By acting fast after missing a repayment, you increase your options and the opportunity to fix the situation.
You may think that missing a mortgage repayment is the worst thing that could happen, but the good news is that your lender is more than happy to help. The earlier your notify your lender the more options the have to help you.
Things you need to know when skipping a repayment on a home loan:
- An arrears management fee may be applied.
- A dishonour fee may also be charged and applies to periodic payments, direct debits and cheque payments from your account that are rejected due to insufficient funds.
- A default interest rate may be charged on overdue payments, which is higher than your mortgage interest rate.
- Your home loan may be withdrawn, forcing you to settle the full amount of the mortgage in cash.
- Enforcement costs will be passed onto you such as legal fees and court documents.
Contact your lender
The first thing you should do is contact your lender. They will then assess your situation and ask you:
- Why you missed a repayment
- How to plan to pay it back and where will the money come from
- How they can help you to get you back on track.
You might find it stressful and embarrassing to talk to your lender about why you missed a repayment, but remember that financial difficulty can happen to anyone. Taking action means that you are trying to fix it as soon as possible and is a positive sign in the eyes of the lender.
The banks will generally only take action if they've seen that a borrower has missed more than two repayments but this will depend on the LVR of a loan:
- High LVR loans over 80% - generally two missed repayments
- Low LVR under 80% - generally three or more missed repayments.
However, this is only a generalisation as every lender has different policies. According to Nick, it depends on your personal situation.
"NAB considers each case on its merits. The law itself sets out notice obligations that all banks have to comply with, such as the requirement to provide 30 days notice before taking any legal action."
The big four banks and most other lenders, have hardship programs for borrowers who are experiencing financial difficulty.
ANZ's dedicated financial hardship team, Customer Connect, makes it a priority to support customers who are finding it hard to keep up with their loan or credit repayments due to a change in their personal circumstances.
ANZ Media Advisor, Joanne McCulloch.
The type of assistance we provide will vary depending on a customer's situation and may include options such as extending the term of a loan, temporarily deferring or reducing repayments, or refinancing a loan.
NAB also has a very similar approach with its dedicated NAB Care team, "generally speaking, if a customer has a genuine willingness to repay their debt and we think hardship assistance would help them do so without making their financial situation worse, then we can offer assistance."
It is important that you talk to your lender and work with them, instead of looking for a quick exit strategy.
What to avoid when you've missed a repayment
If you have missed a repayment, it is important to set a plan to think further than just making up for the next repayment. Put a plan in straight away and remember to avoid the following:
- Borrowing more money and using a credit card. Don't get yourself in deeper debt when you already can't afford repayments.
- Borrowing from family and friends. Not only do you get yourself in more debt, but there is the added social pressure of paying it back. Don't put your relationships at stake along with your finances.
- Consolidating your debts. The risks are much higher if you put all your loans together.
- Switching home loans. The fees involved with exiting a home loan early can take a while to recover from.
If you owe money to your lender, or to any credit providing service like a telco for that matter, your account is in 'arrears' - this is a technical legal term to describe the amount that you owe.
Some of the reasons you may miss a repayment
There are multiple reasons you may miss a mortgage repayment including family or personal illness, change in relationship status or losing your job. You would be best to speak to your lender as soon as your circumstances have changed and discuss with them what your options are as often you can take a repayment holiday or freeze your mortgage repayments until things change.
What if you miss more than one repayment?
If you miss more than one repayment you will need to explore your options, below we have listed some of the steps borrowers can consider when exploring these options.
Catch up with repayments
- Sell some assets to raise some money
- Try to find some extra funds
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 Financial Ombudsman Service
- The Credit Ombudsman Service Limited is also available to help
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.
Ask for outside assistance
Need extra guidance? Contact an Australian financial counsellor for free and confidential help.
|NSW||Consumer Credit Legal Centre||1800 007 007|
|TAS||Consumer Credit Helpline||1800 232 500|
|VIC||Moneyhelp||1800 007 007|
|WA||Consumer Credit Legal Service||(08) 9221 7066|
|NT and QLD||National Legal Aid||(03) 6236 3813|
Your credit history
Major banks generally won't approve your loan if they see any arrears. They generally do not lend to borrowers who have missed payments on their current home, especially in the previous six to twelve months. It is best to approach smaller lenders or apply for a low documentation loan. They tend to have a more open mind and look at how long it took you to repay the debt.
