Home loans are integral to the great Australian dream of homeownership for many owner-occupiers.
But what happens when you’re experiencing financial hardship and your home loan is no longer affordable?
This page covers the basics of defaulting on your mortgage, how to avoid defaulting and what to do if you find yourself in this unfortunate situation.
What Does it Mean to Default on a Home?
A mortgage default occurs with a missed payment, which you fail to correct and eventually fall behind on your mortgage repayments.
Once you fall back on your monthly repayments, some lenders may send a default notice the same day the repayment becomes overdue. Alternatively, some may wait until your repayment is overdue for 90 days or more.
Many lenders consider mortgages to be in default when a home loan repayment is overdue for more than 90 days.
Late Repayment vs Home Loan Default
Depending on the extent of the ‘lateness’, many lenders offer a grace period between 7 - 14 days. After that, you could be subject to a late fee if you still need to repay your mortgage.
Moreover, once you’re more than 14 days late on your mortgage repayment, it will go into your credit file as a ‘late payment’.
On the other hand, mortgage defaults take longer, usually 60-90 days, for a default notice to be issued, depending on your lender and the credit agency.
Simply put, a default is a much more serious violation than a late payment. A late payment entry in your credit report could be a warning for your lenders in future; its impact on your credit score is not as significant as a default.
Is a Home Loan Default Serious?
The short answer is yes. Defaulting on home loans in Australia can be a grave matter. Not only can it result in possible legal action, but in the worst-case scenario, it could also leave you with negative equity if your home is repossessed.
It would be best if you spoke to your lender in advance to understand the implications of late payments and their specific default timelines.
What Happens if You Default on Your Home Loan?
Once you default on your home loan repayments, you’ll receive a mortgage default notice. You typically have 30 days to repay your outstanding amount and regular repayments owed to your lender.
So try and repay what’s owed quickly. If you cannot, talk to your lender immediately about your financial situation and try to find a possible solution. This could range from amending your mortgage repayments to requesting your lender to delay enforcement action.
Most importantly, once you get a default notice, you must remain accessible to your lender, or you may get a clearout listing on your credit report.
Clearouts are best avoided as they indicate that your lender cannot locate you and reasonably believes you’re not likely to repay your home loan.
Consequences of Defaulting on Your Home Loan
Defaulting on your home loan can have serious consequences, namely:
1. Credit Score
A mortgage default will likely appear on your credit file once your lender has sent a notice for repayment and a separate warning about reporting your debt to a credit agency. This could affect your credit rating and ability to access credit later on.
2. Incur Several Fees
For starters, you’ll have to pay additional fees for late payments (sometimes up to $200). Also, fees towards legal proceedings, such as default notices, may be charged and added to your balance loan amount.
3. Higher Default Rate on Home Loan Repayments
In addition to late fees, the interest rate on your loan will most likely be increased to enable your lender to make up for lost interest repayments.
4. Property Repossession
In the worst-case scenario, defaulting on your mortgage could result in losing your home. Failing to pay your overdue mortgage within the 30-day deadline after the default notice, your lender may repossess your property and sell it to recover your debt.
What to Do If You Have a Home Loan Default?
To begin with, if you have defaulted, you should first contact your lender and apply for a hardship variation to make the loan manageable. The Financial Rights Legal Centre can assist you in creating a letter for sending to your lender.
If you have a mortgage default on your home loan, it’s essential to care for your mental health and well-being. It is okay to seek help if you find it stressful to cope with money-related issues.
Here are some resources to help you:
- Financial Counsellor: Speaking to a financial expert will help you negotiate with your lender and work out a payment plan matching your circumstances. The National Debt Helpline 1800 007 007 offers free financial counselling.
- Australian Financial Complaints Authority (AFCA): If you’re unhappy with your lender’s initial response to your hardship request, get in touch with their internal dispute resolution team. If you still haven’t reached an agreement, register your complaint with the AFCA to get a free, independent resolution.
- Seek Legal Advice: It’s heartening to know that these legal services are free of cost and offered by community legal centres and other legal services by state.
Also, if you have a default, you should review your budget to see if you can reduce any expenses or manage them better. For example, contact your utility providers’ hardship teams regarding paying your bills in instalments.
Moreover, if you’ve defaulted because of sickness or an accident, check if you have income protection insurance with your super to cover your repayments.
How to Avoid a Default If You're Experiencing Mortgage Stress?
