August 29, 2018
If you are behind on your mortgage payments, refinancing may be a smart option to help you regain control of your home loan and your budget. The problem is, with a mortgage in arrears, refinancing isn’t as straightforward as it is when you have a clean credit history. Late or missed payments are a red flag to lenders that you may not be a responsible borrower. Your credit has probably dropped and you may have other factors that will drag down your status as a borrower, like shrinking assets and increased credit card debt.
The fact is, life doesn’t always happen like we expect it to. Unexpected car or medical bills, divorce, redundancy, or even simply getting in over your head financially are facts of life for many people. All of these things can be make it a challenge to make your mortgage repayments on time.
If you run into financial trouble for one reason or another and can’t make your repayments, your account will go into arrears. This isn’t just financially troublesome, it’s stressful too. If you don’t find a way to catch up and you default on your mortgage, you could lose your home.
There are things you can do to help you get back in the saddle, so that you can be paying your mortgage on time and managing your other finances comfortably. Cutting out unnecessary expenses to free up more of your budget or taking on another job to increase your income, at least temporarily, can help a little. But, for a lot of borrowers, choosing to refinance a home loan in arrears may be the most practical way to go.
Find out if refinancing your mortgage while you are in arrears may be right for you.
At the beginning of 2018, the research firm, Digital Finance Analytics estimated that nearly 30% of Australian households were under mortgage stress, with approximately 54,000 households at risk of 30-day debt defaults.
What’s startling is that this mortgage stress problem has ballooned recently. With rising living costs in Australia combined with relatively stagnant wage growth, the number of households facing mortgage stress increased by 20% in the last half of 2017.
CEO of specialist lending firm Lucky Money, Louis Velasquez explains what he’s seeing, People are unable to meet mortgage repayments from current incomes and are managing increasing debt by putting more on credit cards.
With more financial stress, more borrowers may go into arrears and even default, which isn’t good for the borrower or for lenders.
Refinancing with a mortgage in arrears is a way to give you a fresh start on your home loan and the opportunity to get your debt under control.
When you switch to a new loan with a longer term and a lower interest rate, you could reduce your monthly repayments significantly. This means you’ll owe less each month. It will be easier to manage your mortgage and to have enough money to get ahead with other expenses so you can start saving again.
When you have a mortgage in arrears, however, it’s unlikely you’ll be able to qualify for a new loan with low rates when you refinance. Whilst the RBA hasn’t increased the cash rate for over two years, lenders have been slowly increasing their rates. So, only blue-chip borrowers are likely to qualify for the low-rate loan products that are still on the market today.
Also, your late mortgage repayments will make you a riskier borrower, which means you may have to pay a higher rate in order to qualify for a new mortgage at all. Still, even with a higher rate than what you may be currently paying, your monthly repayments could still decrease when you extend the term of your loan.
You may be able to refinance with your current lender. Most major banks, however, are not likely to offer a new loan to you if you’ve built up a track record of late payments and have fallen far behind.
If you are struggling or just missed one payment, yet have a clean credit history other than this, it is possible to stay with your bank when you refinance. Your current lender may also have other options to help you stay on your current loan and to bring it up-to-date. Depending on your situation and your history, they may be forgiving and even willing to create a workable solution. After all – if they can keep your business and you can pay your mortgage repayments on time with a new loan or another solution, everyone wins.
One thing you shouldn’t do is jump right into an application to refinance. You don’t want to have your bank make an enquiry into your credit file if you aren’t likely to qualify with them anyway. This may bring down your credit score even more, making it harder to refinance with another lender.
Many non-bank lenders have home loan products that are designed for borrowers with bad credit. You may end up paying a higher interest rate, as well as additional expenses such as lender’s mortgage insurance or the lender’s risk fees, but if you can extend the term of your loan, you could still possibly get your mortgage repayments down. This would make your debt more manageable.
When you extend the duration of your loan, you will pay more over the life of your mortgage. Make sure you look at the costs of refinancing to a longer term with a home loan in arrears. The goal is to understand how much you are increasing your overall costs just to get those monthly repayments smaller.
A mortgage broker or specialist can help you compare specialist lenders. You may also want to talk to a financial advisor to help you develop a plan to reduce your debt and start saving more.
If you go into arrears, you do have options. Don’t assume there’s nothing you can do to improve your finances. Definitely, don’t let your mortgage repayments fall behind even more. The earlier you can identify the problem – and the less damage mortgage stress can do – the easier it will be for you to still qualify for a competitive loan when you refinance. Explore what’s available to you by talking to your current lender or a mortgage specialist and start moving forward.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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