There are many steps you can take to prevent a default on your home loan, and many you can take afterward to protect your financial future.
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No one takes out a home loan with the intention to fail to repay it. Nevertheless, sometimes unforeseen life circumstances can end in financial hardship.
If you find yourself facing default, there are paths you can take to avoid losing your home. And in the unfortunate event that you lose your home, there are important steps to take to rebuild your financial future.
If you miss a mortgage repayment, lenders have to follow a specific set of steps before they can take your home. Each of these steps is an opportunity for you to get yourself back on track. Though missing a mortgage repayment can be incredibly stressful and embarrassing, it’s important to know that you have options to keep your situation from spiralling out of control.
Head off trouble before it starts
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.
Tell them how you plan to catch up with your repayments, and ask what they can do to help you get yourself back on schedule. If you foresee having trouble into the future, ask your lender for a variation on your loan.
Receiving a default notice
If you haven’t contacted your lender to work out a plan, and you’ve missed a repayment, the first step the lender will most likely take is to send you a letter. This letter will let you know that you’ve missed a repayment, and ask you to contact them to discuss how to move forward.
If you don’t rectify this in a timely fashion, you could receive several of these letters. However, the one that lets you know your situation has become extremely serious is an official default notice.
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.
As you can see, even a formal default notice still offers you options. You can contact your lender and request changes to your loan contract if you’re in hardship and can’t pay, you can ask that your lender extends the term of your loan contract and reduces your repayments, extends the contract term and delays your repayments for an agreed period of time or delays repayments without extending the loan term.
If you and the lender enter into an agreement for a variation of your loan contract or if you make up your missed repayment, everything will return to normal. If not, the lender may move to take possession of your home.
Statement of Claim
The next step the lender will take after sending a default notice will be to serve you a Statement of Claim or Summons to claim the arrears, the entire debt (the whole amount of your home loan) or take possession of your home. During this time, you have a set number of days to file a defence or lodge a dispute with a dispute resolution scheme. The number of days varies depending on your state or territory:
Application for a writ
If the prescribed time period has passed following the Statement of Claim and you haven’t taken any action to either negotiate with your lender, lodge a dispute with a dispute resolution service or lodge a defence in the court, the lender will then apply for a writ to take possession of your home.
Letter from the Sheriff
Next you will receive a letter known as a Notice to Vacate. This will tell you when a Sheriff will come to change the locks on your home.
Finally, if no resolution has been reached a Sheriff will come to your home, evict you from the premises and change the locks. At this point, the lender will take possession of your home.
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 most cases, lenders do not want to take possession of your home. They would much rather find a way for you to remain in your home and continue to repay your mortgage, as taking possession of and then selling a home is a costly exercise for them. So you can rest assured that most lenders will be more than willing to work with you to get your repayments back on schedule.
Should your lender be unwilling to work with you, as mentioned above you will need to seek help either from a free dispute resolution service or through the court system.
Dispute resolution services
Dispute resolution services will independently review your case, and will try to come to an agreed outcome. If you ask your lender for a hardship variation and are declined, your first course of action could be to raise the issue with the lender’s internal dispute resolution (IDR) service. This will get your case reviewed by a different group of people within the organisation devoted to helping resolve disputes between the lender and its customers.
If after taking your case to the lender’s IDR team you find you still aren’t satisfied, you’ll want to approach an external dispute resolution (EDR) service. In Australia, there are two EDR services that handle banking disputes, the Credit and Investment Ombudsman and the Financial Ombudsman Service. Your lender is required to belong to at least one of these two services.
If you take your dispute to an EDR service early enough, the lender may stop enforcement proceedings against you while the case is decided. EDR services are free, but you will need to be able to provide information and documentation to support your dispute.
As described above, 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.
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.
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 should continue to seek payment and you are unable to pay, you may find you 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.