If you are unable to repay your mortgage, your lender has the right to issue default notices, and eventually, start a process that ends with the property being sold to recover the debt.
In Australia this process is usually called mortgagee possession. Foreclosure is often used instead, but this term is a little different because it involves a longer legal process.
What is foreclosure?
Foreclosure occurs when a lender takes possession of a property after the mortgage holder fails to make repayments on a home loan. The lender sells the property to recover your debt.
Foreclosure versus mortgagee in possession
Most Australian lenders, if forced to sell a borrower's property, do so via mortgagee repossession.
While people often use foreclosure to mean the same thing there is a technical difference. With foreclosure, the lender goes through a legal process to transfer the title of the property from the homeowner (and borrower) to the lender. Once the lender has the title they then sell the property.
In Australia, foreclosure is not overly common, as a mortgagee possession is often an easier and more cost-effective process. A lender can avoid getting a court order just to be put on the title deed, and instead leave the property in the borrower's name until the sale has taken place.
How does the foreclosure/repossession and sale process work?
This is generally how the process works, but keep in mind that technically foreclosure requires the extra step of a property title transfer, which is rare.
Any missed payments can result in a default notice. A lender can issue a default notice as soon as a repayment is overdue, although they will most likely wait 90 days.
A default notice typically gives you 30 days to make the missed payments, as well as any new repayments.
After failure to make repayments on the 30-day default period you can be served with a Statement of Claim or summons. At this point, seeking legal advice is useful as you are only given a set number of days to respond.
There will be a hearing. If the court is satisfied with your lender's case it will issue a possession order.
You lender can give you a court issued Notice to Vacate. At this stage you will be evicted from the premises by a sheriff or bailiff.
Then your lender can sell your house.
If the sale of the property does not cover the entire balance of the loan the lender may take further legal action against you.
If you took out a lenders mortgage insurance premium the lender may recover its remaining costs via the insurer. And the LMI company may then purse you to recover the shortfall.
How close is the average Australian to foreclosure?
33% of Australians with home loans tell Finder they're struggling to make mortgage repayments. We track this statistic every month, and it's one that moves up and down as interest rates rise and fall. However, it's worth noting that struggling to repay a home loan and failing to repay a home loan are different things. Far fewer borrowers actually end up facing repossession of their property.
Get in touch with your lender early on as soon as a single payment is missed, or earlier if you anticipate having trouble making an upcoming repayment. All missed payments will need to be caught up on, possibly with a late fee included.
If you are likely to miss more than one or two payments, get in touch with your lender and ask about financial hardship and a hardship variation. You will need to explain your circumstances so they can best advise you.
Do you get any money if your lender sells your house?
If your lender forces the sale of your property it gets to keep the money it is owed. After your debt is paid, and any other selling costs, you get anything that's left (if there is any).
But if your debt exceeds the sales price your lender gets for the property, you might still owe money after foreclosure.
Example
Let's say you bought a house for $600,000 with a $120,000 deposit and a $480,000 home loan. You repay some of your loan, bringing your debt down to $440,000.
Then you stop making repayments. Foreclosure proceedings begin and your lender takes possession of the house and sells it on the market for $580,000. Selling costs total $10,000.
Your lender's debt is fully recovered and you end up with what's left, which is $130,000. You've essentially got your deposit back plus some of your loan repayments.
Can I sell m house before my lender forecloses?
Yes. You are allowed to sell your home prior to foreclosure as you are likely to get a better price than your lender. This also stops you facing any legal costs passed along by the lender.
You must let your lender know if you decide to sell, and seeking legal advice or speaking with a financial counsellor could be a good idea.
Frequently asked questions
Generally, lenders may begin foreclosure proceedings after 3 to 6 missed mortgage payments. However, timelines can vary based on the lender's policy and any arrangements made with the borrower. If you are at risk of being unable to make your mortgage repayments, it's a good idea to reach out to your lender and ask about their hardship policy.
A foreclosure notice is a formal notification from the lender informing the borrower that the foreclosure process is about to begin due to non-payment of the mortgage. It often follows multiple missed payments.
Foreclosure fees are the costs associated with the foreclosure process. These may include legal fees, auction fees and other administrative costs that are added to the outstanding loan balance.
A deed in lieu of foreclosure allows a borrower to voluntarily transfer ownership of the property to the lender to avoid the foreclosure process. This can help the borrower avoid some legal costs and further credit damage.
Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University.
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