With interest rates so low, refinancing couldn’t be a more popular option; and many are taking up the advice to re-evaluate their home loans and secure a better rate. But what about those who want to refinance but don’t think they’re eligible?
For some, it might be because you’ve fallen behind on loan repayments in the past. For others, it might be because you’ve got bad credit; or perhaps you’re struggling because your house has fallen in equity, rather than gone up in value? Whatever the reason, here is your go-to guide for those who need a little more information before approaching a broker.
Refinancing with arrears (fallen behind on repayments)
Falling behind on home loan repayments is known as being in arrears, and it can be very easy to do – especially if you have recently taken a big financial hit such as job or income loss.
For the right candidate, refinancing a home loan when in arrears can be a great option. It can make your home loan repayments more manageable and it can allow you to renegotiate a deal that you know you’ll be able to keep up with.
However, the downside is it can be very tricky to do, so other options should be looked at first (and discussed with your current lender). Refinancing when you’re already in arrears can be hard because since you’re already behind on repayments, you’re going to look like a risk to other lenders – and if they don’t believe that you have the means to pay back the loan, they have an ethical responsibility to turn you down.
How to be a better refinancing candidate when in arrears:
Having a good credit score is often a non-negotiable pre-requisite to getting a good home loan. Despite being behind on your home loan, make sure that other bills are paid on time – such as your gas, electricity and mobile phone bill. It could also be worthwhile to check your credit score before going any further.
Have an LVR below 80%
Refinancing is effectively the process of replacing your current home loan, which means that even if you’ve paid lenders mortgage insurance previously, if your loan-to-value ratio (LVR) is above 80% you will be liable to pay it again for the new loan.
This payment is often in the thousands (depending on your loan amount) and could leave you in a worse position, so it is important to do the maths and check it’s worth it before refinancing while liable for lenders mortgage insurance.
Consider a specialist lender/see a broker:
Specialist lenders often have more ability to lend to ‘non-conforming’ applicants compared to traditional lenders. An eChoice broker will be able to help advise you on what lender you’re best suited to and find the best available rate.
Refinancing with negative equity (house fallen in value)
In what is often a devastating blow for homeowners, unfortunately, it is possible for houses to lose equity and fall in value. And while this might not be the biggest problem if you’re planning on staying in your home for the long-term (and have the time to wait for the market to return), it can de-rail refinancing plans.
Factors to consider before refinancing a home that has fallen in value:
- Will the better interest rate put you ahead financially?
Do the maths! Albeit boring, it is important to make sure that refinancing is a move that will bring long-term financial gain, which means sitting down and crunching the numbers. How long will it take for you to ‘make-back’ refinancing costs? How much will you stand to save in interest over the loan term? If this is maths you can’t do, find a professional who can advise you instead, such as a financial advisor.
- Will your LVR be below 80%?
If your LVR falls back over 80%, you will be eligible for lenders mortgage insurance, even if you have already paid for it on your current home loan. Since we are dealing with a home that has lost equity, it’s important to check whether this is a payment you might be liable for.
- Is your home’s valuation correct?
Given your home’s valuation has a direct impact on your available equity, it literally pays to make sure it’s correct. To try and increase it in a pinch: painted walls, a tidy house and a maintained backyard can all play a part in your home’s valuation.
Refinancing with bad credit
If you have bad credit, it’s going to be much harder to get a home loan – but not impossible. While the traditional lenders (such as the big banks) might turn you away initially, depending on how bad it really is, non-conforming, specialist lenders are common options.
While the fees might be greater, if you work hard and pay your bills/repayments on time you may be able to refinance (again) to a traditional lender later on.
Tips for refinancing with bad credit:
- Find out your credit score: Knowing what you’re dealing with is vital before you can even start getting to get your bad credit under control.
- Collate savings/equity: You will need to show your lender that you have enough savings and equity to make you a good choice.
- Consider consolidating other loans into the new mortgage: While refinancing, why not take the chance to combine other debt into the new home loan? Debt from car and personal loans can often be refinanced into the mortgage, making it easier to keep on top of repayments.
Words by Kathryn Lee
If you’re looking at refinancing your current home loan, contact eChoice. Our brokers will be able to let you know if you’re eligible and start the process. With access to 100s of home loan products from over 25 different lenders, eChoice have access to some of the best deals on the market.