Is it possible to refinance with late mortgage payments? 

If you’re behind with your mortgage payments, you may be wondering if you can still refinance to a more competitive home loan option?

The good news is that there may be some specialist lenders who will accept your refinance. While not every lender will accept you - particularly if your credit score has fallen - it is worth comparing your options. 

Can you refinance with late mortgage payments?

It may be possible to refinance your home loan when you are in arrears, but it can depend on your specific financial situation and the lender. Refinancing to a lower-rate and/or lower-fee home loan when you’re already struggling with your repayments may offer much-needed relief in your budget. 

There may be some specialist lenders that are willing to approve refinancing from customers who already have late mortgage payments. As the new lender will be paying out your existing debt with your current lender, they may simply take on your overdue payments as part of this. 

It is worth comparing your options and shopping around to find a lender that may accept your specific financial situation. For example, major financial institutions may not seek out this type of home loan customer, but a non-bank lender may. 

Testing your eligibility for a new home loan

It’s worth noting that, at the time of writing, some major lenders have lowered the stress test on selected refinance applications from 3% to just 1%. This means that homeowners who may already be in mortgage prison could have a chance of gaining approval for a new loan. 

APRA’s guidelines dictate that banks must stress test all new mortgage applications to see if the borrower can still afford their repayments if rates climbed 3% above the original rate they applied for. Both CBA and Westpac are currently allowing some refinancers to be tested at this lower rate.

However, if those late payments have been recorded against your credit file, it’s likely that your credit score will have fallen, which may adversely affect your chances of approval. Lenders look for stability in your finances and low risk levels when deciding whether to approve a home loan application. If your credit score has fallen into a below average range, it may be difficult to gain approval for any credit product, let alone a new home loan. 

While it may seem unfair, it is for your best interest as the regulatory bodies that monitor the home loan market dictate that consumers should not take on debts they cannot service. 

Benefits of refinancing when in arrears

• If you switch to a lower rate lender, you may immediately see relief in your household budget by decreasing your mortgage repayments. As the interest rate is one of the most significant costs associated with a loan, lowering your rate may help reduce your mortgage stress.
• It’s not just interest rates you may be able to cut out, but pesky ongoing fees as well. Depending on the lender, switching to a lower-fee home loan may save you from paying new upfront fees, or ongoing fees like annual fees.
• If you start to repay your mortgage on time again, this may help to boost your credit score as it demonstrates positive payment behaviour.

Risks of refinancing when in arrears

• Refinancing your home loan isn’t free. Besides the application fee for the new loan, you might end up paying discharge fees to get out of your existing loan, depending on the terms of your mortgage.
• If your property value has fallen, you may need to pay Lenders Mortgage Insurance (LMI) again, adding thousands to your debt. Even worse, you may be at risk of being in negative equity, and be unable to refinance full stop.
• If you refinance your home loan to a longer term, you will end up paying more interest over the life of the loan. However, the immediate reduction in your monthly repayment amount could help you manage your debts better. 

Seek help if you are struggling 

It is usually a good idea to contact your lender as soon as possible if you will fall behind on your repayments. This allows you to take the necessary steps to get your finances on track before risking your credit score or home. Depending on your circumstances, your lender may offer options such as extending your loan term, which can reduce your monthly repayments, though you may pay more interest in total.  

If you find things spiralling out of control, consider speaking with a financial counsellor or applying for financial hardship assistance to get your finances under control. You may even think about downsizing to a cheaper home to reduce your debts.  

Another option that may be presented to you is a repayment holiday, which allows you to take a break from repayments. This could help ease your financial pressure and give you some time to get your finances in order, though your interest charges may be capitalised into your loan (added to the balance you owe), so you may have more to pay at the end of your holiday. 

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