Can you refinance with bad credit?

The cheapest advertised rate may be out of reach for now. Compare loans that fit your situation, including what it costs to stay with the current lender.

If the current loan is draining your cash flow, waiting has a cost too. Compare the repayments and fees on a loan you can actually get with what you'll pay by staying where you are.

If you mainly want a lower rate, ask the current lender for a better deal first. If one smaller debt is causing the pressure, compare clearing that separately. You may not need to move the whole mortgage.

Moving debt will not fix a budget that still falls short each month. The new repayments need to leave enough for household costs and your other commitments. Our mortgage default guide covers the immediate steps if you are already behind.

A few more months of repayments made on time can change which lenders will consider you. But 12 clean months does not automatically clear every hurdle. A default, hardship arrangement and private loan each need a different check.

If you have been told to wait 6 months, ask what needs to change and when the lender starts counting. That timeframe is not a rule for every refinance. It may relate to a particular lender, a hardship arrangement or your recent repayment history. We can compare what waiting would cost with any options available now.

Macquarie, for example, checks the last 24 months of repayment history. If hardship information appears, its published guidelines require acceptable account conduct and 6 months of full repayments after the arrangement ends. The clock does not start when you first ask for help.

With a private loan, the payment evidence matters too. Brighten's Near Prime policy looks for 6 months of repayments coming out of a bank account. A private lender's ledger, or interest simply added to the balance, does not meet that requirement. Colin had 8 months of actual payments to show.

It might be an unpaid default, recent missed mortgage payments, an unfinished debt agreement or income the lender cannot yet verify. The defaults guide or hardship guide explains what to check on the report.

The lender counts the whole new loan: your mortgage payout, any other debts you want cleared and any fees you add. It compares that total with its valuation of your home. That percentage is your loan-to-value ratio, or LVR.

Hypothetical equity example

Both examples are before extra debts and costs. The lender uses its own accepted valuation, which may differ from your estimate.

A lower valuation can leave less room to clear other debts, push you outside a lender's limit or mean you need to put in cash. The value you see online is only a starting point. The lender also considers the property, its location and comparable sales.

There is no one equity requirement for every bad-credit refinance. The lender, credit history, loan purpose and income documents all affect the limit. Brighten's residential Near Prime products, for example, cap LVR at 80%.

Resimac's Specialist Alt Doc sheet lists up to 85% for refinancing and 90% for purchases, with lower limits for some credit tiers and properties. Assist and private or solicitor-loan refinances have a separate maximum of 80% LVR and a $10,000 cash-out cap. I would check which limit applies to your actual payout before using the headline figure.

I check how much the lender will actually lend for your refinance. A purchase limit may not apply to a refinance, and enough equity does not make up for repayments you cannot afford.

One smaller repayment can make a real difference to the household budget. But if you restart the mortgage at 30 years, you may be paying interest long after the old loan would have finished.

I compare the same remaining term first. Then, if you need more breathing room, I show what a longer term changes. An interest-only payment also needs a different comparison from a principal-and-interest payment, because only one is paying down the debt. Moneysmart's switching guide explains why the term and fees matter alongside the rate.

Take a hypothetical $500,000 loan with 25 years left at 8% p.a. Now compare it with the same balance and term at an assumed 7% p.a., with $6,000 in switching costs paid from savings. These are example rates, not lender offers.

This example uses monthly repayments and unchanged rates. It excludes other fees, offsets, extra repayments and tax effects. Figures are rounded for the table; comparisons use unrounded amounts. Interest is the repayments made plus the remaining balance, less the original $500,000. The refinance cost also includes the $6,000 fee. If you borrow the fees or extend the term, the result changes.

Ask for the comparison over the time you expect to keep the loan. Include any lender risk fee, mortgage insurance, broker fee and cost of moving again. If you borrow the fees, include the interest charged on them too.

• Get the current lender's payout figure, including discharge costs and any fixed-rate break cost.
• Include application, valuation, legal, settlement and ongoing fees for the replacement loan.
• Check offset and redraw features you actually use, and any lender risk fee or lenders mortgage insurance required.
• Show the new repayment, the total cost over the comparison period and the balance remaining at the end.

List every debt you want cleared and get its current payout figure. Confirm who gets paid at settlement and which accounts must close. Clearing a credit card balance does not close the card: the limit may still be there to use again.

Once a card or personal loan is rolled into the mortgage, your home may be securing that debt. Missing the new repayments puts the home at risk. Where the budget allows, pay that portion down faster and avoid running up the old balances again.

The debt-consolidation guide explains this comparison in more detail. An ATO payout needs its own check. A lender that will pay off cards and personal loans may still say no to tax debt.

Have this conversation before the specialist loan settles. What would need to change for a cheaper loan to become possible: more repayments made on time, a paid default, a bigger equity buffer or stronger income records? Put those changes and a review date in the plan.

A better deal may be available with the same lender, so check that as well as switching. Even when another lender offers a lower rate, the fees can make staying put cheaper.

You can review sooner if a default is paid or an agreement ends. A future move to a bank is not guaranteed: its rules, your income and the property value may change. Make sure you can afford the specialist loan if you need to keep it longer.

You can read more about the differences in our Pepper Money, Resimac, Liberty, Brighten and Bluestone reviews. I check which lender fits your credit history, income and equity before comparing costs.

Keep the explanation simple: what happened, when it happened and what has changed. Match it to the documents before another application goes in. Our explanation-letter examples can help you organise that information.

If repayments are unaffordable now, contact your lender and the National Debt Helpline on 1800 007 007. Financial counselling is free. I can compare lending options, while a financial counsellor can help you work through the wider debt position.

Client examples are based on real situations. Names and identifying details have been changed.