Refinancing when your mortgage is in arrears

• Do all you can to avoid falling behind on your repayments
  
  
• Refinancing is the process of getting a new loan to replace your original loan, often with a different interest rate
  
  
• Make sure you understand the risks and benefits before making the decision to refinance

Falling behind on your mortgage repayments, or having your mortgage in arrears, can happen for a number of reasons.

While refinancing may be a solution to help you with the situation, it’s important to understand the risks and also the benefits of refinancing your home loan with arrears.

First of all, the most important thing you can do to avoid falling behind on repayments is to be completely aware of your responsibilities as a mortgage holder. You need to know when your repayments are due each month and how much your repayment amount is. If you do get into difficulty, make sure you contact your lender or servicer immediately. 

What is refinancing and how can a mortgage in arrears occur?

Refinancing is the process of getting a new loan to replace your original loan. Refinancing could allow you to obtain a lower interest rate, access flexible rate options, bring together multiple debts or set the loan against the equity in your home.

Whether your mortgage is in arrears due to missed repayments or an unexpected rise in interest rates, or you’re unable to work due to illness or an injury, refinancing may be an option to consider.

The risks and benefits of refinancing a mortgage in arrears

Like every other loan you apply for, refinancing has its risks and benefits. It's important to consider and carefully understand what each entail before committing to a new loan.

Risks

Fees - Refinancing will incur fees. Although these vary from lender to lender, in general these fees include a discharge fee and a new application fee. Depending on your loan, some lenders may also charge an early-redemption penalty or a home loan break-fee.

Longer loan duration - Obtaining a longer loan term on your refinanced mortgage may mean a more comfortable repayment amount, but you’ll also be in debt longer, and will have to pay more interest overall.

Benefits

Lower interest rate - Many people choose to refinance their mortgage to get a lower interest rate. A lower interest rate means your monthly repayment will be less. Get advice from your mortgage broker or financial adviser to see if refinancing will put you in a better position financially.

Can you refinance with a bad credit rating?

While it's possible to refinance your mortgage, even when in arrears on a mortgage or with court judgments against you for the non-repayment of other debts, it's highly dependent on your individual circumstances. Each application is based on its own merits. 

If you have a bad credit rating and you need to refinance, you should consult a lending specialist or mortgage broker for advice as soon as possible. You should have a plan to demonstrate how you intend to budget better, reduce your spending and put savings aside. Also, try to be in the best possible financial situation when you apply. If possible, pay off any outstanding debt.