Refinance a Home Loan in Arrears

Find out how to refinance a home loan in arrears right here with Savvy.

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, updated on August 8th, 2023       

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If you’ve fallen behind on your home loan repayments and are in arrears on your mortgage, refinancing could improve your situation. Read our guide to the refinancing process while your home loan is in arrears to find out more about how you can secure yourself a better deal despite a difficult situation.

How can I refinance my home loan if it’s in arrears?

It probably won’t be easy, but it’s possible to switch to a new home loan after your current one falls in arrears. There a number of ways you can potentially refinance a home loan in arrears to help out your finances, one of which is to consolidate debt. The situation for many whose mortgage falls into arrears is that they become overwhelmed with mounting debt from several different sources, not just their home loan repayments. If you’re in this situation, you may look to pursue a refinance to a debt consolidation home loan. This type of home loan allows borrowers to bring all of their debts under one umbrella and pay them off at a cheaper rate per month, although the total interest paid over time will be greater.

Borrowers whose home loan has fallen into arrears may also wish to try to refinance to a mortgage with better terms in order to help ease the financial burden. Whether that’s switching the repayment cycle to become more or less regular or enabling you to make extra payments without cost, these terms can be greatly beneficial to borrowers in helping them manage their repayments. This can also be done through refinancing to an interest only home loan. Once again, this type of loan will cost you more in the long run, but the interest only payment period for the first 1-5 years can help you with your cash flow and enable you to get on top of your repayments.

How do I get approved to refinance my home loan in arrears?

There are a few ways you can look to maximise your chances of approval for your home loan refinance after falling into arrears. Here are a few of the key areas you should review before applying for your refinance.

Employment status

Lenders will always look for applicants with stable employment when it comes to refinancing a home loan in arrears. If you feel yourself beginning to slip under the weight of your mortgage repayments and start to consider a refinance, don’t switch jobs. If you re-enter a probationary period, lenders will consider you a risky customer and many won’t approve your refinance application. Try to stick to the same job for at least three months prior to applying (outside of probation) to prove that you’re stable in your job.

Home equity

You’ll also have to have built up a decent level of equity over your time owning your home. Most lenders will cap their refinance options for home loans in arrears at 80%, meaning that if your equity is sitting at less than 20% you probably won’t be approved for your refinance.

Type of property

The property you own will play a major role in the success of the application. Each lender will have different policies when it comes to granting home loans for certain types of properties, such as units, apartments, townhouses and rural properties. The reason for this is simple: the lender wants to be able to sell the property in the event that you become unable to pay off your home loan. If you decide to go with a new lender for your home loan refinance, they may not accept your property as security.

Case study – refinancing a home loan in arrears

Nick and Sally bought a house together a few years ago with a home loan of $600,000 at an interest rate of 3.75% p.a., which is to be repaid over 30 years. They’ve been making their monthly repayments of $2,778.69 on time thanks to their combined income and their savings. However, their income stream is cut down when Sally falls ill and becomes unable to work. The couple also now have to manage Sally's medical bills on top of this, so Nick takes out a $35,000 medical loan at a 9% p.a. interest rate over seven years to help pay for her expenses, but this soon worsens their financial situation. They begin to struggle with their loan repayments until they eventually miss a payment and it falls into arrears. As a result, Nick and Sally decide to explore a home loan refinance to consolidate their debt.

They find a specialist lender who’s willing to offer a debt consolidation home loan at a rate of 4% for their remaining debts of $500,000 and $30,000 on their home and medical loans respectively. The lender lays out how they can save on monthly repayments with the new home loan in the following table:

Loan type Loan amount Interest rate Remaining loan term Monthly repayments
Home loan
Medical loan
Consolidated debt home loan
Monthly saving:

Nick and Sally acknowledge that lengthening their home loan and adding to it will increase the amount of interest they’ll have to pay in the long term, but agree that refinancing will help them stay on top of their finances until Sally is able to return to work. They refinance their home loan and ease the financial strain on them with reduced monthly repayments.

Frequently asked questions about refinancing a home loan in arrears.

Will I have to pay fees to refinance my mortgage in arrears?

Refinancing a mortgage in any situation will incur some fees. The process will include a discharge fee from your existing agreement, as well as a valuation fee for your home and a set-up fee for your new home loan. It’s important to ensure you’ve factored these costs into your calculations.

Do I have to pay a deposit when I refinance a mortgage in arrears?

No – you won’t have to pay a deposit when you refinance with a new lender. However, the deposit in this instance is replaced by home equity, of which you need at least 20%.

Will I have to pay Lender’s Mortgage Insurance on my new home loan after refinancing in arrears?

No – because lenders won’t generally accept loans above 80% LVR, there won’t be a requirement to pay LMI.

Can I go to, or stay with, a big bank if I try to refinance my home loan in arrears?

No – most banks, especially the bigger ones, won’t accept any applications from borrowers looking to refinance their in-arrears home loan. You're likely to have more success with specialist online lenders who cater to your needs specifically. It's worth contacting any lenders you’re considering to find out their policies on borrowers with home loans in arrears.

Will I be able to negotiate any temporary relief with my current lender if my home loan falls into arrears?

Most lenders will have a hardship team that you can contact if you’re struggling with your mortgage payments. Temporary relief can come in the form of updated terms to reflect your financial capability, as well as reduced or paused payments for a set period.

Will a mortgage broker be able to help me refinance my home loan in arrears?

Yes – a mortgage broker is an option for borrowers looking to refinance once their home loan falls into arrears. They'll act as a direct through-line between you and your chosen lender and might be able to find deals for you that you wouldn’t be able to otherwise. It's important to note that mortgage brokers often receive a commission from the lender they refer you to, so try to ensure you have some say if you have multiple options on the table.

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