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Credit challenges affect many New Zealanders at some point in their lives—unexpected financial hardships, medical emergencies, relationship breakdowns, or simply poor financial decisions in the past can damage credit scores and create lending difficulties. If you need to refinance your mortgage but have bad credit, you might feel like your options are limited or non-existent. While bad credit certainly makes refinancing more challenging, it doesn't always make it impossible. Understanding how lenders view credit issues, what options exist for borrowers with impaired credit, and how to improve your position can help you successfully navigate refinancing despite past difficulties.
This comprehensive guide explains what lenders consider "bad credit" and how it affects refinancing, explores your refinancing options when you have credit challenges, provides strategies for improving your credit score before applying, offers guidance on working with specialist lenders, and helps you understand when waiting to refinance might be your best strategy.
Understanding Credit Scores and Their Impact
Before exploring solutions, it's important to understand what credit challenges mean in the New Zealand lending context.
What is a Credit Score?
Your credit score is a numerical representation of your creditworthiness based on your credit history. In New Zealand, credit reporting agencies like Centrix and illion (formerly Dun & Bradstreet) compile information about your borrowing and repayment history, creating credit reports that lenders use to assess risk.
Credit scores typically range from zero to one thousand, with higher scores indicating lower risk. While exact score requirements vary between lenders, generally scores above seven hundred are considered good, scores between five hundred and seven hundred are fair, and scores below five hundred indicate significant credit challenges.
What Creates Bad Credit?
Several factors contribute to poor credit scores. Payment defaults occur when you fail to pay debts and creditors register defaults on your credit file—these remain visible for five years and significantly damage scores. Late payments, even if not defaulted, show patterns of unreliable payment behavior. Court judgments for unpaid debts remain on credit files for five years and seriously impact lending decisions.
Bankruptcy or no-asset procedures are the most serious credit events, remaining on files for four years after discharge and making mainstream lending nearly impossible during this period. Multiple credit applications in short timeframes suggest financial desperation, lowering scores. And high credit utilization—using most of your available credit limits—indicates financial stress.
How Lenders View Credit Issues
Lenders use credit scores and reports as risk assessment tools. Poor credit suggests higher likelihood of default, which lenders compensate for through higher interest rates or by declining applications entirely. Different lenders have different risk appetites—mainstream banks are most conservative, declining applications with significant credit issues, while second-tier lenders and specialist lenders accept higher-risk borrowers but charge premium rates.
Understanding that lenders make business decisions based on risk helps you approach refinancing realistically rather than taking declines personally.
Checking Your Own Credit Report
Before applying to refinance with credit challenges, obtain your own credit reports from both Centrix and illion. You're entitled to free annual reports from each agency. Review these carefully for accuracy, as errors do occur. Dispute any incorrect information immediately, as resolving errors can improve your score.
Understanding exactly what's on your credit file helps you address issues strategically and prepare explanations for lenders about circumstances behind credit problems.
Refinancing Options with Bad Credit
While challenging, several paths exist for refinancing when you have credit issues.
Mainstream Bank Options
Major New Zealand banks have the strictest credit requirements and typically decline applications with recent defaults, judgments, or bankruptcies. However, they might consider applications with minor blemishes like occasional late payments that have since been resolved or old defaults that have been paid and are approaching the five-year removal date.
To maximize chances with mainstream banks, demonstrate that credit issues are genuinely resolved and in the past, provide strong compensating factors like stable employment and high income, maintain low loan-to-value ratios with substantial equity, and offer detailed written explanations of circumstances that led to credit problems and how situations have improved.
Even with these factors, mainstream bank approval with significant credit issues is uncommon. Be prepared for potential declines before exploring alternative options.
Second-Tier Lenders
Second-tier lenders—smaller banks, credit unions, and building societies—often have more flexible credit policies than major banks. They're willing to consider applications that mainstream banks decline, provided other aspects of your application are strong.
