Life doesn’t always go to plan, and sometimes financial setbacks, like a job loss, illness, or unexpected expenses, can lead to a mortgage default.
While this can impact your credit score and borrowing capacity, it doesn’t necessarily lock you out of refinancing your home loan. With the right strategy and support, refinancing is still possible, even after a default.
How lenders view defaults
Lenders assess defaults on a case-by-case basis. What’s most important is the context surrounding the default and how your financial situation has changed since. If your default was due to unforeseen hardship and you’ve since regained financial stability, some lenders may be willing to look past it, especially if other aspects of your application are strong.
Lenders will generally look at the cause of the default, and whether it was the result of temporary hardship or a broader pattern of financial mismanagement. They will also consider how much time has passed since the default occurred. Defaults remain on your credit file for five years, but their impact tends to lessen over time, particularly if you’ve rebuilt your financial profile.
Your recent repayment history is also key. Demonstrating steady income and a record of on-time payments since the default can help rebuild your credibility. Lenders will also take into account how much equity you hold in the property, as more equity reduces their risk. Lastly, if you’ve actively worked to improve your credit score, it shows responsibility and an effort to recover from past challenges.
When to look at a specialist lender
If major banks won’t approve your application due to the default, a specialist lender may offer a solution. These lenders cater to borrowers with complex financial histories and are often more flexible in their assessment criteria. Interest rates may be higher initially, but they can provide an option.
The best person to speak to will be a mortgage broker, so you can compare your options.
The ultimate goal for many borrowers with a default is to refinance into a new product once they’ve re-established their creditworthiness. To do this you might need to develop an exit strategy that includes paying off outstanding debts, keeping your credit utilisation low, and maintaining perfect repayment history over the next 12 to 24 months.
Once enough time has passed and your credit profile has improved, refinancing will again potentially be possible.