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Mortgage default: What happens if you can’t pay your mortgage?

By acting fast after missing a repayment, you increase your options and the opportunity to fix the situation.

A mortgage default occurs when you miss a mortgage repayment. Your lender will expect you to make up the repayment quickly, and may even charge you a fee. If you can repay the missing payment quickly and continue making future repayments, you'll be back on track. But if you continue missing repayments, you could end up in a serious situation with your bank.

You do have options and the important thing is to understand that your lender wants to work with you to come to a solution. Once you know your financial circumstances, you can communicate with your lender so you can find an appropriate course of action.

What should you do if you miss a repayment?

If you suspect you might miss a repayment, you should be proactive in contacting your lender. Call them before the repayment is due to discuss your options. Let them know the reason why you anticipate having trouble with the repayment, and explain your financial circumstances.

Your lender will then assess your situation and ask you:

  • Why you missed a repayment
  • How you plan to pay it back and where will the money come from
  • How they can help you get back on track

You can still do this after you've missed a repayment, but being proactive means that you are trying to fix it as soon as possible and is a positive sign in the eyes of the lender.

Hardship assistance

Your lender doesn't want you to fall behind on your repayments. This is why lenders have unique departments within their organisations that are there to assist borrowers when they are going through a period of financial hardship. If you need help, reach out to your lender and let them know you're struggling to meet repayments. They can advise you on what to do and how they can help you.

You should also avoid borrowing more money or using a credit card, as you'll only compound your debt and your struggles to repay it.

How does missing a mortgage repayment impact your credit score?

If you are late paying your home loan repayment by more than 14 days past the due date, this may be recorded on your credit report as a 'late payment' as part of your repayment history information.

If you are late paying your home loan repayment by more than 14 days past the due date, a default can be recorded on your credit report. Before listing a default, your bank or lender must have taken steps to collect the whole or part of the outstanding debt. This means they are required to have sent you written notice setting out the amount overdue and seeking payment, and a separate written notice advising you that the debt may be reported to a credit reporting body.

A default remains on your credit report for five years. If you are struggling to make your mortgage repayments as a one-off situation, this shouldn't have too much of an impact on your credit score. However, if you miss more than one repayment then it may impact your credit score.

What can you do if you're struggling to make loan repayments?

If you've missed repayments and are struggling financially, you may be able to work with your lender to restructure your loan or make other arrangements. Here are some steps you can take:

  • Make a repayment arrangement. Call your lender for financial guidance and work out a new budget. Ensure that your new budget is realistic. If you've noticed that you cannot afford to make the repayments you may have to look at options that include renting out or selling your home.
  • Call or write to the lender. Make a note of the phone conversation and ask to be transferred to the financial hardship team. Show them your repayment arrangement and ask for the term of the loan to be extended. If you're uncomfortable with calling your lender, you can write a letter requesting financial hardship and attach all the required documentation.
  • Complete a Statement of Financial Position. This is a document that allows your lender to see whether or not you can afford your home loan repayments. You should complete this document with a financial counsellor because you need to include your essential expenses. If your Statement of Financial Position includes expenses that your lender might deem unnecessary, you need to question whether you can do without them. However, if your Statement of Financial Position shows that you can't afford your repayment arrangement, the lender may reject the application.
  • Change loan terms. If the problem is short term, the lender can help by changing the terms of the loan. If the problem is long term, consider selling the home or refinancing
  • Talk to the ombudsman. Borrowers not satisfied with the lender's decision can contact the Australian Financial Complaints Authority (AFCA).
  • Downsize to a cheaper home. If repayments are no longer affordable, one option is to consider moving to a more affordable house. Another option is to rent until finances are sorted
  • Create a budget to repay. Take the time out to create a budget and carefully think about where your expenses are going. Getting a clear picture of this will help you manage your debts. Read our guide on the elements of a budget.

What if you can no longer repay the mortgage?

If you have exhausted all your options and simply can't make your mortgage repayments, even after talking to your lender, then the lender may repossess your home. There is a very strict legal process in place before this happens.

It is important that during this time you seek out as much legal advice as you can. This is the usual process:

  1. Letter of demand. Your lender sends a notice that you've missed a repayment. You may have to negotiate a repayment plan or apply for a hardship variation. Now is the time, if possible, to catch up with your repayments.
  2. Default notice. Your lender sends you a default notice to catch up on your repayments. A default notice will typically come if your repayment is 90 days or more overdue. The notice will give you 30 days to repay the arrears (the payment you missed) plus the regular repayment on your loan. Attached will be a form known as Form 12.
  3. Statement of claim. Your lender files a statement of claim with a court. You need to get legal advice at this point (if not sooner). You will have a fixed number of days to pay the debt. You should also lodge a dispute with the Australian Financial Complaints Authority (AFCA).
  4. Apply for writ. Your lender will apply for an order to take possession of your home.
  5. Sheriff letter. Your lender will send you a letter telling you when a legal official will come and change your locks
  6. Eviction. Finally, your lender will send a legal official to evict you from the property.

