Can I refinance with a default on my credit file?

A default is a listing for an overdue amount of $150 or more that was more than 60 days late and reported after the required notices. Lenders look at four things: how much, how old, whether it is paid, and what it was for. A paid $600 telco default from three years ago is a minor issue at many lenders. An unpaid $15,000 default from last year with a finance company is a serious one. Multiple defaults, or a default combined with missed mortgage repayments, push the file toward specialist lenders only.

Near-prime lenders accept paid defaults with limits, usually under a few thousand dollars and older than twelve months, at rates close to prime. Specialist lenders accept larger and unpaid defaults, and will often refinance to pay the default out at settlement, at rates one to three percentage points above prime and LVRs of 70 to 85 per cent. Risk fees may apply instead of LMI. The trade-off is clear: you pay more for a year or two to keep the property and repair the file.

If the default is unpaid, refinancing with cash out to pay it is a common structure. The lender pays the creditor at settlement, the listing becomes a paid default, and the file starts improving from that date. Lenders will want the creditor's payout letter and will confirm the payment. This is also the point to check the file for errors, because incorrectly listed defaults can be disputed and removed.

Paid defaults matter less each year. After twelve months of clean mortgage conduct with the specialist lender, and with the default paid, many borrowers can refinance to a near-prime lender. After the default drops off at five years, the full market opens. Plan the specialist loan as a bridge, not a destination, and avoid long fixed terms or high exit fees that trap you.