Should I Refinance A Home Loan With Bad Credit?

We explain the key factors to consider when deciding whether to refinance a home loan with bad credit. Find out if it's a suitable option for you here.
Should I Refinance A Home Loan With Bad Credit?

The refinancing process can be daunting and confusing. It can also make or break your finances. So, before you commit to a long term loan, it’s important to study the costs associated.

Here are some factors to consider when determining whether to refinance a home loan with bad credit:

Could you benefit from a reduction in interest rates?

It is wise to reconsider refinancing if it means you could save money on lower rates.

  • Perhaps you took out a variable-rate mortgage with an initial 4-year fixed period. If the rate rises after this period, it may be time to consider refinancing your home to a lower, fixed rate.
  • If you took out a mortgage many years ago and noticed that the market rate interest rate has reduced, it could be worth refinancing to a lower rate.

Supposing you currently have a 30-year fixed-rate mortgage loan for $400,000 with a 6.5% fixed interest rate, you are able to secure a new rate with just 5.5% interest. Your monthly payment could be reduced by over one hundred dollars and more than one thousand dollars in a year.

Would you like to take advantage of lower mortgage repayments at the cost of facing a longer loan term?

Let’s say you originally took out a 15-year home loan. You could refinance to a 30-year agreement to lower your monthly payment.

However, this would likely increase the overall cost of the loan because you’d be paying interest for longer.

Is your goal to unlock capital tied up in your home equity?

Perhaps you’ve been hit financially and need to secure some extra capital. You could release some equity in your home to achieve reduced mortgage repayments or extra cash in hand.

Before doing anything, be sure to consider the Pros & Cons of home equity loans:


  1. Lower Interest Rates: Typically lower than other loans, saving you money over time.
  2. Lump Sum Payment: Provides a large amount of money upfront for major expenses like renovations or education.


  1. Risk of Losing Your Home: Your home is collateral, so failure to repay can lead to foreclosure.
  2. Increased Debt: Adds to your overall debt load, potentially impacting your financial stability and credit score.

Are the overall savings worth the transfer costs?

Early repayment charges, admin fees, and other closing costs are examples of one-off transfer costs, otherwise known as “closing costs”.

Always compare the potential savings against the refinancing fees to determine if refinancing is a good option for you.

Let’s say that by refinancing, you reduce your interest rate by 1% p.a., resulting in a monthly saving of $100 on your mortgage payments.

Calculating Savings Over Time:

  • Monthly savings: $100
  • Annual savings: $100 x 12 = $1,200
  • 10-year savings: $1,200 x 10 = $12,000

Determining the Break-even Point:

Suppose your total refinancing closing costs are $3,000, here is how to calculate the break-even point, to figure out whether it’s worth paying the closing costs to refinance at a lower rate.

  • Break-even point = Closing costs / Monthly savings = $4,000 / $100 = 30 months

If you plan to stay in your home for at least 30 months, you will break even on your closing costs. However, if you move out after 24 months, your total savings will be only $2,400 ($100 x 24 months), which is less than the $4,000 closing cost. In this case, refinancing may not be worthwhile.

Is it wise to refinance a home loan with bad credit?

If you are looking to refinance a home loan with bad credit, the fees and interest rates could be higher than those of somebody with good credit.

So always be sure that it is the right decision for you before proceeding.

  • Are you able to secure a favourable rate despite having a bad credit score?
  • Is the risk of being rejected and potentially facing a further dip in your credit score worth it?
  • Could you improve your credit score first to get a better deal?
  • Could you find a different way of unlocking capital, for example, with a bad credit personal loan?

Is it wise to refinance my home loan?

Refinancing requires careful financial planning. You can calculate potential savings by evaluating changes in interest rates, loan amortization periods, and refinancing costs.

Refinancing could be smart if you can lower your monthly payments and recoup the transfer costs within a year or two. Additionally, shortening the loan term can offer further financial benefits.

If you can refinance a home loan with bad credit at a good rate, this could be a great opportunity for you.

Refinancing offers several advantages:

  • Lower Interest Payments: Reduce the total interest paid over the life of the loan.
  • Reduced Monthly Payments: Decrease your monthly financial burden.
  • Overall Cost Reduction: Save on the total cost of the loan over its lifetime.

However, it’s crucial to consider the fees associated with obtaining the new loan, the principal amount, and the loan term.

Remember, refinancing is still a loan obligation that must be repaid, and therefore, you must be confident in your ability to honour your agreement.

Contact the Australian Lending Centre today to learn more about how to refinance a home loan with bad credit and how we could improve your financial situation.

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