Can you avoid mortgage default?

Trying to catch up on mortgage repayments can be an uphill battle, especially if you’ve already missed a couple of payments.

Life can sometimes derail the most detailed financial plans so is there help available so you can avoid mortgage stress?

Golden tips for homeowners

Create a budget

Before you do anything else, the best way to overcome mortgage stress is to create a budget.

First, calculate how much money you have coming in by looking at your fortnightly or monthly payslip and recent bank statements.

Then, identify how much you’re spending and match these against bills, credit card statements, mobile phone bills and receipts.

Once you’ve done this, you’ll have a good idea of how much you have left over and can reasonably put towards paying back any missed payments.

Cut down on all non-essential expenses, for example:

  • Cut out spending on fashion and entertainment.
  • Avoid dining out multiple times in a week.
  • Change mobile phone providers or switch to prepaid.
  • Cancel your gym membership or find a cheaper gym.
  • Use public transportation or carpool whenever possible.
  • If it applies to you, cut down on nights out where you may drink, gamble and smoke.
  • Push that holiday or music festival ticket in favour of putting some savings aside in the short-term.
  • Reduce spending on your pets.
  • Hold off buying new clothes.
  • If you want luxury items, put them on your Christmas or birthday list.

Contact your lender

If you’re already behind your mortgage repayments, even if you’re not in arrears yet, contact your lender and explain your situation.

Lenders are more likely to work with borrowers that are proactive in trying to fix their situation.

You have the right to apply for a financial hardship arrangement in which your repayments can be reduced in the short-term. Most lenders have these arrangements.

Do not agree to make repayments you cannot afford to make!

As a general rule, the repayment offer should not be more than 50-60% of your income.

If you truly cannot afford to make any repayments then you need to ask for a period of no repayment, otherwise known as a repayment holiday.

Having a new baby, relying on one borrowers’ income, short-term injury or any other incapacity that prevents you from undertaking normal work hours are common reasons to ask for a repayment holiday.

Keep in mind that lenders do not have to agree to the change you’ve requested.

Contact your service and utility providers

If your electricity, gas, water, phone bills and your council rates are affecting your ability to pay your home loan, you should contact your provider.

Most utility providers and councils have hardship officers that can help you work out a plan to pay the bill in instalments.

There are also rebates and vouchers that can help you pay your utility bills.

This list breaks down what vouchers are available and where to apply for them.

Make the minimum repayments on time

It’s imperative that you try and make your minimum repayments on time. Any payment is better than no payment at all.

This is extremely important if you want the option of refinancing your home loan in the future.

Refinancing as an option

If your mortgage is unaffordable for you due to the interest rate, you could refinance your home loan to a lower interest rate thereby reducing your monthly repayments.

To have this option you need to have a certain amount of equity and should have been making regular repayments on your mortgage.

In order to refinance, most lenders require you to owe less than 80% of the property value on your mortgage balance.

Can you increase your income?

Ask your boss for a pay rise or a bonus.

If possible, ask if there’s an opportunity to work overtime or you may even be able to find a second job.

What other solutions are available to me?

Apply for mortgage assistance

The government provides short-term help to struggling homeowners in the form of mortgage assistance.

Mortgage assistance is an interest-free loan paid directly to the applicant’s home loan account.

It is available in the Australian Capital Territory (ACT), Victoria (VIC) and Queensland (QLD).

The maximum amount payable for an approved mortgage relief loan varies between $7,000 and $20,000.

To check the eligibility requirements and types of assistance offered, please refer to your respective state revenue office below:

Contact a financial counsellor

The National Debt Helpline (1800 007 007) provides free phone financial counselling services.

You can find a free face-to-face financial counsellor on their interactive map here.

They offer a free, confidential service to help you sort out your money problems.

They can even help you approach your utility provider or council to work out a payment plan or apply for vouchers.

Last resort: accessing superannuation

Accessing your superannuation to prevent losing your home should only be considered as your last resort.

There are no guarantees that you will be able to withdraw your super for this purpose so it is essential that you seek advice from a qualified accountant.

Generally speaking, you may be eligible for compassionate release of your superannuation to pay for mortgage arrears if your lender is threatening to repossess or sell your home.

To find out how much you can withdraw from your super on compassionate grounds, please visit this section of the ATO website.

The top three things not to do when you’re behind

  • Don’t run and don’t hide: You can usually come to a repayment agreement if you’ve previously been making regular payments on time and have a reason for missed payments.
  • Don’t apply for more debt to pay off your home loan: Getting credit cards or personal loans will simply dig a deeper hole for yourself.
  • Don’t make huge lifestyle changes: Once you’ve created a budget, stick to it and avoid making drastic financial decisions so you can create a savings buffer.

Mortgage stress case study

Specialist lender solution

John and Lisa were approved for a home loan just two years ago.

John had just started his locksmith business (less than 2 years ABN) so they had to go to a specialist lender for a low doc loan.

They were paying around 5.00% per annum.

Around 6 months ago, Lisa was made redundant as a copywriter.

This created significant stress on their financial situation, so they missed a mortgage repayment and their home loan went into arrears.

After 60 days of non-payment, they had a default listed on their credit file.

Because of the default, their lender hiked their rate to over 9.00%.

This put the couple in an even tougher position when trying to keep up with mortgage repayments.

Thankfully, within two months of being let go from her previous job, Lisa got another job at a higher salary.

Even though they were in a much better financial position as a couple, their lender wouldn’t drop their rate.

Lisa could prove that she had been earning a regular income for more than 3 months and, as a couple, they could provide bank statements showing perfect repayments on their mortgage.

Frustrated with their lender, they got in touch with Home Loan Experts’ mortgage broker Edward Zhang.

Edward was able to assess their situation and make a strong case with another lender who understood that losing a job is common and can cause home loan stress.

They are now paying a much cheaper rate and, if they’re able to make their repayments on time over 12 months, they can potentially refinance to a major lender at a cheaper rate.

Repayment holiday solution

Frank had suffered a relationship breakdown and was made redundant from his full-time position which was his only source of income.

This led to a period of manic episodes and an extended one-month stay at a psychiatric hospital.

When he was discharged, he had fallen two months behind on his mortgage repayments of $1270 per month and he was in real danger of losing his home.

He had outstanding household bills, and medical bills were piling up while he was looking for a new job. His savings had all but run out.

The best thing he did was contact his lender and explain why he was having problems paying his monthly mortgage repayments.

Frank applied for financial hardship and proposed a realistic repayment arrangement with his lenders to help him catch up on his home loan repayments.

Before his troubles began, he had a perfect 5-year repayment history on his $334,000 home loan.

He believed he could find full-time employment within 3 months.

His lenders gave him a 3-month repayment holiday in which they reduced his monthly repayments by $500.

Frank made a remarkable recovery and secured employment within 2 months earning approximately $2,400 per month.

He was able to bring his bills up to date and resume payments on his mortgage.

Are you looking to refinance your home loan?

If you’ve been struggling with your mortgage repayments, it could be that you don’t have the right home loan for your needs.

You may even be eligible for a much sharper interest rate.

Please call us on 1300 889 743 or fill in our free online assessment form to find the right solution for your needs.