A definitive guide to mortgage defaults
Published 5:55 am 12 Jan 2021
Taking on a mortgage to buy a property is one of the most significant milestones in many adults’ lives – and also one of the biggest financial responsibilities read on for a definitive guide to mortgage defaults.
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While most people are confident that they will be able to make the required payments on time when they take out a mortgage, life can sometimes be unpredictable. Job losses, a death in the family, business breakdowns, rising interest rates, and unexpected major expenses can all hinder our ability to make mortgage repayments.
When an individual falls 90 days or more behind in their home loan repayments, they enter into a phase known as mortgage default. If you are behind on your payments, it is worth your while to understand the consequences of defaulting and what you can do to take charge of the situation. Otherwise, you may end up in circumstances where your lender sells the property from under you in order to recover the money it is owed.
In Australia, mortgage repayments are typically between $1,000 – 2,000 per month – which represents a significant amount of money. It is also understandable that a proportion of mortgage holders will struggle at times to make repayments. So too, are increased numbers of Australian mortgage holders expected to enter into default as a result of the difficult financial circumstances created by the COVID-19 pandemic.
What happens if you default on a mortgage?
Missing a single mortgage payment is unlikely to place you in grave trouble. However, if the situation is not addressed, things can rapidly escalate. If you do miss a mortgage repayment, you are likely in the first instance to receive a notice from your lender telling you that your payment is late and you need to remedy the situation
In Australia, lenders will often send a reminder to the borrower after as little as seven days of a missed payment, and certainly within 30 days. If the repayment is then not made within 60 days, a notice of default will be issued. If after 60 days the repayment has still not been made, the lender will send an S88 Notice which advises the borrower they have 30 days to pay the overdue loan. The S88 notice expires six weeks after it is issued, and legal proceedings are then typically initiated by the lender.
If you find yourself in a situation where you need to miss a repayment, be proactive and contact your lender to discuss your options. Let them know the reason why you anticipate having trouble with the repayment, and explain your financial circumstances. Your lender may be able to make repaying the loan easier for you by: changing your borrowing arrangement; extending the term of the loan and reducing repayments; extending the term of the loan and delaying repayments; or delaying repayments and allowing for payments in arrears to be paid at a later date.
How long can you default on a mortgage?
There are a range of negative consequences should you fall behind on your repayments and then default on your mortgage.
For a start, your lender may charge a fee of up to $200 as a penalty for missing each payment. The repayments on your loan can also be increased by the lender to factor in the additional money you owe due to the missed payment. The fact that you entered into default may also appear on your credit record, negatively impacting your credit rating with each lender and significantly hindering your borrowing capabilities in the future.
But the most serious potential consequence of mortgage default is losing your home. If you fail to pay your overdue repayment within six weeks of receiving an S88 notice, the lender may initiate legal proceedings to repossess the property and sell it in order to recover the debt.
There is a process lenders must take before they seize a property. The first step is to issue a statement of claim or summons on the borrower for the arrears, and/or the whole debt, and/or the possession of your home. You then have a set period to respond by filing a defence or lodging a complaint with the Australian Financial Complaints Authority (AFCA).
If you do not respond within the specified period, the lender receives a court judgment in its favour and may apply for a writ to take possession of the property. This is followed by a Notice to Vacate with details on when you will be evicted from the property.
Even if legal proceedings have been commenced by a lender to repossess a property, you can enter into dispute resolution to try and achieve the best outcome for your circumstances, such as a good sale price for the home.
Can you stop foreclosure/repossession by paying the past due amount?
Even if you have been issued a notice to vacate and the sale of your property by the bank is pending, all is not lost. You can address the default by paying the total amount due under the mortgage at any time before the property is sold. Having you pay off your debt is generally cheaper and more convenient for the lender than a forced sale, even if you pay less than what you owe. You can try renegotiating with your financial institution to see if you can settle your debt and remove it from your credit reports.
In cases where a borrower believes they have remedied a default and the lender continues to proceed with the sale, the borrower may be able to apply to the court for an injunction to stop the sale.
You can also apply for a hardship variation to your loan and request to have your mortgage repayments varied especially if you can show that you are facing financial difficulty or you could make the repayments if they are varied. However, it’s always a good idea to keep your lender informed if you cannot maintain a payment plan to which you’ve agreed. If you don’t do this and simply miss payments, your lender may recommence legal action that leads to repossession of your home.
Can banks go after your assets in a foreclosure?
In jurisdictions such as the United States, lenders ‘foreclose’ on properties where borrowers have failed to make payments over many months or years. This means they remove the borrower from the title ahead of putting the property up for sale. While this occasionally occurs in Australia, it is far more common for lenders to repossess the property while leaving the borrower on the title. The resulting sale is known as a mortgagee-in-possession sale.
If they foreclose, a lender cannot chase the borrower for any shortfall. However, with repossession and a mortgagee-in-possession sale, the borrower may still be liable for any difference between the sale price of the property and the amount owed.
Frequently Asked Questions
Can you get a mortgage with unpaid defaults?
Most mainstream lenders will view past credit defaults unfavourably. They will question why they should lend you money if you were unable to make repayments in the past. However, the amount of weight attached to a default will depend on how long ago it occurred, whether it has been paid and the dollar value. An unpaid telephone bill from a decade ago will be viewed less seriously than an unresolved mortgage default. Specialist lenders may provide credit to people with unpaid defaults, however, the interest rate for the loan may be correspondingly higher.
How does defaulting on a mortgage affect my credit?
The credit history of Australians is stored with a reporting agency known as Equifax. The data in your individual file contains details of any defaults, court judgments or bankruptcy issues. In assessing credit applications, banks rely on the Equifax data as well as their own internal systems and any information they might hold on your loan repayment performance. While, defaults will be viewed unfavourably, each lender will determine your credit score individually. Some may be less concerned by defaults than others.
What is the difference between a release of mortgage and satisfaction of mortgage?
The satisfaction of mortgage is a document that acknowledges that the terms of a mortgage agreement have been satisfied, meaning that a borrower has repaid their mortgage loan to the lender. A mortgage release is where the homeowner voluntarily transfers the ownership of their property to the owner of the mortgage in exchange for a release from mortgage loan and payments. The latter is more common in the United States where lenders assume ownership of properties during foreclosure proceedings.
Can I give my house back to the mortgage company?
You are generally better off selling the property yourself as you can push for a better price. Banks tend to accept any reasonable offer presented to them on the day of sale.
As well, if the property is advertised as distressed, it is marked down immediately. By selling the property yourself you have control of the marketing and will have a better chance of receiving a higher price.
Is voluntary surrender better than repossession?
Because a voluntary surrender means you worked with the lender to resolve the debt, future lenders may view it a little more favourably than a repossession when they review your credit history. However, the difference will likely be minimal in terms of how future lenders assess your credit score.
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