These lenders typically require higher equity positions—often thirty to forty percent minimum—to compensate for credit risk, charge slightly higher interest rates than mainstream banks, and want comprehensive explanations of past credit issues with evidence of resolution.
Second-tier lenders are worth exploring before resorting to specialist lenders, as their rates are significantly better than specialist options while being more flexible than mainstream banks.
Specialist Non-Bank Lenders
Specialist non-bank lenders focus specifically on borrowers who can't qualify with traditional banks. They accept applicants with defaults, judgments, and even recent bankruptcies, assessing applications based on property equity and exit strategy rather than just credit scores and income.
These lenders charge substantially higher interest rates—often eight to twelve percent or more compared to six to seven percent for standard rates. They typically require very high equity positions, sometimes fifty percent or more. Loan terms are often shorter than standard mortgages. And they view their loans as transitional—expecting you to improve your credit and refinance to cheaper options within a few years.
Specialist lenders serve important purposes for people who genuinely can't access standard lending but need refinancing. However, their high costs mean they should be temporary solutions rather than long-term borrowing arrangements.
Using Guarantors
If you can't qualify for refinancing independently due to credit issues, having a guarantor with good credit can improve your options. A guarantor agrees to be legally responsible for your mortgage if you default, reducing lender risk.
Guarantors must understand they're putting their own financial security at risk to support you. Most guarantors are parents or family members wanting to help, but they should seek independent legal and financial advice before agreeing.
Guarantees can help you access mainstream lending despite credit challenges, though not all lenders accept guarantees for applicants with serious credit issues.
Staying with Your Current Lender
Sometimes your best option is negotiating with your current lender rather than refinancing elsewhere. If your credit issues developed after you obtained your current mortgage, your existing lender might be more flexible than new lenders because they already have your loan on their books and want to avoid defaults.
Approach your current lender explaining your circumstances honestly, demonstrating that credit issues are resolved, and proposing solutions like extending your loan term to reduce payments if serviceability is tight, or accepting slightly higher rates than standard if necessary to avoid refinancing with expensive specialist lenders.
While not ideal, staying with your current lender might provide better terms than available alternatives if your credit has deteriorated since you originally obtained your mortgage.
Strategies for Improving Credit Before Refinancing
If your refinancing isn't urgent, spending time improving your credit before applying substantially improves your outcomes.
Paying Off Outstanding Defaults
Defaults remain on your credit file for five years regardless of whether they're paid. However, paid defaults are viewed more favorably than unpaid defaults. If you have outstanding defaults, prioritize paying them off and obtaining written confirmation from creditors that they're satisfied.
Once paid, contact credit reporting agencies to ensure files are updated showing defaults as satisfied. This won't remove them from your record but significantly improves how lenders perceive them.
Resolving Court Judgments
Similar to defaults, court judgments remain on files for five years but paid judgments are better than unpaid. Pay any outstanding judgments and obtain confirmation from the court that they're satisfied. Some lenders might consider applications with old, satisfied judgments where they'd automatically decline applications with unpaid judgments.
Establishing Positive Payment History
Building consistent positive payment history helps offset past problems. Make every payment on time for all debts over at least six to twelve months before applying to refinance. Set up automatic payments to ensure you never miss due dates. Pay more than minimums where possible, demonstrating financial management improvement.
This consistent behavior shows lenders that past problems don't represent current reliability, increasing approval chances despite credit file blemishes.
Reducing Credit Utilization
High credit utilization—using most of your available credit limits—suggests financial stress. Reduce balances on credit cards and other revolving credit to below thirty percent of limits, close unused credit facilities reducing your total available credit, and avoid taking new credit while preparing to refinance.
Lower utilization demonstrates financial control and improves credit scores, making you more attractive to lenders.
Limiting Credit Applications
Each credit application creates a hard inquiry on your credit file. Multiple applications in short periods suggest financial desperation and lower scores. Before formally applying to refinance, get indicative assessments or pre-approvals that don't create credit file inquiries, then formally apply only when confident of likely approval.
