Can refinancing affect your credit score?

By Mark Rosanes

Refinancing your mortgage yields several benefits. It can be a great opportunity for you to save money by changing your current loan terms to a shorter repayment period or a lower interest rate. It can also provide a means of tapping into your home’s equity.

However, refinancing entails an often tedious and complicated process that requires careful planning and preparation because it can have an adverse effect on your credit rating if hastily done.

How does refinancing impact your credit score?

While refinancing can help you save your hard-earned cash, the unintended drawback is that it can hurt your credit rating. It is important to keep in mind, though, that if refinancing is properly executed, the drop is merely temporary and your score should recover. Here are some common ways refinancing may cause your credit score to dip:

1. Closing a loan

Refinancing works by taking out a new home loan and using it to pay off your existing mortgage. Essentially, you are closing an account and opening a new one. But because the overall duration of your credit history is taken into consideration when your credit score is calculated, closing a long-standing account in favour of a new loan may cause your rating to fall – initially at least. As you make repayments over time, your credit score should also improve.

2. Credit checks

When you apply for any type of loan – refinance loans included – the potential lender checks your credit history to determine whether you are risky borrower or not. These checks – also known as hard enquiries – are reflected on your credit report and can impact your score. You can minimise the number of hard enquiries on your credit report by shopping around for lenders and rates, and making a shortlist of those that suit your financial situation before applying for a loan.

3. Skipping mortgage payments

The process of refinancing may take longer than expected, so you should make sure that you continue to meet monthly repayments on your current mortgage until you have closed your refinance loan. Missed payments often have a huge impact on your credit score because your payment history accounts for a large part of your rating. 

What is the ideal credit score for refinancing a mortgage?

An above-average credit score goes a long way in helping you secure a lower interest rate. The required rating varies depending on the lender, but typically a credit score of 622 will allow you to refinance your home loan. The table below shows the usual credit score ranges, along the chances of getting a lower interest rate:

Credit score

Chance of getting lower interest rate

Excellent (833 to 1,200)

Easy access to better interest rate, along with more refinancing options

Very good (726 to 832)

High chance of getting a lower interest rate

Good (622 to 725)

Good chance of getting a better interest rate

Average (510 to 621)

Lenders will need to evaluate applicant’s financial situation

Below average (509 and below)

Refinancing not advisable, usually interest rates are very high if approved

Can you still refinance your mortgage even with a bad credit score?

The answer is yes, but there are huge obstacles you would need to overcome. If your reason for refinancing is to access a lower interest rate, then your best bet is maintaining a good credit score.

If you are planning to tap into your property’s equity or consolidate debt, you can work with specialist or non-conforming lenders who offer loans for borrowers with a bad credit history. The caveat is that these loans often have higher interest rates and limited options because of the risks involved.

If you credit score is far from ideal and you decide to go this route, it is advisable to consult an experienced mortgage broker first as they know which lenders can provide loans that suit your financial circumstances. If you apply directly to bank or lender and get denied, this will further cause your rating to fall as each application will be reflected on your credit file.

When it is advisable to refinance your mortgage?

It is worth noting that refinancing a mortgage is not always about getting the lower rate. You can also use this strategy to better manage your finances. Here are some instances when refinancing your home loan makes sense:

  • Your current rate is no longer competitive and lower deals are available.
  • Your property’s value has increased, and you want to access your equity.
  • Your financial or personal situation has changed.
  • Your credit card debts have started accumulating and you want to consolidate them.

When is refinancing your mortgage not a good idea?

One of the biggest benefits of refinancing a home loan is saving money. However, there are certain instances when refinancing costs more. Here are some situations when mortgage refinancing is not advisable:

  • Your break cost is too high.
  • Your equity is less than 20% of the property’s value.
  • Your no longer have a reliable source of income.
  • You plan on selling your property.

Best mortgages for refinancing

To find the best rates available, it pays to do some research of your own. This way, you will be able compare interest rates, loan features, and payment terms first-hand, and pick the one that fits your financial situation.

Some mortgage experts say that many lenders reserve their most competitive rates for refinancers with enough equity built up on their properties. So, it is also advisable for you to review your loan terms every couple of years to check if you are still getting the best deals.

You can compare home loans from some of the country’s top lenders by visiting this page.

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