Falling behind on your mortgage repayments, or having your mortgage in arrears, can happen for a number of reasons. This includes financial hardship, a sudden illness or loss of job or even just not having enough money in the budget to pay. Unfortunately, it’s a lot more common than you might think.
More Australians are falling behind on home loan repayments. The latest data from S&P Global Ratings shows mortgages more than 90 days in arrears rose to a record high of 0.75 per cent in December, with a total of 55 per cent of all prime mortgage (a mortgage where the borrower has a clean credit history and low risk of default) arrears more than 90 days overdue. This is the highest level since 1966.
But what exactly is mortgage arrears and how does it differ to missed payments? Can you refinance when your mortgage is in arrears? If you have a home loan, it’s important to understand what a lender can do if you fall behind on your mortgage repayments and how you can avoid it.
What is Mortgage Arrears?
Being in mortgage arrears is when you fail to meet the required payments on your home loan. This includes missed repayments, late and overdue payments. Missing a payment, failing to make a payment on time and mortgage arrears are three different scenarios:
- A missed payment is a payment you completely miss and never pay.
- A late payment is a payment you don’t pay on time, but do eventually pay.
- Mortgage arrears is when you miss payments for an extended period of time and fail to communicate with your lender about the situation. Home loan arrears generally occurs after a period of 30 days of non-payment.
Although often out of your control, you may find yourself late on mortgage repayments due to an unexpected or unplanned event. Being in mortgage arrears is a serious concern and can result in your home being repossessed if you don’t act quickly. Minor arrears due to a one-off event can be dealt directly with your lender, who should understand your circumstances and provide you with a once-off payment extension or renegotiate a payment plan to suit your needs. But if your home loan arrears turns into a long-term problem, it may require a complete financial makeover.
If your mortgage is in arrears due to missed repayments, an unexpected interest rate rise or personal circumstances, refinancing your home loan may be an option to consider.
Can you Refinance Your Home Loan During Mortgage Arrears?
While it is possible to refinance your mortgage when in arrears, it’s highly dependent on your individual circumstances and your individual lender. In most cases, the big 4 banks will not re-negotiate your mortgage while you are in arrears. You may need to re-negotiate your mortgage with a non-conforming lender. A non-conforming lender, often referred to as a non-bank lender, is a lender who doesn’t hold an Australian banking licence and who is not a mutual society.
A non-conforming lender offers highly competitive interest rates which are attractive for borrowers with good financials. They are more flexible and can provide more options for borrowers, including those with a bad credit rating, are self-employed or have previously been knocked back by the banks. Refinancing comes with its benefits and risks, so it’s important you understand these before you make the final decision to commit to a re-negotiated new loan.
- Lower interest rate and fees. Many people who want to refinance their home loan do so to get a lower interest rate. This means your repayments on your mortgage will be less.
- A method to consolidate your debt. If you have other debt, such as a car loan or credit cards, you can consolidate these by refinancing your home loan. Having a single repayment will help you manage your finances and help manage mortgage repayments going forward.
- Fees. Refinancing your mortgage will generally incur fees. Although these vary depending on the lender, some of these fees may include a discharge fee and new application fee.
- Longer loan duration. Obtaining a longer loan term on your refinanced mortgage may mean a smaller repayment amount, but you’ll also be in debt longer which means you will pay more interest in the long run.
If you have problems paying your mortgage, there are steps your lender will take to recover them.
What Steps Does a Lender Take if You Fall Behind on Your Home Loan Repayments?
Banks have no hesitation in taking action if you have breached your contract, which is generally when you have a mortgage in arrears. If your lender believes you are unwilling to cooperate, they’ll most likely take action against you quickly. Here are the steps a lender can take if you’re behind on your home loan repayments.
- Your lender will send you a letter about your missed mortgage repayment.
- You will receive a default notice from your lender, giving you 30 days to catch up on your missed mortgage repayments.
- Your lender can take you to court if the default notice expires, serving you with court proceedings.
- If you do not take action on these court proceedings, you will receive a court order from your lender to repossess your home.
- You will receive a letter from your lender telling you to move out of your home.
- You will be evicted from your home.
If you’ve experienced any of the above, it’s best to seek professional advice immediately before the situation gets worse. Take measures to avoid falling into arrears on your mortgage, so you can prevent having issues with your lender from the beginning. Sometimes financial situations occur by means out of your control, but there are always options open to you if you are unable to afford your home loan repayments. These include:
- Payment plans,
- Hardship negotiations with your lender, and
- Accessing your super early on severe financial hardship grounds.
How to Avoid Falling into Arrears on Your Mortgage
The most important thing you can do to avoid falling into arrears on your home loan is to be aware of your responsibilities as a borrower. Some useful tips include:
- Keep track of when your repayments are due each month and how much your repayments are.
- Work your home loan repayments into your budget, so you can make sure you can afford the repayments each month.
- If you face an unexpected event such as job loss or illness, act quickly and speak to your lender about whether you are eligible for hardship assistance.
- Resist borrowing more money or using your credit cards if you’re facing financial difficulties. These will only make the situation worse.
- Refinancing, consolidating your debts and switching home loans may be a good strategy. But be aware of the fees and costs involved before you make the final decision.
- Only access your super as a last resort if it will save your home. You can only do this in limited circumstances.
Being in arrears on your mortgage should be avoided at all costs. You don’t want to lose your family home.
Free Financial Advice
If you’re worried about mortgage arrears on your home loan, Positive Solutions Finance can help. We offer a suite of financial solutions specifically designed to help you consolidate your debts, reduce your repayments and improve your financial position. If you are looking for advice on home loans, debt consolidation or refinancing your mortgage, get in touch with us today on 1800 560 591 for a free consultation.