A common misconception is that refinancing requires a perfect credit score. It doesn't. While bad credit does narrow your options and typically means higher rates, a specialist lender market exists in Australia specifically for borrowers who don't meet standard bank criteria.
This guide covers what "bad credit" means in the context of refinancing, what options exist, and what you can do to improve your position.
Can You Refinance With Bad Credit?
Yes — though not with every lender, and not always at the rate you might hope for.
Mainstream banks (Commonwealth Bank, Westpac, ANZ, NAB) and many non-bank lenders have strict credit policies that decline applications with defaults, arrears, or low credit scores. But the specialist lending sector — represented by lenders like Pepper Money, Liberty Financial, and others — has built entire business models around assessing these borrowers more holistically.
Specialist lenders charge higher rates than mainstream lenders. But for borrowers who are currently on a very high default or arrears rate, or who need to restructure debt, specialist finance can still be a net positive.
What Triggers "Bad Credit" for Refinance Purposes?
Lenders consider the following negative factors:
Defaults: A formal record of a debt $150+ going unpaid for 60+ days. Paid defaults remain on your file for 5 years; unpaid defaults for 5 years.
Payment arrears on existing mortgage: If you're behind on your current home loan, refinancing is difficult but not impossible — especially if the arrears are situational (e.g., period of unemployment now resolved).
Credit enquiries: Too many applications in a short period signals financial stress. If you've applied to multiple lenders recently without success, this hurts your score.
Part IX or X arrangements: Formal debt agreements remain on your credit file for 7 years (or until resolved).
Bankruptcy: Post-discharge, options exist through specialist lenders after a clean period of 2+ years.
Low credit score: Scores below 500 generally require specialist lenders.
What Do Specialist Lenders Look For?
While mainstream lenders rely heavily on credit scores, specialist lenders take a more holistic approach:
Story behind the blemish: Was a default caused by a one-off event (job loss, medical issue, relationship breakdown)? Is that situation now resolved? An explainable, historical blemish is treated differently from ongoing financial instability.
Current financial behaviour: The last 6–12 months of banking behaviour matters most. Consistent income, no dishonours, no new missed payments.
Equity position: Strong equity reduces lender risk. A borrower with a 50% LVR who has a historical default is far more attractive to a specialist lender than a 90% LVR borrower with the same history.
Employment stability: Current stable employment (especially in the same job for 6+ months) is a strong positive signal.
Income sufficiency: Can you actually service the proposed repayment? Even at specialist rates, the repayment must be affordable.
Rates to Expect With Bad Credit
| Credit Profile | Indicative Refinance Rate | Rate Type | |---------------|--------------------------|-----------| | Minor blemish, single old default | 6.99%–8.49% | Non-conforming | | Multiple defaults, some recent | 8.49%–11.99% | Specialist | | Arrears, recent | 10.99%–14.99% | Specialist | | Bankruptcy, post-discharge | 10.99%–15.99% | Specialist |
These rates are higher than mainstream — but remember, the purpose of refinancing might be to escape a worse situation (very high personal loan rates, credit card debt, inability to service current mortgage).
When Bad Credit Refinancing Might Help
Debt consolidation: If you're managing multiple high-rate debts (credit cards at 19%+, personal loans at 12%+), consolidating into a home loan at 8%–10% is still a significant saving.
Rate reduction (from even worse): Some bad credit borrowers are on non-standard loan products from original purchase that carry rates of 9%–15%. Refinancing to 8.49% is still an improvement.
Mortgage stress relief: If you're struggling to make current repayments, refinancing to extend the term can reduce monthly payments even at a higher rate.
Steps to Improve Your Credit Before Refinancing
If you're not in urgent need, spending 6–18 months improving your credit position before refinancing can dramatically improve your rate:
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Check your credit report for errors. Incorrect defaults are more common than people realise and can be disputed and removed.
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Pay off any outstanding defaults. Paid defaults look better than unpaid — even though they remain listed for 5 years.
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Stop applying for new credit. Each application creates a hard enquiry. Use a broker who can pre-assess without a hard pull.
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Make all current repayments on time — including your existing mortgage, utilities, and subscriptions.
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Reduce credit card limits. High credit card limits reduce your assessed capacity even if balances are $0.
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Demonstrate income stability. 12 months of consistent employment strengthens any application.
A credit repair specialist (legitimate ones, not those making unrealistic promises) can help identify and address errors. NIK Finance can refer you to reputable credit repair services.
LVR and Bad Credit: The Most Important Factor
The single biggest lever when refinancing with bad credit is your LVR. The lower your LVR, the more options you have and the better the rate you can access.
Under 60% LVR with bad credit: Multiple specialist lenders available; rates 7%–10%
60%–80% LVR with bad credit: Options narrower; rates 8%–13%
Above 80% LVR with bad credit: Very limited options; specialist only at 12%–18%
If your property has grown in value, your LVR may be better than you think. Get a property valuation estimate (a broker can do this informally as a starting point) before assuming your options are limited.
Frequently Asked Questions
Will a specialist refinance further hurt my credit score? The application itself creates one hard enquiry. Formal specialist loan approval and repayment doesn't negatively affect your score — consistent repayments actually improve it over time.
How long do defaults stay on my credit file in Australia? Listed defaults remain for 5 years from the date of default, regardless of whether they're paid or unpaid. After 5 years, they're removed automatically.
Can I refinance if I'm currently in arrears on my home loan? Yes, through specialist lenders. This is sometimes called a "rescue refinance" — bringing your mortgage current and resetting your repayments. Requires sufficient equity and some explanation of the arrears cause.
Is there a government program for people struggling with mortgage repayments? Some state-based hardship programs exist, and lenders are required to consider hardship arrangements under Australian banking regulations. Speak to your broker or financial counsellor before refinancing in severe hardship.
Can NIK Finance help me even with very poor credit? Yes. We work with the full spectrum of credit profiles. We'll assess your situation honestly and tell you what's possible — and what you can do to improve your position if current options aren't optimal.
Don't Assume You Can't Refinance
Fill out our 2-minute form at nik.finance and let us assess what's possible for your situation. We work with specialist lenders across Australia and provide honest advice regardless of your credit history.
NIK Finance holds an Australian Credit Licence. All loan products subject to lender assessment. This content is general information only.