It's important to note that this does not release you from the obligation to your loan. Banks still have recourse to other assets in the event the sale of your home does not cover the balance outstanding on your loan.

In the event that you sell your home, your lender should postpone all proceedings. This is because your loan balance should be paid off and such a sale allows you to avoid late and legal fees. Your credit rating shouldn't be affected in this circumstance. If this is not the case, get free legal advice or contact the Credit and Investments Ombudsman for information.

What happens if I lose my home?

If the worst should happen and the bank takes possession of your home, they will look to sell your home either by auction or private sale in order to recoup the cost of your home loan. Lenders will charge you for all sale and legal costs incurred during this time. When selling your home, your lender has to:

  • Take reasonable steps to obtain the best possible price
  • Exercise the sale in good faith and have regard to the interests of both parties
  • Sell the property as and when it chooses to claim the security
  • Require you to move out of the premises

Once the property is sold, the lender can still seek recourse for any outstanding amount on your home loan not covered by the sale price, though they may not choose to seek recourse.

If the lender continues to seek payment and you are unable to pay, you may have to file for bankruptcy (or, the lender may initiate bankruptcy proceedings against you). Bankruptcy is a very serious event, and carries serious ramifications for your financial future, so make sure you have all the information before following this route.

Services and assistance

Legal help

Each state and territory has its own laws surrounding which legal forms you'll have to file and when. While you can file these forms and appear in court on your own, you can also avail yourself of free legal aid. There are community legal centres across Australia, which you can find listed at the National Association of Community Legal Centres site. Alternatively, you can contact Legal Aid in your state or territory.

State and Territory Legal Aid

Before you begin court action, remember that if your defence fails you will have a court judgement registered against you. If this does happen, however, you can apply for a stay of eviction. This means that your eviction will be delayed to give you more time to sell your home, more time to move out or more time to refinance your mortgage, should your lender agree to this. Sometimes the lender will agree to a stay of eviction. If they don't, you can apply to the court with an affidavit explaining your circumstances.

Credit help

NSWConsumer Credit Legal Centre1800 007 007
TASConsumer Credit Helpline1800 232 500
VICMoneyhelp1800 007 007
WAConsumer Credit Legal Service(08) 9221 7066
NT and QLDNational Legal Aid(03) 6236 3813

Remember that there is always help available for financial and emotional distress.

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15 Responses

    Default Gravatar
    JamesFebruary 5, 2023

    hi i like to find out so im based in Melbourne and my lender is bank west bank
    at the moment im not in default yet because i have financial hardship with the bank and ends in 16/2/2023 , the arrears currently around $6500-$7000 my question is when my hardship ends and still arrears of this amount , i wont be able to clear it , in the past i have few hardships put in and also capitalized previous debt of $6500 to be added into the life of the contract but now is the second time im in arrears, lets say if hardship team no longer can help and refer me to retention team and they expect me to pay the arrears +monthly repayment if i can not able to clear it due to reduce wage , what is the process and time do i have before bank can repossess my house.
    i did have a read on your site – What if you can no longer repay the mortgage?
    with 6 steps, but the part where it says if loan is not paid up until 90days they will send a default letter with 30days to pay it and if not arranged plan or plan then it moves on next steps
    but technically says is it 3months from default letter they can sell your home ?

    also the amount i am owing is around $280k if bank does sell home for $300k or $400k does the remainder gets paid to me or they take the whole thing

    Thank you

      AvatarFinder
      RichardFebruary 21, 2023Finder

      Hi James,

      The information we’ve provided is general in nature. Your bank may act on a slower timeframe, we can’t really say. You really need to talk to your lender about this rather than waiting for a default notice.

      If the bank does repossess the property and sells it, they don’t keep the entire amount if it sells for more than you owe. They keep the amount that covers your outstanding debts.

      Sorry we can’t be more help.

      Richard

    Default Gravatar
    wayneApril 29, 2018

    having a terminal ill wife and my wage wont cover the house payments and every thing else but have been told that some times a bank will buy back half the house to lower repayments is this true

      AvatarFinder
      JeniApril 30, 2018Finder

      Hi Wayne,

      Thank you for getting in touch with finder.

      As a friendly reminder, while we do not represent any company we feature on our pages, we can offer you general advice.

      In this page, it states that if your Statement of Financial Position is accepted and your repayment arrangement is successful, then it is essential you stick to it so you don’t fall behind on repayments again. If your State of Financial Position includes expenses that your lender may think are not necessary, you need to question whether you can do without them. However, if your Statement of Financial Position shows that you can’t afford your repayment arrangement, the lender may reject the application. If you find that you won’t be able to afford your repayments in the next couple of years, you may want to consider selling your home.

      Since you mentioned about a bank would buy back half of the house to lower repayment, I suggest that you contact your lender/bank directly regarding this matter or the Credit Ombudsman Service if you are not satisfied with your lender’s decision.

