Refinancing your home loan can reap many benefits, from securing a lower interest rate to the consolidation of debts. On the downside, refinancing can lower your credit rating in the short term. Ever wondered why this happens? We’ll explain. We’ll also give you some steps to take to minimise the impact on your credit rating. And we’ll show you why getting a Home Loan Experts broker to handle your refinancing can be one of the best ways to keep your credit rating from falling in the first place.
Why should I refinance my home loan?
Refinancing allows you to lock in a more competitive interest rate. Besides that, it can also help you consolidate your debts, leaving you just one bill to pay each month for all of them. Finally, refinancing allows you to access the equity in your home – to invest in another property, make upgrades to your home or make other purchases. The benefits can easily justify a short-term hit to your credit score.
How Does Refinance Affect Your Credit Score?
When you refinance, you essentially pay off one home loan and take on another. This can lead to some unique circumstances that will temporarily change the way rating agencies – and lenders – view your credit. Here are some factors that you’ll notice make a difference. Our expert mortgage brokers can assist you with All of these issues.
Contact us at 1300 889 743 or fill in our online assessment form and we will help you refinance your home loan!
Any time you apply to refinance, it is processed as a new loan enquiry, even if you’re looking to refinance with your current lender. A new loan enquiry means your credit worthiness will be re-assessed, based on your current financial situation and not your previous status. This registers as a ‘hard enquiry’on your credit report. Multiple hard enquiries over a short period will hurt your credit score in the short term and lessen your appeal to lenders. This is why having a mortgage broker is so helpful. Our brokers will use their extensive knowledge of our lender base to determine which ones are likely to approve you for refinancing before you apply. This saves you from having multiple credit enquiries on your report in a short time period.
Closing Your Current Home Loan
As mentioned above, when you go ahead with refinancing your home loan, you are essentially closing your loan and opening a new one. This means you have closed a credit facility and doing so means your credit rating takes a short-term hit. If your current home loan is a longstanding account with an excellent repayment history, the effect can be even greater.
Not Making Repayments On Time
Late or missed repayments can have a huge negative impact on your credit score. People often miss their repayments while their refinancing is in progress. This often arises because people underestimate the time it takes to get refinancing approved or are not mindful of meeting their current repayments in anticipation of getting approval for the new loan. This is shortsighted and can hurt your credit score. Always remember to make all payments on time until your current account is closed.
How Long Will Refinancing Affect My Credit Score?
The answer isn’t straightforward. Hard enquiries usually stay on your credit report for up to two years. As for your credit score, refinancing will have a negative impact, but how much depends on various factors. Some of them are:
- Whether your existing loan was a longstanding account or not.
- The number of lenders you approached for refinance.
- TFrequency and timeliness of repayments after refinance.
The information above will help reduce the impact of refinancing on your credit score. Also, bear in mind that the short-term impact on your credit score should not put you off from refinancing. The benefits can help you greatly improve your finances. And bringing your credit score back up to where it was beforehand – or even improving on it – is entirely feasible.
Reasons To Refinance Your Home Loan?
There are many reasons why refinancing can have a positive impact such as an increase in your credit score in the long run to securing better interest rates. Some of the main reasons people refinance their home loans are:
- Refinancing to get a lower rate
- Refinancing to reduce your repayment term
- To access equity
- Consolidation of debts
- If you want to switch lenders
- Refinancing to reduce fees (Reduced fees usually mean higher interest rates)
Click here to learn everything you need to know about refinancing your home loan.
Want To Start Your Refinancing Process?
Contact us at 1300 889 743 or fill in our online assessment form and our specialist mortgage brokers will help you refinance your home loan!