options.
• Negotiate with lenders on your behalf to secure the best possible terms.
• Guide you through the entire refinancing process.

Here at Tiger Finance, we understand the challenges of bad credit and are committed to helping Australians achieve their financial goals. Our experienced mortgage brokers can assess your situation, explore all available options, and work tirelessly to find a refinance solution that meets your needs.

Important Considerations

• Refinancing with bad credit often comes with higher interest rates. Carefully weigh the potential benefits (lower monthly repayments, accessing equity) against the long-term cost of a higher interest rate.
• Not all lenders are created equal. Do your research and compare different lenders before making a decision.
• Be wary of upfront fees associated with refinancing. Understand all the costs involved before proceeding.

Refinancing with bad credit is possible, but it requires a strategic approach and potentially more effort than if you had good credit. By improving your credit score, exploring all available options, and seeking professional help, you can increase your chances of securing a successful refinance and achieving your financial goals. Remember, Tiger Finance is here to help you navigate the complexities of refinancing with bad credit. Contact us today for a free consultation, and let us help you unlock the potential of your home loan.