Refinancing your home loan can be a useful way to review your current mortgage, but it can feel harder if you have a poor credit history. Missed repayments, defaults, too much existing debt or other credit problems may make you wonder whether another lender will approve your application.
The good news is that having credit issues does not automatically mean refinancing is impossible. Your options will depend on your current financial position, the type and age of the credit issue, your income, existing debts, property value and the lending criteria of the provider you apply to. A [mortgage broker] (/blog/what-does-a-mortgage-broker-do/) can help you understand your position and identify lending options that may be worth considering.
Can You Refinance a Mortgage With Bad Credit?
Yes, refinancing with bad credit may be possible, but there is no guarantee that a lender will approve the application.
Every lender has its own lending criteria. A lender may look at your credit history alongside your income, expenses, existing debts, loan amount and the value of your property. For example, someone with an older, minor credit issue and strong equity in their home may be assessed differently from someone with several recent missed payments and high levels of debt.
The key question is not simply whether you have bad credit. It is why the credit issue occurred, how recent it is and what your financial position looks like today.
What Do Lenders Look at When You Refinance?
When you apply for a home loan mortgage refinance, the lender will generally want to understand your overall financial position.
Your Credit History
Your credit history can show lenders how you have managed borrowing in the past. They may consider missed payments, defaults, applications for credit and other information contained in your credit report.
A recent problem may receive more attention than an older issue, particularly if there has not been enough time to demonstrate improved repayment behaviour.
Your Current Income
Stable and sufficient income can help demonstrate that you can manage your mortgage repayments.
Lenders may consider your employment, regular income and other sources of income when assessing an application. If your income has changed since you took out your existing mortgage, this may also affect the assessment.
Your Existing Debts
Credit cards, personal loans, vehicle finance and other debts can affect your overall borrowing position.
Even if you have substantial equity in your home, a high level of other debt may affect whether a lender is comfortable with a new mortgage loan refinance.
Your Property Value and Equity
Equity is the difference between your property's current value and the amount you owe on your mortgage. For example, if your home is worth $800,000 and your mortgage is $500,000, you have approximately $300,000 in equity before considering other costs or secured debts.
Your equity can be an important part of a refinancing assessment. However, having equity does not automatically overcome problems with income, affordability or credit history.
Does Bad Credit Stop You From Switching Home Loans?
Not necessarily. Switching home loans involves moving your mortgage from your current lender to another provider. If your financial circumstances have changed, however, the new lender will still need to assess your application.
This means mortgage switching is not simply a matter of finding a lower interest rate and asking another bank to take over your loan.
The new lender will usually assess your application based on its current lending criteria. This can make timing important if your credit history has recently changed. If you are searching for "switching home loan NZ" or "switching mortgage NZ", it is worth looking at the whole financial picture before submitting an application.
What if You Have Missed Mortgage Payments?
Missed mortgage payments can make refinancing more difficult, particularly when they are recent or ongoing.
Before applying, consider whether you can bring your repayments up to date and maintain a consistent repayment history. It may also be useful to review your other debts and regular expenses.
If you are struggling to meet your current mortgage payments, speak with your lender as early as possible. Waiting until the situation becomes more serious may reduce the options available to you. A mortgage broker may also be able to help you understand whether refinancing is realistic based on your current circumstances.
Can You Refinance After a Credit Default?
A default does not always mean you cannot refinance, but the details matter. Lenders may consider:
- When the default occurred
- Whether it has been paid
- The amount involved
- Whether there are multiple defaults
- Whether there have been more recent credit problems
- Your current income and expenses
- Your property value and available equity
- Your overall debt position
A paid and older default may be viewed differently from a recent unpaid default. However, lending decisions are made by individual providers, so you should not assume that one lender's decision will be the same as another's.
Should You Refinance With Bad Credit?
Refinancing is not automatically the right option just because another lender may be available.
Before switching, compare the full cost of the new loan with your existing mortgage. This can include interest rates, loan fees, legal costs, valuation costs and any break costs that may apply to your current fixed-rate loan. You should also consider whether the new loan structure suits your long-term plans.
A lower advertised interest rate does not necessarily mean the overall cost will be lower once all applicable costs and loan terms are considered.
How to Improve Your Position Before Applying
If your credit history is making refinancing difficult, taking some time to strengthen your application may help.
Keep repayments up to date
Consistent repayments can help demonstrate that your current financial position is more stable.Reduce high-interest debt
Paying down credit cards, personal loans or other debts may improve your overall financial position and reduce your monthly commitments.Avoid unnecessary credit applications
Making multiple credit applications in a short period may not help if you are already trying to improve your credit position.Check your credit information
Review your credit report and make sure the information recorded about you is accurate. If you believe something is incorrect, you can contact the relevant credit reporting provider to ask about it.Understand your equity
Knowing your property's approximate value and current mortgage balance can help you understand your starting position before exploring refinance and switching loans.
Can a Mortgage Broker Help With Bad-Credit Refinancing?
Yes, a broker can help you understand your available options and prepare for the application process.
Rather than approaching several lenders without knowing their criteria, you can discuss your circumstances first. This may help you understand which factors could affect your application and what information you may need to provide. A broker can also help compare different loan structures and explain the potential costs involved in changing lenders.
However, a broker cannot guarantee approval. The final lending decision is made by the lender after assessing your application.
Refinance and Switching Loans in NZ: What to Consider
If you are considering refinance and switching loans, look beyond the interest rate.
Think about your credit history, income, existing debt, property value, equity, loan structure and the costs of changing lenders. It is also important to consider whether your circumstances are likely to change in the near future. For example, if you expect your income to change, plan to take on additional debt or are approaching the end of a fixed-rate period, these factors may influence when and how you refinance.
The Reserve Bank's lending rules also form part of the wider mortgage environment. Current LVR and DTI restrictions apply to banks' residential lending, while individual banks also carry out their own affordability and lending assessments.
How Capital Finance Can Help
If you are considering refinancing but are unsure how your credit history may affect your options, Capital Finance can help you review your circumstances and explore suitable lending pathways.
As an independent mortgage broker, Capital Finance works with clients across New Zealand and can help with the process of comparing lending options, preparing an application and managing the refinance process.
Get in touch with Capital Finance to talk through your refinancing options.
FAQ
Can I refinance my home loan with a bad credit score?
It may be possible, depending on the type and age of your credit issues, your income, debts, property value and the lender's criteria. Approval is not guaranteed.
How long after a default can I refinance?
There is no single waiting period that applies to every lender. The age, amount and status of the default can all affect how an application is assessed.
Can I switch mortgage lenders with missed payments?
You may be able to switch, but recent missed payments can make an application more difficult. A lender will assess your current financial position and credit history.
Is refinancing harder if I have a low credit score?
A low credit score can reduce the number of lending options available to you, but it does not necessarily prevent refinancing. Other factors, including equity and affordability, are also important.
Does having home equity help with mortgage refinancing?
Having equity can strengthen your overall position, but it does not guarantee approval. Lenders will still consider income, expenses, debt and credit history.
Should I apply to several lenders if I have bad credit?
It can be better to understand your position before making multiple applications. A broker can help you assess potential options and the relevant lending criteria before you apply.
Can a mortgage broker help me refinance after being declined?
A mortgage broker may be able to review why an application was declined and discuss whether other lending options could be available. However, another lender's decision cannot be guaranteed.
