Disclaimer: This page contains factual advice only. It has been prepared without taking into account your objectives, financial situation or needs. Please seek financial advice before taking any action.
Around a quarter of Australians are currently experiencing financial stress and more than 60% of all household debt is in the mortgage.
When interest rates rise, the Australian economy takes a turn for the worst or you experience a devastating life event, it’s easy to see why a home loan in arrears becomes an everyday reality for many Australians.
If you’re struggling with your mortgage repayments, these are the top 10 strategies for home loan arrears.
Life event or is it money management?
First things first: most people who are struggling with mortgage repayments tend to fall into two groups:
- People who suffered what banks refer to as “life event” such as divorce, loss of job, illness or a short-term or permanent disability that prevents them from working.
- People who had the income to make payments but weren’t able to properly manage and budget their household income.
A life event can often be solved by simply speaking with your bank and making an arrangement with them.
An ongoing money management issue, on the other hand, requires you to make changes to your lifestyle in order to stay ahead of your mortgage.
Contact your lender as soon as possible!
Lenders tend to be far more understanding and try to work with you if you are open, honest and timely when contacting them and explaining the situation that you’re in.
Specifically, explain how and why you were unable to meet your repayments, how you plan to pay it back and how the lender can help you get back on track.
Banks actually see it as a positive that you’re taking responsibility and trying to get a handle on your finances again. In the meantime, set a budget and stick to it!
If your loan is currently in arrears and the bank cannot find you then they may take legal action in an attempt to sell your property.
If you’re not satisfied with the lender’s decision you can contact the Financial Ombudsman Service (FOS) or the Credit and Investments Ombudsman (CIO).
Solution 1: Reduce your home loan repayments
When interest rates drop, many lenders keep the repayment schedule at the same level.
This is great in that your home loan is paid off sooner but it means you’re losing access to spare cash that you need to pay for your ongoing costs of living.
Call your lender and ask them to reduce your repayments to the minimum until you can put yourself in a better financial position by either finding an extra source of income (second job or more shifts) or paying down some of your other debts, depending on what situation you’re currently in.
You may also want to consider switching from principal and interest to interest only repayments if your lender will allow it and it is suitable for you to do so.
Solution 2: Refinance and consolidate debts
If you’ve owned your property for some time then you may have plenty of equity. It may be as simple as calling a mortgage broker and seeing if they can consolidate your debts.
This works well if you don’t need to borrow more than 80% of the value of your property.
Special tip: If your home loan has been paid on time for past 6 months then you’ll get a better interest rate than the one you’d get with a second tier or non-conforming lender that will consider your application. Because of this, it may sometimes be best to wait a while before refinancing.
This is something that we can help you with. Please call us on 1300 889 743 or fill in our free assessment form and one of our mortgage brokers will contact you.
Solution 3: Access redraw
If you’ve paid more than the minimum home loan repayments then you may have several thousands of dollars accessible in your redraw facility (if you’re on a professional package).
Ask your lender if you can access these funds in order to give yourself some breathing room and avoid getting further into home loan arrears.
Solution 4: Change your repayment date
If you’re struggling to manage your money then change your home loan repayments to come out on the day that you are paid.
Alternatively, you can ask your payroll department to redirect part of your pay directly into your mortgage.
You don’t see the money day to day so this reduces the risk that you’ll use it for something else before your home loan is paid.
Solution 5: Sell a property or downsize
If you’ve got multiple properties then you may want to consider selling one of them to clear your arrears.
If you don’t then consider selling, renting for a while and then re-entering the property market with a smaller property.
This is far from ideal and won’t be suitable for everyone. If you end up being out of the property market for some time and the market rises you’ll lose out.
Solution 6: Focus on your home loan
Some people choose to pay their home loan first, then their investment property loans, then car loan and then their credit cards.
In many cases, credit card providers do not take significant action to chase up their debts. They may lodge a default on your credit file but they will rarely take court action or try to sell your home.
You should seek advice from a Financial Counsellor before considering any option like this.
Having a default on your credit file can seriously impair your chances of borrowing for up to 5 years in the future.
Solution 7: Apply for a hardship variation
Most lenders are willing to work with you if you cannot make your repayments. If your financial situation is quite serious you can apply with your lender for a hardship variation.
This usually comes in the form of:
- Frozen repayments: You can avoid making repayments for several months but it’s important to note that interest still adds onto your mortgage.
- Frozen interest: No interest for several months.
- Partial repayments: You’re still paying full interest but you’re making less than the normal repayments.
This is something you should discuss with a financial counsellor or financial adviser before proceeding with.
You can find more information on claiming a hardship variation and what thresholds apply visiting ASIC’s (Australian Securities and Investments Commission) MoneySmart website.
Solution 8: Debt negotiation
There are some companies that can negotiate with your creditors on your behalf and get them to accept less than the full amount owing.
This works well with unsecured debts as they rarely recover the full amount owing in the event that someone cannot pay.
Solution 9: Part IX debt agreement
Some people may qualify to enter into a Part IX debt agreement.
Be careful when making your decision!
Make no mistake: a part IX agreement is an act of bankruptcy and should not be taken lightly.
Solution 10: Access your superannuation
This option isn’t available to everyone.
You need to be in severe financial hardship to be able to access your superannuation so refer to the Australian Taxation Office’s (ATO) website for eligibility criteria and seek independent financial advice.
This option may impact your tax position and your future retirement plans.
Have you already missed a payment?
It’s always better to be proactive when it comes to mortgage stress but if you’ve gone beyond that and have missed a mortgage repayment or two, you may be in for a bit of shock.
Certain fees may apply including:
- An arrears management fee.
- A dishonour fee as a result of insufficient funds in your account to make your repayment.
- A default interest rate on overdue payments.
Worst case? Your entire home loan may be withdrawn and you’ll be forced to settle the full amount in cash or through the sale of the property. Enforcement costs (those pertaining to legal fees and court documents) will also apply.
When will my bank take action?
In saying that, if and when a bank will take action depends on your current Loan to Value Ratio (LVR).
If you owe more than 80% of your property, banks will generally take action as soon as you miss two repayments. Below 80% and the bank may be willing to accept three or missed payments before taking action.
Not all banks are the same though so find out what your bank’s current hardship program is and what lengths they’re willing to go to work with struggling customers.
Final golden tips
- Always make sure you talk to your bank. Don’t hide from them!
- If you took out unemployment, accident or sickness insurance when you obtained your loan, you may be able to claim on that insurance.
- Seek advice from a professional such as a qualified financial counsellor or financial adviser.
- If managing your money is an ongoing problem then fixing your late payments won’t solve the issue! Seek help from a professional.
What not to do when you’ve missed repayments
- Borrow more money, use your credit card or increase your limit: You’re simply putting yourself further into the red.
- Borrow money from family and friends: You’re not only putting yourself in more debt but you’re putting your relationship to the test.
- Consolidate debt or switch home loan products without careful consideration: An experienced mortgage broker can properly assess your situation, weigh up the costs and let you know if you will, in fact, be in better financial position by doing so.
Where can you find a financial counsellor?
- NSW: Financial Rights Legal Centre
- TAS: Consumer Credit Helpline
- VIC: MoneyHelp
- WA: Consumer Credit Legal Service
- NT and QLD: National Legal Aid
If you’re currently struggling with your mortgage repayments we can point you in the right direction in getting help.
Call us on 1300 889 743 or complete our free assessment form and tell us a little about your current situation.