Mortgagee sales represent a risk to both mortgage holders and investors. Find out how you can practise due diligence to protect your asset from being possessed by the lender, and if you’re an investor, learn why it's crucial to seek independent advice before going ahead with a purchase.
An unforeseen event, such as unemployment or an accident, may mean that you’re suddenly unable to meet your mortgage repayments. Unfortunately, if you default on your mortgage repayments, this may mean that the lender has the right to possess your property and put it on the market. As a borrower, you need to consider your options if this happens - such as refinancing your home loan or consolidating your debts- to ensure that you can hold onto your property.
Although a mortgagee-in-possession property may represent a bargain, as an investor you also need to take steps to lessen your risk, such as observing the non-standard clauses in the sales contract and seeking an independent valuation to ensure that you’re not buying a dud.
What is a mortgagee in possession?
A mortgagee in possession occurs when a borrower defaults on their repayments and the lender subsequently takes possession of, and sells, the property.
Whether it’s an illness in the family or a sudden loss of employment, a change in your personal circumstances may mean that you’re unable to service your repayments, which can put you at risk of the mortgagee taking possession of your property and selling it on your behalf.
How can a lender gain possession of a property?
If you fail to meet your mortgage repayments as outlined by the mortgage contract, the mortgagee will typically 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.
There are several notice requirements that need to be issued by the mortgagee. After the expiry of these notices, if possession of the mortgaged property is required, the lender must issue and serve a writ for possession on the debt and seek judgement for possession.
If you are unable to rectify the situation and your default status continues until after the specified date, the Notice statement may include an acceleration clause that may make the total outstanding loan amount payable. The lender can then apply to the Court and seek orders for you to vacate the property so it can take possession of the asset and organise for its sale.
How will the mortgaged property be sold?
The mortgagee will take care when deciding the method of sale for the mortgaged property, as this will largely depend on the property type as well as local market conditions. For instance, if there are low auction clearance rates in the suburb, the mortgagee may decide to sell the property through a private treaty in order to maximise sales potential and buyer competition.
Typically, the mortgagee will organise for the sale of the property to be undertaken via auction or a private treaty and the proceeds of the sale will be used to absorb any legal, administrative and holding costs incurred by the mortgagee in maintaining the property.
What factors may contribute to a mortgagee taking possession of my property?
A sudden change in circumstance may inhibit your ability to meet your mortgage repayments or manage other debts. Examples include:
- Illness or accident: The medical costs associated with an unexpected illness or physical harm could mean that your financial strength, and your ability to service your home loan, is harmed.
- Family bereavement: If a family member passes away, funeral and other expenses may prevent you from meeting your mortgage repayments.
- Unemployment: If you are made redundant, or you suddenly lose your job, a loss of income can drastically affect your financial status.
- Interest rate rises: A rise in interest rates, even a marginal 0.25% increase, may mean that you’re unable to meet your repayment commitments. Use our repayment calculator to see how an interest rate rise could affect your serviceability.
How can I avoid the mortgagee taking possession?
If you feel at risk of having your property taken over by the mortgagee and you’re struggling to meet your repayments due to a change in personal circumstances, or for any other reason, you should contact your lender as soon as possible to discuss your options.
The mortgagee may enable you to take a "repayment holiday" if you can prove financial hardship, or you may be able to negotiate changes to your mortgage contract which lessens the financial burden.
If the lender is unwilling to cooperate or offer any lenience, you may want to consider debt consolidation or refinancing. You can compare a range of home loans that are suitable for refinancing in the table below.
While the Reserve Bank has maintained the cash rate at a historic low of 2.0% for the past 6 months, results from our RBA monthly finder.com.au survey found that 25% of experts believe a rate rise will occur in the final quarter of 2016. If you have not maintained a cash buffer, or a contingency plan for your repayments, this could mean that you are vulnerable to defaulting on your mortgage in the event of a rate hike.
However, following APRA’s intervention, deposit-taking institutions have tightened their serviceability requirements which means that you are generally protected from interest rate rises and the impact this may have on your ability to service the loan.
Are mortgagee sales a genuine bargain for investors?
As mortgagee in possession sales typically result in reduced priced properties associated with distressed sellers, you may want to benefit from purchasing a property for under market value. While the mortgagee selling the asset has a duty of care to achieve the highest price possible, they are in a weak bargaining position because they don’t have the authority to withdraw the property from the market, as a normal vendor would.
Due to holding costs of the property, the mortgagee is often preoccupied with selling the property as soon as possible so if you have pre-approved finance, you’re in a strong position to secure a sale.
