Life throws us obstacles now and then and it’s not uncommon for some of these to challenge our financial security.
Mortgage stress – when we struggle to meet our home loan repayments, probably affects more people than you think.
A mortgage is essentially a ‘statutory charge’ in favour of a lender over property held in the borrower’s name. The mortgage secures the repayment of the money loaned and the associated loan contract gives the lender the right to repossess and sell the property if repayments are not made.
Missing a mortgage payment however does not necessarily mean you will lose your home. A mortgage is a long-term commitment and your lender will generally work with you to remedy the situation.
This article provides guidance on what to do when you can’t meet your loan repayments and an overview of your rights and your lender’s responsibilities if a solution cannot be found and repayments remain unpaid.
I have missed a loan payment, what do I do?
Let your lender know. This is the most important first step. Contact your lender and let them know you are aware of the situation and plan to fix it. Better still, if you know in advance that you will not be able to make a payment when it is due, be proactive.
Banks and building societies have specific areas that deal with loan defaults. As it is in both parties’ interests to get things back on track, they are generally happy to assist. The quicker you act, the more likely you will be offered a solution and the more options you will have.
Most lenders have hardship programs in place to assist borrowers facing financial difficulties.
If your financial problems are short-term and you are genuine in your attempts to repay the loan, you may be able to arrange to temporarily defer payments, take a repayment holiday, extend the term of the loan, or refinance. Each case is assessed on its own merits and your lender will usually assist you provided the usual checks are in place to ensure you (and they) are not likely to be financially worse off.
Your lender may require a statement of financial position to assess whether you will be able to come to a suitable arrangement for repaying your loan.
Don’t panic and talk to your lender before you consider short-term, high risk alternatives such as using credit cards, taking out personal loans or borrowing from friends.
What rights does the lender have when I can’t pay my mortgage?
By holding a registered mortgage over your property, a lender (mortgagee) has a statutory right to take certain action if you default in your loan repayments. A power of sale is generally written into the loan contract and allows the mortgagee to sell the property to recover the mortgage debt and associated costs.
The loan contract sets out additional matters such as the right to charge a higher rate of interest when the account is in arrears (default interest), the right to charge additional fees and to be reimbursed for the costs of chasing you for loan payments.
If you can no longer comply with the terms and conditions of the loan the lender can:
- exercise power of sale, take possession of the property and / or foreclose on the property, selling it to recover the debt together with interest and associated costs such as agent’s fees, legal fees and any costs of insuring and maintaining the property;
- if the proceeds of sale do not cover the debt due, sue each of the borrowers personally for the balance.
What are my rights?
A mortgagee will usually exercise its power of sale rights after a default continues for a period of one month (unless some other time is stated in the mortgage). The mortgagee must ensure due process is taken before exercising these rights.
All borrowers (mortgagors) must be given formal written notice and allowed 30 days to remedy a default before action is taken. Notices must be correctly served on each defaulting mortgagor to the addresses specified in the mortgage documents.
The mortgagee must act in good faith towards the mortgagor. This means that the mortgagee must take reasonable steps to sell the property at market value or for the best price reasonably possible in the circumstances.
The value of the property should not be sacrificed and a mortgagee may be liable for loss suffered due to the mortgagee acting recklessly or carelessly during the selling process.
When the property is sold the proceeds of sale are distributed in a specific order of priority.
Conclusion
If you are experiencing financial difficulty, particularly with paying your mortgage, it is important to be proactive and up-front. Contact your lender, be frank, and try to make a workable plan to get things back on track.
If you have received a default notice from your lender you should seek legal advice immediately. Your lawyer can explain the process and ensure your rights have been properly protected and may also be able to liaise with the lender on your behalf to assist in formulating a resolution.
If you believe you have been unfairly treated by your lender or have not been given due process, you can lodge a dispute with the Australian Financial Complaints Authority (AFCA).
If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected].