Having a bad credit history can prove to be a real obstacle when it comes to getting finance to purchase a property. Whether its originates from circumstances beyond your control or the consequences of mistakes with money from the past, it can be frustrating if you’re trying to get on the right track for the future. The fact is your credit score can cast a long shadow over your financial options.
A poor credit record doesn’t mean it’s completely impossible to get a home loan or refinance the one you have. There are a range of strategies you can use to help you get your finances back under control.
Possible Causes of Bad Credit
Having any of the following on your credit record can lead banks and other lenders to think twice about lending to you:
- Defaults – on home loans, personal loans, and even credit cards, phone bills and utility bills;
- Outstanding debts – money owed on a car loan, personal loan or credit card;
- Declined loan applications – if one lender has decided you’re not worth the risk, others may do the same; and
- Bankruptcy – a record of this stays on your file for seven years.
While some of these may be a larger problem for first home buyers trying to obtain finance (e.g. bankruptcy), the majority of them will cause most lenders to scrutinise history when it comes to financing in general.
How Bad Credit Can Affect Your Chances of Having Finance Approved
The process of refinancing a home loan essentially involves swapping your existing mortgage for a new one – usually with a better rate of interest and enhanced features that suit your situation more closely. This may be something you’re keen to do, especially if you’ve been on a high rate of interest because of your credit score.
Today’s home loan market is highly competitive and most lenders continue to develop products that encourage individuals to examine their current lending needs more frequently.
If you’ve had success with mortgage applications in the past, the truth is, there is no guarantee that you’ll be approved again, especially if you haven’t been working to improve your credit score. It’s no secret that most lenders will offer lower interest rates to borrowers they deem to be most likely to repay the loan and the interest without any obvious signs of repayment stress. Lenders are ideally looking for borrowers who can demonstrate both security (from savings and/or equity), and good financial behaviour (judged by credit history).
Will Bad Credit Stop You from Getting a Better Rate?
Getting a better deal on your home loan is something most people aim for at some point in the life of their loan. The reality is most people should aim to look at their situation regularly, as lenders bring out new products.
If your credit rating has slipped since you took out your original loan it may impact your ability to obtain a highly competitive interest rate.
Before you look at refinancing, it can be worth cleaning your credit score by attempting to clear up any issues you’re aware of. Although credit problems such as past defaults and bankruptcy can stay on your record for up to seven years, other credit issues can be resolved sooner.
Taking the time to paying down or significantly reducing outstanding debt while keeping a clean repayment record on your current loan is one way that can make a difference when your lender assesses your finances.
Refinancing for Easier Finance Management When You Have Bad Credit
If you’re considering to refinance because you’re finding it difficult to keep up with repaying multiple lines of credit like your mortgage, credit cards and other loans then consolidating these might make life easier.
Although consolidating the loans may not lower your interest rate or shrink your monthly home loan repayments, they do allow you to wrap up these debts into your mortgage which can help eliminate trying to manage multiple accounts and lenders.
Reverting Back to a Standard Loan from a Bad Credit Loan
If your current lending has attracted a higher rate of interest because of your credit rating, it stands to reason that you’d be keen to move to back to a standard rate loan as soon as is possible.
To increase your chances, you’ll need to be vigilant about making the correct instalments on your current loan for at least six to 12 months, as well as making additional repayments on the loan where possible. It’s also worth avoiding any new loans during this time and repaying your credit cards in full every month.
Consider Getting Some Advice
Following these simple strategies will go a long way towards helping to build your credit rating and ultimately a better overall financial picture of you for lenders. It’ll go a long way towards building further financial credibility for yourself and demonstrate you’re taking a positive step to any lenders you’re dealing with.
At this point, you may want to consider contacting a mortgage broker. They’re able to understand your situation and use their expertise and experience to search for a solution that suits your needs. Mortgage brokers deal with many clients, all with differing circumstances and needs and credit histories. They take this on board when they approach and negotiate with lenders. After all, why deal with just one lender when a broker can access many lenders at once. They’re here to obtain a suitable solution regardless of a client’s needs.
Anne Street Partners Home Loans Pty Ltd (ABN 11 135 905 681 Australian Credit Licence 391660)
General Advice Disclaimer
This article contains general information only and has been prepared without taking account of your needs, objective or personal circumstances. It is not intended to constitute financial, legal or taxation advice as it is of a general nature only. Accordingly, before acting on the information you should consider its appropriateness having regard to your personal situation. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.