      Upon going through the page, it only mentioned that you must keep reaching out with your bank/lender when you missed your mortgage repayments due to some inevitable circumstances and they might help you make a repayment plan or apply for a hardship variation.

      I hope this helps.

      Have a great day!

      Cheers,
      Jeni

    Default Gravatar
    ElleDecember 1, 2017

    I really need a breather with my mortgage and want to know the best way to approach things.

    My work dried up, leaving me without income currently. I have been very actively trying to find employment – with no luck so far. I am also a sole parent who does not receive child support (father lives overseas).

    My Sydney home is worth 2million and I owe <$245k, so the repayments are $1100 per month.

    If I tell the bank I am currently unemployed, will they work with me to give me some time (at least 3 more months) to find employment? It's now Dec 1st and already I notice the job market is slowing down for the xmas period.

    Does anyone have any experience successfully getting a 3 month pause on monthly repayments?

      AvatarFinder
      JoanneDecember 1, 2017Finder

      Hi Elle,

      Thanks for reaching out.

      There are some options available like mortgage holidays or applying for financial hardship with the lender.

      A mortgage payment holiday is a temporary period of time wherein your lender or bank will not require you to make your regular monthly repayments. This can be very helpful for many people in a variety of situations, as it can free up your cash flow and reduce the amount of money you need to pay out that month. Different lenders have a different set of rules so it would be best that you check with your lender first if this type of option is available.

      In addition, lenders have unique departments within their organizations that are there to assist borrowers when they are going through a period of financial hardship. You may also reach out to your lender if they do have a financial hardship assistance team you can speak with. This page has provided a guide above the steps you can take to proceed with the process.

      Hope this helps,
      Joanne

    Default Gravatar
    SmittybApril 27, 2016

    I lost my job at the end of February and after no luck in finding anything suitable I decided to put my property up for sale and leave Sydney. I am currently under severe financial hardship. I owe $193000 and houses in my area are selling around the 600k median. I approached my bank of 15+ years to 1st to access my super to pay all outstanding debts ie home utilities car and to eat. Then ask for an overdraft to do all necessary clean up and to start moving stuff out of the house and survive during the period of the sale. My way of thinking was if I was making 350k+ from the sale they would be more than interested in keeping my business as I have been a good customer. Not so. The way I have been treated is worse than appalling. I have pretty much hocked everything I own..Also being fed false promises from 2 bank managers saying that it was a no brainer until the decision to give me the overdraft.. Then I get totally ignored and treated like a beggar. I have told them that I am in need of medical treatment as I have gout on my spine I’m at a whits end and absolutely no patience left as there treatment of me is putting me under so much more duress. I have even supplied them with a copy of my home sale contract but I’m getting shoved from one useless person to another and has been going on for weeks.

      Default Gravatar
      BelindaApril 27, 2016

      Hi Smittyb,

      Thanks for reaching out. I’m really sorry to hear about how you’ve been treated.

      The Australian Investments and Securities Commission (ASIC) Money Smart program offers free online financial and legal counseling which you might find useful. You can jump online and get personal advice about the best way to manage your existing debts. They also offer a financial counseling hotline and crisis support.

      You can take some steps to show your bank that you’re trying to improve your financial situation. For instance, you can demonstrate that you’re actively seeking work and you can also show your financial discipline even by depositing small amounts of money into a high-interest savings account.

      We have some useful tips about debt reduction and management strategies on our getting out of debt guide. If you have several loans or debts, you may want to consider consolidating them.

      Also, you may want to apply for a Centrelink benefit during the interim.

      Before taking any action, I strongly suggest that you seek advice from a licensed financial and/or legal professional to help you take back control.

      All the best,
      Belinda

      Default Gravatar
      SmittybApril 27, 2016

      Thanks for your quick response Belinda..Much appreciated))

    Default Gravatar
    LeighMarch 11, 2016

    What can the bank do to get their money back? EG Access your super,Access bank accounts with a different banks,Force you to sell property mortgaged with another bank etc. If you default on a land only loan. I am thinking of defaulting on a land loan as I cannot sell the land and do not wish to pay anymore. There was no leaders insurance on the loan. All advice gratefully accepted.

      Default Gravatar
      BelindaMarch 14, 2016

      Hi Leigh,

      Thanks for getting in touch.

      If you believe you are going to default on your home loan, you should contact your lender right away and tell them that you are experiencing financial difficulties. Depending on the lender and the structure of your loan, you may be able to apply for a temporary repayment holiday which could reprieve you from your mortgage commitments for a given period of time.

      Otherwise, you should visit the Australian Securities and Investments Commission (ASIC) website as they have free financial and legal counselling services online.

      In some instances, a lender can take possession of your property/land and sell it if you fail to meet your mortgage repayments as outlined by your mortgage contract. However, the lender has to issue a notice identifying that you are in default of the loan and that you have a certain amount of time to resolve the situation. You can read more about mortgage in possession sales and learn about what happens if you fail to repay your mortgage.

      It is advised that you seek financial and legal advice to fully understand your options.

      All the best,
      Belinda

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