Refinancing your home loan can bring about many benefits. Depending on your circumstances it can help you save money, pay off your mortgage faster, and let you release equity in your home. But be warned: it could also impact your credit score.
Why are credit scores important?
When you apply for a loan, lenders need a way to assess how much of a risk it is to lend you money. They do that by looking at your credit report and using the information there to assign you a number. This number is known as a credit score. The higher the number, the less of a risk the lender thinks you are.
Credit scores are important as they influence how much money you can borrow and the interest rate you will be charged. They can also mean the difference between you being approved or rejected for a loan.
Credit enquiries can impact your credit score
Refinancing means applying for a new loan and giving permission to a lender to make a credit enquiry on your report so they can assess your eligibility for the loan. This is known as a ‘hard’ credit enquiry.
Hard enquiries can sometimes cause your credit score to dip, especially if you don’t have a long credit history. Each time a lender makes a hard enquiry, this information is noted on your credit report. Multiple hard enquiries over a short space of time can have a negative impact on your credit score. This is because lenders could view this as a sign that you are struggling to get a loan approved, and may be cautious to lend you money as a result.
Being declined can cause your credit score to fall
As part of your loan application, the lender will want to see information about your income, expenses, assets and liabilities to help them assess your eligibility. If your circumstances have changed since you originally applied for your home loan, there is a risk you might be seen as less creditworthy than before. If your refinancing application is then declined, this would be noted on your credit report and could cause your credit score to fall.
Paying off your new mortgage can improve your credit score
On the flip side, refinancing can have a positive impact on your credit score. You might see your credit score improve once you start paying off your new home loan – especially if you make all your repayments on time. However, missing repayments or paying them late can have a serious impact on your credit score so avoid doing this.
Consolidating debts into a home loan can have a positive impact
Refinancing to consolidate other debt into your home loan may help you organise your repayments better. If you are disciplined and make this repayment on time every month then you may see a positive impact on your credit score. This is because it suggests to lenders that you are responsible at managing your debt.
Prequalifying can give you answers
Prequalifying for a home loan can give you an idea of how much you can borrow and whether you meet a lender’s eligibility criteria. It doesn’t involve an application, so a hard credit enquiry won’t appear on your report.
Getting prequalified with Well Home Loans can help give you the answers you need to decide whether refinancing is for you. Find out if you qualify for one of our home loans by completing our quick and simple 60-second process.