Space out any necessary credit applications by at least six months where possible to avoid creating concerning patterns.
Disputing Errors
Credit file errors are more common than people realize. If your credit report contains errors—defaults that aren't yours, payments marked late that were actually on time, accounts that have been closed showing as open—dispute these immediately with the relevant credit reporting agency.
Provide supporting documentation proving errors, and persist until corrections are made. Removing incorrect negative information can improve your score substantially.
Waiting Strategically
Sometimes the best strategy is simply waiting. As negative items age, they impact scores less. The five-year removal date for defaults and judgments means if you're close to this threshold, waiting a few more months until they drop off entirely might be worth delaying refinancing.
If you're three or four years past defaults, waiting another year or two might mean refinancing with good credit at standard rates rather than fighting for approval with bad credit at premium rates.
Working with Mortgage Brokers
Specialist mortgage brokers provide valuable support when refinancing with credit challenges.
Why Brokers Help with Bad Credit Situations
Brokers who specialize in difficult lending situations understand which lenders are most flexible with different credit issues, know how to present applications to maximize approval chances, maintain relationships with specialist lenders that individual borrowers can't access directly, and provide realistic assessments of whether refinancing is currently achievable or if you should wait and improve your credit first.
Their experience with similar situations means they know strategies that work and can guide you effectively through what might otherwise feel overwhelming.
Questions to Ask Brokers
When seeking broker assistance with credit challenges, ask about their specific experience with bad credit refinancing, which lenders they work with who accept credit-impaired borrowers, what success rate they have with situations similar to yours, and their fee structure—some brokers charge upfront fees for difficult applications rather than relying solely on lender commissions.
Be completely honest with brokers about your credit situation. They can't help you if they don't know the full picture, and discovering credit issues after they've started applications wastes everyone's time.
Realistic Expectations
Good brokers provide honest assessments of your situation. If they tell you refinancing isn't currently achievable, trust their expertise rather than shopping around hoping someone will tell you what you want to hear. Most brokers would rather place your loan and earn commission—if they're saying it can't be done, they have good reasons.
Accept realistic guidance about needing to improve your credit before refinancing, even if this means waiting longer than you'd prefer. Rushing into expensive specialist lending when six more months would qualify you for standard rates is poor financial strategy.
Special Circumstances
Certain credit situations require specific approaches and considerations.
Recent Bankruptcy or No Asset Procedure
If you've recently completed bankruptcy or a no asset procedure, mainstream refinancing is essentially impossible for at least three years, typically longer. During this period, your options are extremely limited—essentially specialist lenders with very high rates and equity requirements, or waiting until enough time has passed for mainstream consideration.
Focus these years on rebuilding credit through consistent positive payment history on any remaining debts, stable employment and income growth, and building savings demonstrating financial recovery and responsibility.
After three to four years with clean history post-discharge, some second-tier lenders might consider applications, particularly if you have strong compensating factors.
Defaults from Specific Circumstances
Lenders assess defaults contextually. Defaults resulting from one-time hardship events like medical emergencies or natural disasters are viewed more favorably than defaults from ongoing financial mismanagement. Defaults from telecommunications or utilities companies are viewed less seriously than defaults on loans or credit cards.
When applying to refinance with defaults, provide detailed written explanations of circumstances, evidence that situations causing defaults have been resolved, and documentation showing consistent positive behavior since defaults occurred.
Lenders appreciate honest, complete explanations more than silence or minimization of issues.
Disputes with Creditors
If you have defaults or negative credit items that you're genuinely disputing—perhaps believing debts are illegitimate or amounts are incorrect—document your disputes thoroughly. Provide lenders with evidence of your dispute including correspondence with creditors, any legal proceedings, and your position on the matter.
Some lenders might overlook disputed items pending resolution, particularly if disputes appear legitimate rather than simply trying to avoid valid debts.