To refinance your current loan, you will need to see a specialist mortgage broker to carefully look at your situation. It may be better to sell your home rather than refinance and possibly end up in the same situation again.
What do lenders offer if you fall into financial hardship?
Lenders have unique departments within their organisations that are there to assist borrowrs when they are going through a period of financial hardship.
Below are a selection of the lenders that offer some form of financial hardship assistance.
What should you do if you fall behind on your mortgage?
If you're behind on your mortgage, you need to take action quickly. Chances are that your lender will want to repossess your home, so avoid this by speaking to your lender first and seek legal advice.
The lender will need to undergo a few processes before they can take legal action against you. So the sooner you act, the more likely you can come to an arrangement with your lender.
What will your lender do?
There are processes your lender must follow before they can take legal action against you, which is why the sooner you approach your lender, the better. Your lender will send you a series of notifications and will try to repossess your home. It is important that during this time you seek out as much legal advice as you can. Below is the usual process:
Letter of demand
- A notice that you've missed a repayment
- You may have to negotiate a repayment plan or apply for a hardship variation
- If you disagree with the debt, or you do not owe the debt, you have a right to dispute it
- Try and catch up with your payments
- 30 days notice to catch up on your repayments
- You can pay the amount that is owed plus your usual repayment, or take a repayment holiday for up to six months
- Your lender cannot take recovery action against you until they take steps as well
- You may need to consider selling your home
Statement of claim
- Fixed number of days allocated for you to repay the debt
- Lodge a dispute with the Financial Ombudsman Service
- Consider getting free legal advice
- Consider selling the home
Apply for writ
- Your lender will apply for an order to take possession of your home
- Try to get free legal advice urgently
- Your lender will send you a letter telling you when a legal official will come and change your locks
- Continue getting free legal advice
- Your lender will send another legal official to evict you
- Continue seeking legal advice
What should you consider?
- Make a repayment arrangement. Call 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 want to consider 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 if you can afford the repayments or not. You should complete this document with a financial counsellor because you need to include your essential expenses. If done incorrectly, your application may rejected.
Do I need to consider selling my home?
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.
It is better to sell your home yourself, rather than letting the lender do it for you. You can get a better price for your home and avoid legal costs if you sell your own home. The best time to sell your home is before your lender takes any legal action.
Deciding whether to selling your home is most difficult when:
- You're unemployed but trying to find a job
- You are ill and trying to recover but don't know when you'll fully recover
- Waiting for a payment for another reason
In these situations, one set of options to consider is:
- Make a repayment arrangement for up to six months and show it to your lender
- If by the end of the six months you still cannot make the repayments, consider the option of selling your house.
- Go back to the lender and negotiate another arrangement on the basis that you are selling your home.
Tips for selling your home
- You need to place your home on the market at a realistic price
- Give copies of evidence that you are selling your home to the lender. Include the contract with your real estate agent if you have one.
- Negotiate another repayment arrangement on the basis of financial hardship with your lender. Also negotiate on the basis that when your home is sold, your loan will be repaid.
- If you sell the house, you need to tell your lender as soon as possible and provide evidence.
- Lodge a dispute with the Credit Ombudsman Service if the lender has issued you with any legal notices claiming possession.
If you're struggling to make your mortgage repayments, you need to speak to your lender. It's in everybody's best interest that you continue to make your loan repayments - so don't be afraid to approach your lender and ask for help if you need a hand.
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 with you, get free legal advice or contact the Credit and Investments Ombudsman for information.
Use the equity left in your property to make other housing arrangements. If money is still tight, you could decide to rent or find temporary accommodation. If you have a stable stream of income again, it may be a good idea to purchase a cheaper home and make new financial arrangements with a lender.
Depending on how much equity you have, you may need to make more affordable housing options. There are some Government initiatives that may help;
- NSW New Home Grant Scheme. Offers a grant of $5,000 towards the purchase of a new home up to $650 000 in value. The grant also applies to homes off the plan with a value of up to $450 000.
- Sale of Home to Tenants Scheme. If you're staying within a NSW public housing complex and want to purchase the home, you can apply. Sales are subject to whether the property will be used for any future developments.
- Exemption from transfer duty. An exemption from transfer duty is available for tenants of Housing NSW and community housing providers if you purchase more than a 25 per cent share in the property.
- Australian Government Assistance. Under the Housing Affordability Fund, there are a few opportunities to be eligible for a rebate on the purchase price. To be considered, you need to have a low to moderate income. To date, this is only restricted to housing at Lake Macquarie.