Mortgage stress is when a household has difficulty paying off bills and home loan repayments. It usually occurs more than 30% of a household's pre-tax income is spent on home loan repayments.
If mortgage stress continues for an extended period, it can stress your finances, affect your mental health and finally lead to mortgage default.
Here are some tips on how to avoid defaulting on your mortgage repayments:
1. Talk to Your Lender
Connect with your lender's hardship team to discuss your options and possibly change the terms of your loan. If possible, you could seek a temporary pause or reduce your repayments. Your lender should ideally revert within 21 days of the outcome of your request. In the meanwhile, respond immediately to any queries they have.
2. Consider a New Lender
If you're under mortgage stress and struggling to make repayments, consider refinancing with a different lender. Switching lenders or refinancing your current home can give you access to a more competitive interest rate and allow you to extend your loan term.
Nonetheless, you should also consider that additional fees and charges will likely be associated with refinancing to another lender. Moreover, your current bank or lender may impost break fees if you refinance with another lender. Therefore, it's advisable to factor in all potential costs alongside the benefits of refinancing and only then move ahead with a clear strategy.
3. Review Your Home Loan
In general, and more so if you're experiencing mortgage stress, it’s a good practice to speak to your broker from time to time and review your home loan. This will help you gauge whether your current loan matches your personal objectives and financial needs. They'll likely be better placed to help you access a more manageable loan.
For example, they could negotiate on your behalf with your existing bank for lower home loan interest rates. This may help you reduce the overall interest and the cost of your loan.
Alternatively, if they feel they can get a better deal somewhere else, they may help you refinance to an entirely new loan with a different lender.
When reviewing your loan, your broker may find that a restructured loan will significantly improve your repayment capability. For instance, by extending your loan term, you'll be able to reduce your monthly mortgage repayments and give you some much-needed breathing space. However, you should note that the more you extend your loan repayment term, the more interest you’ll pay.
Use our mortgage payment calculator to estimate your monthly repayments and the interest payable.
4. Access Additional Funds in Home Loan
Another way to avoid mortgage stress is to leverage your offset account and use some of the funds available in the offset account to make your repayments. Likewise, use the redraw facility associated with your loan to access additional funds.
Both offset and the redraw facility allow you to withdraw and spend the funds per your needs. Using it to make your mortgage repayments will help ease some financial pressure. However, remember that accessing funds in your offset account or redraw facility may extend your loan term further.
Also, if you have set aside an emergency fund, now's when you can access it to make your repayments. Ideally, home buyers should plan for a fund that can take care of 3-6 mortgage repayments when taking a loan. This helps you minimise mortgage stress and the risk of losing your home.
5. Debt Consolidation
Mortgage stress may hit even harsher when home buyers are already reeling under multiple debts such as car loans, credit card debt and personal loans. To make things easier, consider consolidating all your debts into one. This can typically be achieved with a debt consolidation refinance.
Home loan interest rates are usually much lower than interest rates of other debts. Debt consolidation can help lower the interest rate and monthly payments – making it easier to manage all your debts in one go.
Finally, if nothing works, and you cannot repay your overdue mortgage even 30 days after receiving a default, your lender may repossess the property and sell it to recover the debt.
In such a scenario, it's advisable to try to sell the property yourself before your lender does. Understandably, it may be a tough decision, especially if you have a deep attachment to your home. However, in most cases, this is more financially beneficial for the owner-occupiers.
Downsizing and moving to a more affordable home will help you with much-needed funds due to lower monthly repayments.
Let Joust Match You with the Perfect Home Loan!
If you're in the market for a home loan, start with a home loan that you can afford. That way, you won't find yourself in a situation where you default on your home loan.
Try our Instant Match tool, which has enabled home buyers across Australia to find loans matching their needs. Once you specify your requirements, you will be matched with three home loan options most suited to your profile.
These home loans are from some of Australia’s leading lenders, so you can rest assured you’re getting a trusted loan. With no compulsion to accept the loan, it's a great way to get started.
How Long Do Defaults Stay On Your Credit File?
A default will remain on your credit file for five years for overdue payments and seven years in case of a clearout.
Can You Remove a Default From Your Credit File?
A default can be removed only if it has been erroneously listed. Otherwise, a default will stay on the credit report for five years. If you make a repayment and pay the default, the status will change to ‘paid,’ but it cannot be removed.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.