What happens if I default on my mortgage?
When you took out your home loan, you would have felt confident of your ability to cover your mortgage repayments each month. Unforeseeable events, however, such as divorce, illness, a death in the family or unemployment, can lead to tough times financially and impact our ability to keep up with mortgage repayments. Mortgage default is a serious issue that needs to be dealt with as soon as possible – hide your head in the sand and your problems could simply multiply.
What is mortgage default?
Lenders generally define a mortgage default as being when a borrower is 90 days or more behind on their home loan repayments. The financial implications may start with additional fees for late payments and an increase in the interest charged on your loan. Any legal fees for default notices sent to you may also be charged to you and added to your home loan balance. A default will also be listed on your credit file and could impact your ability to obtain credit in the future.
In a worst-case scenario, if you are unable to make your mortgage repayments for a prolonged period, your lender may foreclose and sell your property to recover the debt.
What should I do if I am late with a payment?
If your mortgage payment is due and you cannot meet it in full, pay as much as you can and contact your lender immediately to discuss your situation. You should do this even if you know you will be able to make the rest of the repayment in a couple of days or the next week.
If the same situation occurs the next month, then you will need to take more serious action. If you are two months behind with your home loan repayment, it’s likely that other bills and payments on credit cards and personal loans are also lagging and your debt could worsen.
Some ideas/solutions to help correct the situation quickly could be:
- Holding a garage sale or selling items on eBay or Gumtree
- Borrowing from family
- Taking on extra overtime or a second job
What should I do if I am 90 days behind?
Hopefully, you have been keeping in regular contact with your lender during this time. Most lenders have a hardship department you can speak with and can offer you temporary relief such as paying interest only for a set period or capitalising the arrears by adding the amount onto your mortgage. Try to get as much detail on all options they might consider to find the best one for your situation.
You could also see a financial counsellor who can advise you and even negotiate with your home loan lender and other creditors on your behalf.
If your mortgage repayments are large and you can’t see a way out of your situation then you might need to consider selling your home. You could be in a better position if you are in control of the sale yourself.
How do I prevent mortgage stress?
Firstly, be cautious in how much you borrow in the first place and make sure you have extra room in your budget to cover hard times or interest rate increases. Some home loans have a redraw facility so if you make extra payments they can cover you if you hit difficulties and help ensure you don’t miss a payment.
With some major life changes, such as involuntary unemployment and serious illness, these preventative measures may not be enough. For your peace of mind, it’s advisable you consider loan protection insurance as soon as your loan is approved.
An ALI Group Loan Protection Plan may help ensure your home loan repayments are covered in a range of situations that can occur to any of us – involuntary unemployment, serious illness or injury and death. Mortgage default can be devastating for both you and your family and lead to financial hardship you would never want to endure. Speak with your mortgage broker or ALI Group to do your best to prevent this from happening.
Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.