If you are having financial trouble you can ask your lender about hardship options.
You miss a mortgage repayment, what happens next? According to the experts, that largely depends on how quickly you spring into action.
Say you miss one payment but you quickly make good. Then you stay on top of your future repayments.
Finder home loans expert Richard Whitten says you may get hit with a late fee. If, on the other hand, you fail to make up that missed repayment, you could be at the top of a slippery slope.
“You’ll soon receive a default notice and your credit score will take a hit,” he says. “If you’re in this situation you’re likely in financial distress.
“In the worst case scenario your lender can start legal proceedings against you and ultimately reclaim your debt by forcing the sale of the property.”
Lenders can force the sale of your property if you can’t pay your mortgage.
Financial Rights Legal Centre director of Casework Alexandra Kelly says if you receive a formal default notice you should take it extremely seriously.
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“If you do not rectify the default in the period (generally a minimum of 31 days) they can accelerate your mortgage – which means it is no longer about the arrears, but the full amount due under your mortgage,” She says. “This can then result in formal repossession proceedings taking place through the relevant state court.
“If a property is vacant, they do not need a court order.”
Founder of Atelier Wealth Mortgage Brokers Aaron Christie-David. Picture: supplied
Mortgage broker and managing director of Atelier Wealth Aaron Christie-David says if you come into unforeseen circumstances, like a job loss or illness that will affect your ability to pay your mortgage, you should call your bank or broker to discuss hardship arrangements before you start missing repayments.
“You’ve got to put your hand up for help super, super early,” he says. “You need to ask for permission – you can’t ask for forgiveness.”
The Financial Rights Legal Centre has a Mortgage Stress handbook as well as sample letters on their website that show how to ask your lender for hardship arrangements. There’s also a free and confidential National Debt Helpline on 1800 007 007.
“Lenders are obliged to offer hardship arrangements to people in hardship, and this can help reflect your situation accurately in your credit history,” Kelly says.
Finder’s Richard Whitten.
INSURANCE COVER
If you can’t afford to repay your mortgage on an ongoing basis, you may be faced with the difficult decision to sell, but if it looks like you will still owe the bank a shortfall after the sale, there are some things to consider.
“A free financial counsellor can help you understand your financial position and give you some guidance on options available,” Kelly says. “Sometimes people hold insurance cover they can claim on during hardship – such as income protection or mortgage protection insurance. But, this is not always held or widely claimable – it will depend on the cause of your inability to pay.”
Lenders Mortgage Insurance will not protect you in the case of mortgage default. Instead, it protects the lender.
If you can’t pay your mortgage you may be forced with the difficult decision to sell.
“Any shortfall amount left owing (if the property is sold for less than the mortgage debt) will be owed by you as an unsecured personal debt – but to the insurer and not the lender,” Kelly says. “The insurer may make contact through a debt collector to demand repayment.”
Some LMI providers, like Helia, work alongside lenders to support borrowers experiencing hardship.
“Helia assesses waiving shortfall debt on a case-by-case basis and considers circumstances such as family violence and illness,” a company spokeswoman says. “In 2024, Helia supported over 11,000 families experiencing hardship support helping them remain in their homes and provided $4.6m in shortfall debt waivers for borrowers who sold their property.”
NEGATIVE EQUITY
It’s not common for Australian borrowers to wind up in negative equity, Whitten says.
September 2024 data from the RBA shows less than 1 per cent of all owner-occupier housing loan balances at the time were more than 90 days in arrears and that just 0.5 per cent of loans in arrears were estimated to be in negative equity.
It’s better to contact your bank about hardship arrangements before you start missing payments. Picture: istock
“RBA analysis in 2024 found that the borrowers most likely to be in mortgage arrears were high LVR borrowers (borrowers with smaller deposits relative to the amount they borrow),” Whitten says.
Whether there is a shortfall on a property at the time of sale can depend on several factors, including market fluctuations and the borrower’s ability to manage debt, Kelly says.
If you are trying to sell a property where you are receiving offers worth less than the amount you owe you need to ask your lender’s permission, she adds.
“They will look at factors to make sure the offer is reasonable. You should always seek permission before you enter into a contract of sale, as they will need to agree,” she says.
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