At some point in our lives, we all go through a rough patch as we all experienced during the pandemic. Many mortgage homeowners struggled when lost their income due to economic uncertainty. Many decided to defer the loan repayments with their current bank. Some could not meet contract obligations to repay the required minimum repayment to the bank. In some instances, it was unfortunate that it was declared as hardship which is appearing in your Credit File now, and that is what most banks will rely on to determine applicants’ character. When you want to refinance with an impaired credit history can be challenging, but it is not impossible.

Here are some steps you can consider if you are looking to refinance with a less-than-perfect credit history or have a credit-impaired history.
  1. Assess your Credit Report: It is highly recommended to obtain a copy of your credit report from all three major credit bureaus (Equifax, Experian, and Illion). Review the report for any errors or inaccuracies that might be negatively impacting your credit score. Dispute any incorrect information by contacting the relevant Credit Agency. The report may cost you a little fee but it will prevent significant delays and hassle with the new bank when you apply to refinance. It will provide the option to consider the most suitable lender to apply with based on your credit file which reduces any disappointments and surprises.
  2. Improve Your Credit Score: If you believe some reporting is not legitimate, it is best to work on improving your credit score before applying for refinancing by contacting a Credit Repair Agency that can assist you in removing any unnecessary inquiries, defaults, etc. Also, this might involve paying down outstanding debts, making on-time payments, and avoiding new credit inquiries if possible. While it might not drastically improve your score immediately, every point can count when seeking refinancing. A Credit Repairing Agencie can negotiate with credit providers on behalf to resolve the matter if it is allowed within the legal framework. Your mortgage broker can refer you to a credit-repairing agency to look at your file before applying and get advice.
  3. Shop Around Cautiously: The best approach to finding the best-suited lender for your circumstances is to reach your local mortgage broker. ASA Mortgage Brokers have access to multiple lenders to get a sense of the options available to you. Not all lenders have varying criteria for approval, so your mortgage broker might find one that is more lenient toward your credit history and delivers a positive outcome. However, it is best to be cautious of predatory lenders who might take advantage of your situation by offering credit facilities without formal approval in writing and properly assessed by the Credit Manager.
  4. Consider a Co-Applicant: If possible, it is best to consider a close friend or family member with a strong credit history to purchase your property. This might not be an ideal option if you are a First Home Buyer and going to apply for any First Home Owner Grants. Your partner might be willing to be a co-applicant for the refinance application with you if not already in the previous loan application. Their good credit could help you secure better terms. It is best to discuss your situation with your mortgage broker before applying.
  5. Explore Loan Options: There are Government-backed loans, such as FHG loans for mortgages, might have more flexible requirements, making them more accessible to individuals with impaired credit histories. This is again subject to the lender’s credit criteria and terms and conditions of the scheme.
  6. Offer Collateral: If you are refinancing a secured loan (like an auto loan), offering additional collateral might improve your chances of approval. When considering brick and mortar as collateral, your home loan is already attached to the property as a security. Some banks will consider your circumstances to provide you with a rate that mitigates the risks when you refinance your current home loan as this could be a valuable asset, such as real estate or a high-value possession.
  7. Provide Explanations: When you discuss your circumstances with your mortgage broker, he/she can provide a background story to present to the Credit Assessor to consider your application. If your impaired credit history is due to extenuating circumstances, such as a medical emergency or job loss, consider explaining these circumstances to potential lenders. When the broker presents the case with its merit, some lenders might be more understanding if they know the reasons behind your credit issues.
  8. Higher Interest Rates: From the bank’s perspective, they are taking high-risk lending to a credit-impaired applicant(s) despite the circumstances of that applicant. Mortgage Brokers will always try to get the best rate for their clients. However, be prepared for the possibility of higher interest rates compared to someone with a stronger credit history as the banks will have to mitigate their risks and compliance under Responsible Lending Obligations under the National Consumer Credit Protection (NCCP) Act. While this is not ideal, it might still be a more manageable option, if it results in a lower monthly payment than your current loan.
  9. Document Your Financial Stability: Whatever the life circumstances you had in the past to impair your credit file, it is best to demonstrate that you have a stable income and can afford the new loan payments that can help reassure lenders that you are a responsible borrower. A mortgage Broker can assist you with this when structuring your home loan with the refinance, i.e. having an offset, Redraw, etc.
  10. Seek assistance from a Financial Broker: It is best to contact a local mortgage broker to discuss your options if your credit history is severely impaired. They will provide personalized guidance on improving your credit and finding suitable refinancing options that will prevent you from further damaging your credit file by applying with multiple lenders if you were to do it yourself.

When considering your refinancing options, remember that the terms you have been offered and your overall experience will vary depending on your unique circumstances and the lenders you approach. Be cautious and do your research to ensure that any refinance offer you consider is legitimate and in your best interest. Only a mortgage broker will look after your best interests as an obligation. So, do not be afraid to contact ASA Mortgage Brokers to discuss your requirements.

The information is a compilation from various sources for your benefit and should not be relied upon instead of appropriate professional advice. This article is prepared based on general information. It does not consider individual financial objectives or needs and is not financial product advice.