Potential Consequences of making Late Home Loan Repayments in Australia: A Comprehensive Guide.
When it comes to taking out a mortgage to purchase property, it’s crucial to ensure you make your loan repayments on time, missing or making late payments can have an impact on your financial wellbeing.
But what happens if you are unable to make a payment or need to make a late payment? It's important to understand the consequences so you can take action and avoid serious financial repercussions.
What happens if you’re late making your home loan repayments?
If you're late making your home loan repayments in Australia, your lender may charge you a late repayment fee and your credit score could be negatively impacted. The fee can vary depending on the lender, but it is usually a flat fee or a percentage of the missed payment. Additionally, if you have missed quite a few payments, your lender could report you to the credit bureaus, which can also have quite a large negative impact on your credit score.
If you continue to miss payments generally over a longer period of time, your lender may take legal action to repossess your property and sell it to recover the outstanding debt. This can result in significant financial loss and can also have long-lasting negative impacts on your credit score.
It’s important to communicate with your lender, and let them know you are having challenges -or might miss a payment– they can often help you by exploring options for financial assistance.
Lenders may offer options such as:
- A repayment holiday, where you can temporarily pause or reduce your loan repayments.
- A loan restructure , where the terms of your loan can be adjusted to make it more manageable.
- Financial Hardship Assistance, some lenders may have financial hardship support to develop tailored solutions to help your individual circumstances.
Case Study: John is a resident of Australia and he takes a home loan of $500,000 for a period of 30 years. He starts making his payments on time but due to being made redundant by his employer , he is unable to make his payments on time. He missed the payments for 3 consecutive months and his lender charged him $100 as late payment fee each month. He also received a letter from the lender that they have reported his late payments to the credit bureaus, which will negatively impact his credit score. As a result, John's credit score went down by 50 points. He immediately contacted his lender and explained his situation, his lender provided him with a repayment holiday for 3 months and restructured his loan which helped him to get back on track with his payments. John also had to pay an additional fee of $300 for the late payments and the credit score impact was recorded for next 2 years. However, due to the steps he took, he was able to avoid the lender gaining repossession of his home.
What is considered a late payment on a home loan?
A payment is typically considered late if it is not received by the due date outlined in your loan contract. This can include both the principal and interest payments. It's also worth noting that some lenders may have different policies, so it's always encouraged to check with your specific lender to understand their rules prior to signing your mortgage contract.
How does being late on home loan repayments affect your credit score?
Your credit score is a numerical rating that reflects your creditworthiness and is used by lenders to evaluate your credit risk. A lower credit score can make it more difficult to obtain credit in the future and can also result in higher interest rates and fees.
In Australia, credit reporting agencies such as Veda and Experian, collect information about your credit history and make it available to lenders, in the form of a credit report. This credit report contains information about your credit accounts, including any late payments. When a lender reports a late payment to the credit bureau, it will be reflected on your credit report and will negatively impact your credit score making it difficult to obtain any credit in the future.
The severity of the impact on your credit score will depend on a number of factors, such as the number of late payments, how long the payments were overdue and the total amount of debt you have.. For example, if you only miss one payment and rectify your account quickly , the impact on your credit score will likely be minimal. However, if you miss multiple payments and are in default on your loan, the impact on your credit score can be significant.
Helpful Tip: : Make sure you communicate with your lender if you're having trouble making payments and to explore options for financial assistance. Lenders may offer tailored solutions to help you get back on track of your repayments which can help prevent further negative impacts to your credit score.
Additional fees and penalties for late home loan repayments
Whilst each lender may differ, in addition to the impact on your credit score, there could also be additional fees and penalties for late home loan repayments such as late payment fees and/or legal costs if the lender decided to take you to court to repossess your home. You should always read the terms & conditions to ensure you are aware of the potential implications from missed loan repayments. ,
How to avoid mortgagee possession and protect your assets?
The most serious consequence of late home loan repayments is the risk of mortgagee possession. This is when the lender takes legal action to repossess the property and sell it to recover the debt. Mortgagee possession can have a severe impact on your credit score and can also result in the loss of your home. To avoid Mortgagee possession and protect your assets, it's essential to address late payments as soon as possible. If you're having trouble making your repayments, you can take the following steps:
- Communicate with your lender: If you're having trouble making your home loan repayments, it's important to communicate with your lender as soon as possible. They may be able to offer options to help you get back on track.
- Explore options for financial assistance: There are various options available for borrowers who are experiencing financial hardship, such as a repayment holiday, loan restructuring, loan modification, or financial hardship. These options can help to make your loan more manageable and reduce the risk of foreclosure.
- Seek professional advice: If you're having trouble making your home loan repayments, it's a good idea to seek advice from a financial counselor, mortgage broker, or legal professional. They can help you understand your options and guide you through the process.
- Keep records: Keep records of all correspondence and documents related to your loan, including any agreements or options for financial assistance you have with your lender. This will help you to stay organized and provide evidence in case of any dispute.
- Take preventive measures to relieve mortgage stress: To avoid mortgagee possession and protect your assets, it is also important to take preventative measures such as budgeting, saving, and avoiding unnecessary expenses. This will ensure that you are able to make your loan payments on time and avoid any potential financial hardships.
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*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Joust recommends that you consider whether it is appropriate for your circumstances. Joust recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.