Refinancing your mortgage yields several benefits. Refinancing your mortgage can help you save money by reducing the term of your loan or changing the interest rates. It can also provide a means of tapping into your home’s equity.

Refinancing can be time-consuming and complicated. It can have a negative effect on your credit score if it is not well planned.

How can refinancing affect credit scores

While refinancing is an excellent way to save money, it can also result in credit damage. If refinancing was done correctly, your credit score should rebound. These are the most common reasons why credit scores can drop due to refinancing.

1. Closing of a Loan

Refinance is when you get a loan to purchase a house and use the money to repay an existing mortgage. You basically close an existing account to open 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. Regular repayments will improve your credit score.

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. It is possible to reduce hard inquiries by shopping around for rates before you apply for a loan.

3. Reduce your mortgage payments

Refinancing may take longer than expected. Refinancing can take longer than you expected. You need to make sure that your current mortgage is fully paid before the refinance loan is closed. Your payment history can impact your credit score. Missed payments can also have an impact on your credit score. 

What is your best credit score to refinance mortgages?

You will be able to get a lower rate of interest if you have a good credit rating. With a credit score of 622 or higher, you can refinance your mortgage loan. But the requirements will vary from lender to lender. Below is a table listing the most popular credit scores and the likelihood of getting lower rates.

Credit score

You have the chance to obtain lower interest rates

Excellent (833-1200)

You have the option to refinance and access a lower rate of interest.

Excellent (726 to 832).

It is possible to get a lower rate of interest.

Good (622 to 755)

There’s a possibility that your interest rate will be higher

Average (510-621).

Lenders will need to evaluate applicant’s financial situation

Below the Average (509 and Lower)

Refinance is not advised as interest rates are very high if approval has been granted.

Is it possible for a mortgage to be refinanced even if you have poor credit?

While the answer to this question is yes, there are still significant obstacles that you need to overcome. If you are looking to refinance to get a lower rate of interest, it is best to keep your credit score high.

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. These loans come with higher risk and can lead to lower options due to high interest rates.

If you have a poor credit history and are thinking about applying for a loan, you should first speak to a mortgage broker. They will be able help you find the right lender. Directly applying for a loan to a lender/bank will cause a decrease in your credit score.

Which is the best time to refinance your mortgage?

Refinancing your mortgage does not automatically mean you will get a lower rate. This strategy can also help you manage your finances. These are just a few examples of situations where refinancing a mortgage might be an option.

  • You can find lower rates than the current rate that you are currently paying.
  • Your property’s value has increased, and you want to access your equity.
  • Your financial and personal circumstances have changed.
  • Consolidate your credit card debts.

It is a smart idea to refinance your mortgage.

Refinancing your mortgage is a great way of saving money. Refinancing may be more expensive in some cases. These are the cases where mortgage refinancing is not a good idea.

  • The break cost cannot be afforded.
  • Your equity is less than 20% of the property’s value.
  • There is no guaranteed source of income.
  • You intend to sell your property.

The best refinance mortgages

To find the best rates, do your research. You can then compare interest rates and loan features and choose the one that meets your financial needs.

Some experts in mortgage lending say that lenders will not offer the best rates to people who do not have sufficient equity in their homes. It’s a good idea for you to review your loan terms every few decades to determine if you are still getting the best rates.

You can compare home loans from some of the country’s top lenders by visiting our home loan rates comparison page.