Credit Issues from Ex-Partners
Relationship breakdowns sometimes leave people with credit damage from ex-partners' financial behavior on joint accounts or joint debts. While legally you remain responsible for joint debts regardless of relationship status, lenders might view these situations more sympathetically.
Provide documentation showing your separation, evidence that you're meeting your obligations on debts you're personally responsible for, and explanations that credit issues relate to ex-partner behavior rather than your own financial management.
When to Wait Rather Than Refinance
Sometimes the financially optimal decision is delaying refinancing despite wanting immediate action.
Cost-Benefit Analysis
Calculate the true cost of refinancing now with bad credit versus waiting to refinance with improved credit. If refinancing now requires using specialist lenders at twelve percent versus waiting eighteen months to access standard lending at six percent, the extra cost of premature refinancing is substantial.
Model scenarios comparing immediate expensive refinancing against waiting with your current mortgage, factoring in current interest costs, potential specialist refinancing costs, and eventual standard refinancing costs once credit improves.
Often waiting is clearly superior financially even though emotionally you want immediate action.
Fixed Term Considerations
If you're currently in a fixed mortgage term that won't expire for another year or two, you'll face break fees to refinance early. Combined with credit challenges requiring expensive lending, the total cost of immediate refinancing might be prohibitive.
Consider whether simply maintaining your current mortgage until your fixed term expires naturally, then reassessing your credit position at that time, provides better outcomes.
Employment Stability
If your credit issues accompanied employment instability or recent job changes, allow time to establish solid employment history before refinancing. Six to twelve months in stable employment combined with improving credit creates much stronger applications than immediately refinancing while employment remains uncertain.
Developing Better Financial Patterns
If credit issues reflected broader financial management problems—overspending, poor budgeting, or lack of savings discipline—use refinancing delay periods to genuinely improve your financial behaviors and patterns. Develop budgeting skills and discipline, build emergency savings providing financial buffers, reduce or eliminate consumer debt beyond your mortgage, and establish consistent saving and spending patterns demonstrating financial maturity.
Rushing to refinance without addressing underlying behavioral issues often leads to recurring problems and future credit damage.
Protecting Yourself from Predatory Lending
When you have bad credit, you're vulnerable to predatory lenders who exploit your situation.
Warning Signs
Be alert for lenders who guarantee approval without assessing your situation properly, charge excessive upfront fees before providing any services, pressure you to sign documents quickly without time to review or seek independent advice, or offer terms that seem too good to be true given your credit situation.
Legitimate specialist lenders charge higher rates reflecting risk, but their terms should be transparent and documented clearly. Predatory lenders deliberately confuse borrowers with complex terms hiding excessive costs.
Protecting Yourself
Always seek independent legal and financial advice before signing loan documents with specialist lenders. Compare multiple offers rather than accepting the first option. Research lenders thoroughly including checking whether they're registered and regulated financial service providers. And never pay large upfront fees for loan approval—legitimate lenders typically charge fees at settlement, not upfront.
If something feels wrong about a lender or their practices, trust your instincts and seek alternative options.
At Luminate Financial Group, we help New Zealand homeowners navigate refinancing challenges including credit issues by providing honest assessments of whether refinancing is currently achievable given your credit situation, identifying which lenders might consider your application and connecting you with appropriate options, helping you understand what credit improvements would make refinancing viable if it's not currently possible, and protecting you from predatory lenders by recommending only reputable, regulated lenders with transparent terms.
We've successfully helped many clients with credit challenges refinance by understanding that credit issues often result from genuine hardship rather than character flaws, knowing which lenders are most flexible with different types of credit issues, presenting applications to maximize approval chances, and providing ongoing support through what can be a frustrating process.
We also provide honest feedback when refinancing isn't currently your best option, helping you develop credit improvement plans that position you for successful future refinancing.
Facing credit challenges and need to refinance? Contact Luminate Financial Group for an honest assessment of your options. We'll tell you realistically what's achievable, connect you with appropriate lenders if refinancing makes sense, or guide you toward credit improvement if waiting is your best strategy.
