What Happens if You Miss a Mortgage Repayment or Worse ...
The Reserve Bank of Australia continues to warn us of more interest rate rises, there are fears overextended borrowers might default on their mortgage repayments.
It's a frightening prospect but Amanda Varidel, Managing Director of Heart Mortgage Service, says there are ways to get yourself out of trouble.
But before we get into that, let's run through the three steps of a bank repossessing a home, which is the ultimate level of trouble you can end up in.
There are three basic steps to the process of a bank reprocessing a home due to missed mortgage repayments.
Default notice - First, the bank must issue a default notice. This notice gives you 30 days to make the payments you've missed as well as your ongoing repayments.
Statement of Claim - If those 30 days go by and you haven't made the repayments, your bank can send what's called a Statement of Claim or a summons. This marks the beginning of the bank's legal action against you to claim the remaining amount on your home loan back. You can file a defence or lodge a dispute with a dispute resolution scheme at this point but how much time you must do so depends on which state or territory you're in. If you do nothing, the bank can repossess your home.
Eviction - If the bank gets a court order to repossess your home, you'll be sent a Notice to Vacate or a Sheriff's letter. Then a sheriff will come to your home, evict you and change the locks.
But having trouble making your mortgage payments doesn't have to end in eviction.
Here's how to navigate the situation.
What can you do if you know you're going to miss a repayment? Amanda says you should call your broker, a financial counsellor or call the National Debt Helpline on 1800 007 007.
She says you need to work out how much you can pay.
"Review your income and expenses and prepare a budget, as this will allow you to know how much you can realistically afford to allocate to your repayments. Look at ways of reducing other expenses to free up money to pay your home loan. And make sure you call your bank. If you have missed a payment, you can't make the repayment in full, or you think you might miss a payment, it is vital you call your lender – without delay – to ask for hardship assistance and discuss your options," Amanda said. The earlier you work out those options, the better the outcome will be."
How long do banks wait to send a default notice?
"There are no hard and fast rules," Amanda said. Banks will generally wait until a customer is at least 60 days behind, she said. And a default won't be listed on your credit report until at least 60 days.
What should I do if I get a default notice?
"Work out when it's due to expire. At this point, it's still possible to stop things going any further. The default notice must give the consumer at least 30 days to fix the default," Amanda said. "Enforcement proceedings can begin only if the default notice period has expired, and the consumer has not fixed the default."
What are your options if you get a default notice?
Here's a few of your options:
Work out a hardship assistance arrangement with your bank
Find way to make the current repayments — this might mean asking for a pay rise at work, taking on an extra job or renting out a room for extra income
Move out, rent your entire home and live somewhere that costs less than your mortgage repayments
Sell your home
Let the bank repossess your house
How do I get hardship assistance?
What hardship assistance you get will depend on your circumstances, but your bank might agree to temporarily reduce or pause your payments until you can return to your normal repayments. To organise this, you'll need to contact your bank.
"Ask to speak with the hardship department and explain that you are in financial hardship," Amanda said. "The hardship department staff will explain your options and offer a hardship variation." Amanda says you should ask about the following options, if they suit you:
pay a reduced amount for a few months until your circumstances improve
have the term of the mortgage extended to add three months of overdue payments and interest to the end of the loan
stop paying your mortgage temporarily until things improve
pay the interest only for the time being
be offered a changed payment plan
"But do not agree to a repayment plan you know you cannot afford," Amanda said.
"If you break the repayment arrangement, this can make it harder to negotiate another payment plan in the future."
And make sure to keep records of who you spoke to and when.
What if I can't get hardship assistance?
"If you can't come to an agreement with your lender, and the default notice is about to expire, or has expired, then lodge a dispute with the Australian Financial Complaints Authority (AFCA) immediately," Amanda said.
"Your lender cannot continue any further enforcement proceedings while the matter is with AFCA and still unresolved.”
"During this time, keep making the repayments you can afford – this will stop you from getting any further behind and help demonstrate to AFCA and the lender that the amount you are proposing is affordable."
What if the bank sells the house for less than what you owe?
You'll still have to pay back the full amount of the loan.
What if the bank sells your house for more than what you owe?
You keep what's left over.
But you might need that leftover cash to pay extra legal fees and outstanding costs like council rates or body corporate fees you'll have to settle.
Can the bank make you sell your other assets?
No. It can only make you sell what's attached to the loan. The exception is if this matter ends in bankruptcy.
If your home is repossessed, does that mean you're bankrupt?
No. You are only bankrupt if you have declared bankruptcy or been made involuntarily bankrupt by a creditor. Your mortgage lender does not have to make you bankrupt to repossess your home. Bankruptcy will obviously affect your credit rating and, therefore, the ability to obtain credit in the future.