Generally, deceased estates or properties sold by mortgagees in position are sold for 5-10% below the reserve, which represents leverage for the potential buyer. For instance, a property valued at $750,000 may sell for $712,500 depending on supply and demand factors in the location.
The myth of heavily discounted mortgagee sales
Sensationalist media often exaggerates the discounted nature of the price of mortgagee sales, claiming that they sell for 50% under market value. However this is not the case. As mentioned above, properties that are sold by the mortgagee in possession may sell for 5-10% below reserve, which may represent a good opportunity for a buyer, but the lender still has a legal obligation to sell the property at the highest possible value.
The lender will appoint an experienced real estate agent and a reserve will be set based on advice from the agent. The mortgagee is required to execute an adequate marketing campaign for the property so that they achieve the best sales result feasible.
Are mortgagee sales risky for investors?
Despite this, you shouldn’t get carried away by the potential profit margin you could make on the sale, as you still need to ensure that you practise due diligence when undertaking your research and sticking to your strategy.
In particular, you should get legal advice and have a solicitor review the contract terms, particularly any non-standard clauses which may represent a risk. It’s also a good idea to get an independent valuation of the property to identify any hazardous materials or structural defects.
As an investor, you should focus on the quality of the property itself as well as location considerations such as nearby infrastructure projects, transport hubs or schools.
Can a mortgagee possessed property represent a good investment?
If mortgagee possessed properties are treated as a long-term investment, they may have potential to provide high rental yield for investors. On average, it is believed that these types of properties may provide a 7-8% rental return which can be attractive to many Australian investors as this can help you repay your investment loan.
Combined with rental yield, you should also consider the property’s potential to provide capital growth over time as well as any value-adding activities you can undertake to boost its value.
How do I locate mortgage possessed properties?
Lenders don’t usually advertise mortgagee-in-possession sales because it may reflect poorly on the lender’s ability to assess borrower’s serviceability and may harm their brand image.
However, you can contact local real estate agents or buyer’s agents who may have the resources to track down mortgage-in-possession properties on the market.
Frequently asked questions (FAQ) about mortgagees in possession
What happens if I fail to vacate my property upon request from the lender?
If you don’t vacate the property in accordance with Court Orders, the local Sheriff's office may intervene to remove occupants from the property.
Does the mortgagee in possession have to act in good faith?
Yes, the mortgagee is responsible for acting in good faith when taking possession of the property and initiating the sale. Reasonable care must be exercised to ensure that a fair price is achieved in accordance with local market conditions.
What are some ways that I can avoid the mortgagee taking my property?
- Refinance with a new lender
- Apply for mortgage variation ("repayment holiday")
- Consolidate debts
What if my lender is unwilling to negotiate my mortgage ter
If you feel that you’re at risk of having your property possessed by the lender, you should contact them directly to see if you can negotiate your mortgage terms. However, if they are unwilling to cooperate, you may want to consider refinancing your mortgage to another lender with more favourable terms, such as a more competitive interest rates, or the ability to take a ‘repayment holiday’ where required.
What’s a repayment holiday?
A mortgage payment holiday is a temporary period of time where your lender won't require you to make your regular monthly repayments, which can free up your cash flow and ease financial pressure.
To apply for hardship variation, you should contact your lender directly to discuss the process and paperwork involved. You may need to provide evidence for your hardship and proof of your current income to receive a mortgage holiday or repayment pause.
How long does it take for the lender to recover a defaulting borrower’s property?
The entire process can take 6-12 months, or even longer.
Are mortgagee sales a good thing?
There are negative connotations surrounding mortgagee in possession sales as they are generally sold for below market value and thus can put downward pressure on property values in the area. However, if investors or homebuyers are interested in purchasing properties in mortgagee possession, this can stimulate demand and maintain pricing within the area.
What happens if the property sells for less than what the borrower owes?
The repossession process is highly expensive for the mortgagee, particularly if it doesn’t have insurance for that particular mortgage and if the property sells for less than the amount in which the borrower owes. This is why the mortgagee may reflect these costs through higher fees.
Home owners who own a property which is sold for less than what is owed will see lenders activate their mortgage insurance policy, covering them from the shortfall. The home owner would then need to pay back the mortgage insurer.
As a buyer, what non-standard clauses should I look out for in the sale contract?
If you’re thinking of purchasing a property from a mortgagee in possession, you need to seek legal advice to review any non-standard clauses in the contract. These may include; the buyer’s acceptance of the property in its existing condition; no warranties; no disclosure of hazardous substances; no disclosure of structural defects, and many others.