Losing a home is a distressing experience that can disrupt lives and uproot families. To prevent such a scenario, it’s crucial to understand the reasons behind home loss and the urgency to act swiftly. Various factors can lead to foreclosure, including financial hardships, job loss, medical expenses, excessive debt, or changes in interest rates. The key is to recognise the signs early on and take proactive measures to avoid reaching that tipping point. By doing so, you can regain control of your financial wellbeing and protect your home.
What Is Foreclosure?
Foreclosure is a legal process in which a lender repossesses a property from a homeowner due to their failure to make mortgage payments. The lender takes legal action to terminate the borrower’s rights to the property, typically resulting in its sale to recover the outstanding debt.
In Australia, foreclosure is sometimes referred to as “repossession” or “mortgagee in possession”. There are, in fact, slight differences between these terms. But they all refer to when a homeowner defaults on their mortgage payments, giving the lender (mortgagee) the right to take possession of the property, usually to sell it and recover the outstanding debt.
What Causes Foreclosure?
There are several reasons why a lender may become a mortgagee in possession. Some of the most common causes include:
Default on Mortgage Payments
This is the most common reason for a lender to become a mortgagee in possession. If a borrower fails to make their mortgage payments, the lender will eventually send them a default notice. If the borrower does not take action to bring their payments up to date, the lender can apply to the court for a possession order.
Some reasons for borrowers defaulting on their loans can be:
- Job loss or income reduction.
- Unexpected medical expenses.
- Negative equity
- Variable interest rate increases.
- Excessive debt
If a borrower files for bankruptcy, the lender may foreclose. This is because the bankruptcy trustee will sell the borrower’s assets to repay their creditors. The lender’s mortgage is typically one of the first assets to be sold, and the lender will become a MIP if the proceeds from the sale are not enough to repay the total amount of the mortgage.
Death Of The Borrower
If the borrower dies, the lender may foreclose if the borrower’s estate does not have enough assets to repay the mortgage. The lender will then be responsible for managing the property until it can be sold.
If a borrower becomes disabled and is unable to work, they may not be able to afford their mortgage payments. In this case, the lender may become a mortgagee in possession if the borrower’s disability insurance does not cover the full amount of the mortgage payments.
Steps Of Repossession
The process of a lender taking possession of property is as follows:
- Step 1: The lender sends a default notice to the borrower. This notice will outline the borrower’s options, such as entering into a repayment plan or selling the property.
- Step 2: If the borrower does not take any action within 30 days, the lender can apply to the court for a possession order.
- Step 3: Once the possession order is granted, the lender can take possession of the property. The mortgagee obtains a Writ of Possession and serves a Notice to Vacate.
- Step 4: The lender will then be responsible for managing the property, including paying the property taxes and insurance.
- Step 5: The lender can sell the property at any time.
- Selling for less than your mortgage balance may require paying a shortfall out of pocket.
- Moving to a less desirable location may affect convenience and social connections.
- Downsizing could mean giving up certain amenities.
The specific legal process and requirements for repossession may differ among states and territories in Australia, but the general concept of the lender reclaiming the property due to default remains consistent across the country.
5 Strategies To Avoid Losing Your Home
Consider the following proactive measures to prevent foreclosure or a mortgagee taking possession.
1. Communicate Effectively with Your Lender
Open lines of communication with your lender are paramount when facing financial difficulties. The moment you realise that you may struggle to make mortgage repayments, reach out to your lender. Discuss your situation honestly and transparently. Many lenders in Australia have hardship programs to assist homeowners during challenging times, such as loan modifications, repayment plans, or repayment holidays. Keeping the lines of communication open increases your chances of finding a mutually beneficial solution and avoiding foreclosure.
2. Explore Refinancing Opportunities
Refinancing your mortgage can be a powerful tool in preventing home loss. You can renegotiate your current loan terms to secure a lower interest rate or extend the repayment period, resulting in reduced monthly repayments. This approach can make your mortgage more manageable and provide financial relief. Consider consulting with a mortgage broker specialising in refinancing to guide you through the process, help you explore the best options, and negotiate on your behalf.
Contact our expert mortgage brokers specialising in refinancing to explore the best options tailored to you. Call us at 1300 889 743 or complete our free online assessment form.
3. Increase Your Income And Reduce Your Expenses
Supplementing your income and cutting expenses can help you maintain your mortgage payments and avoid foreclosure. Look for opportunities to increase your income through part-time work, freelancing or starting a side business.
Additionally, take a closer look at your expenses and identify areas where you can make adjustments. Create a realistic budget that prioritises essential expenses and trims unnecessary ones. Every dollar saved contributes to the stability of your mortgage repayments and protects your home from potential loss.
4. Investigate Loan Options
In certain situations, alternative loan options may be available to help you navigate financial difficulties. One such option is an interest-only (IO) loan, where you pay only interest for a specific period, temporarily reducing your monthly financial burden.
Another avenue to explore is government loan programs, such as the Mortgage Relief Loan in Queensland and the ACT, which can be used to resolve any outstanding arrears on your home loan, as well as grant support in the form of subsidised home loan repayments for up to six months. These programs are designed to support homeowners in times of financial hardship and can provide much-needed breathing space, but you will have to meet the eligibility requirements.
5. Downsize Your home
Consider selling your home and downsizing. Opting to sell your home before reaching the point of default may allow you to pay off the remaining loan balance, steer clear of the risk of repossession and avoid extensive damage to your credit score. By taking this proactive step, you can regain control of your financial situation and prevent the lender from taking possession of your property. Downsizing also presents an opportunity to transition to a more manageable and affordable living situation.
Selling your home and downsizing can be a beneficial strategy, but it’s important to consider potential drawbacks:
Consider these factors before making a big decision.
Act Now Before It’s Too Late!
Ready to protect your home from foreclosure? Let’s work together to find the best solution for you. Our expert mortgage brokers can explore refinancing options, navigate lender communication, and find the best solutions tailored to your unique situation. Don’t wait until it’s too late – take action now! Call us today at 1300 889 743 or complete our free online assessment form.