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What happens if you default on a home loan?

A young woman is on the phone, sitting in a home office and holding paperwork.

Taking out a home loan is a huge financial commitment which can span up to 30 years, and anybody’s financial situation can change over such a lengthy time period.

A mortgage default can occur if you’re experiencing financial hardship, but there are steps you can take if you feel you’re at risk of defaulting on your home loan – we’ve run through them here.

It’s important that you seek help from your lender’s financial hardship team as soon as you feel you’re heading towards a default.

What is a mortgage default?

A mortgage default is when you don’t meet your home loan repayment on time, and you fall behind on subsequent repayments.

Your lender can issue you with a default notice one day after you’ve missed a mortgage repayment, however, it’s likely that your lender will give you somewhere between 30 and 90 days to catch up on repayments before officially issuing a default notice.

Once you’ve received a mortgage default notice, you’ll typically have 30 days to remedy the default by catching up on any overdue repayments, plus making your regular payment and paying any late fees.

Credit reporting agencies will also make a note of the mortgage default in your file, which will affect your ability to refinance your home loan and apply for other credit products for up to 5 years.

What happens when a mortgage defaults?

You’ll likely be hit with late payment fees when your mortgage defaults, and it’s important to note that missed payments on your mortgage are extending the life of the home loan. That means the interest on your home loan is also increasing.

Credit reporting agencies will typically list a mortgage default on your file after you’re at least 60 days behind on your repayments, so you have some time to remedy the default before it affects your credit rating. Once it’s recorded, it will be on your report for at least 5 years.

Here are the steps your lender will take once you’ve fallen behind on your home loan repayments:

1. Contact you about the missed payment

Your lender will contact you when you miss a mortgage repayment, and will connect you with its financial hardship team.

You’ll typically have between 30 and 90 days to catch up on your missed payments and remedy the default before you are issued with an official mortgage default notice.

2. Issue a default notice

Once your lender has sent you a default notice, you’ll have 30 days to pay the overdue repayments in addition to your regular payment for the month.

3. Send a Statement of Claim

If you don’t get on top of your repayments within 30 days, your lender will send you a Statement of Claim or a summons – it’s the beginning of your lender’s legal action against you.

A Statement of Claim is a legal document which outlines how much the other party claims you owe them. In this case, the lender will set out how much is owed on your entire mortgage.

You can respond in a number of ways, including filing a defence or lodging an external dispute resolution. The amount of time you have to respond to a Statement of Claim or a summons varies between states and territories.

But don’t just sit on a Statement of Claim – it’s likely it will lead to you being evicted from your home. You can seek free legal advice if needed.

4. Eviction and repossession of the property

If you can’t come to a solution with your lender, you are at risk of losing your home. Your lender will obtain a court order for repossession, and once this happens, you’ll be evicted from the property.

This may involve a sheriff or bailiff coming to the home to evict you and change the locks.

Your lender will likely sell the property after repossessing it to recover the debt you owe. If the lender isn’t able to recoup the amount you owe through the sale, you will still be on the hook for the outstanding debt.

If you took out a home loan with a deposit of less than 20%, this is when your lenders mortgage insurance (LMI) will come into play.

How do I avoid a mortgage default?

Here are our tips to avoid defaulting on your home loan if you feel you’re at risk of doing so:

Have a backup savings fund

Set yourself up for success by building an emergency savings fund before you take out a home loan. This savings buffer will help you pay your mortgage if something unexpected impacts your finances.

An emergency savings fund should ideally be at least three months worth of expenses, which could be anywhere between $7,000 to $10,000 depending on where you live in Australia.

That way, you won’t run the risk of losing your home while you’re looking for a new job, recovering from an illness or injury, or otherwise getting back on your feet after unforeseen circumstances.

Find a competitive home loan interest rate

Choosing the right home loan could mean the difference between spending thousands of dollars in interest on your mortgage, so it’s important to compare home loans from the very beginning to ensure you’ve got a competitive interest rate.

Your loan-to-value ratio (LVR) is one factor that impacts your home loan interest rate – generally speaking, the lower your LVR, the lower your interest rate can be.

When you first get a home loan, your LVR represents the amount you need to borrow compared to the property’s value. 

As you pay off your mortgage, your loan-to-value ratio refers to the percentage of property value that is owned by you (in other words, your home equity).

As your loan-to-value ratio lowers over time, lower home loan interest rates should also be available to you. You can use this to refinance your mortgage and get a better interest rate.

Tailor your home loan

Your home loan may have certain features that can help you in the short term if you’re having financial difficulty. For example, your lender might offer a home loan repayment holiday, though remember that your mortgage will still be accruing interest during this time.

Other home loan features that may help you are an offset account or a redraw facility.

An offset account is an everyday bank account that is connected to your home loan, and it’s called an offset because the amount in the account offsets your mortgage balance, which in turn lowers the amount of interest you pay.

A redraw facility gives you the ability to withdraw on extra repayments you’ve made towards your home loan, to use for another purpose. Importantly, this option is only available if you have made extra payments in addition to the minimum repayments.

The drawback of tapping into your offset account or home loan redraw is that you’re likely going to extend the life of your home loan, which will see you pay more in interest over the longer term.

Keep in contact with your lender

It’s in your lender’s best interest to help you, so you should get in contact with your lender’s financial hardship team as soon as you feel you’re experiencing financial stress.

What can I do if I default my home loan?

If you default on your home loan, or you’re at risk of defaulting, it’s strongly recommended that you contact your lender’s financial hardship team and apply for a hardship variation.

This can help make your mortgage more manageable by changing the terms of your home loan.

In addition to adjusting the terms of your home loan, the financial hardship team may temporarily reduce or pause the cost of your payments. It can also give you advice on how to move forward with your financial situation.

There are also free financial counselling services available to you for further advice. The National Debt Helpline has a page which explains your rights while experiencing financial hardship.

Free financial counselling

Defaulting on your mortgage can be an emotionally stressful time, and it’s equally important that you look after your mental health. You can access free mental health support from these services.

Mental health support

Can you get a home loan if you have a default?

A mortgage default does not automatically prevent you from being approved for a home loan, as lenders will assess you on a case-by-case basis. For example, the number of defaults and the total cost of the defaults will be looked at when considering your approval.

Think you might be at risk of defaulting on your mortgage? Speak to your lender as soon as possible, and be sure to compare home loans to search for a better interest rate.

Jasmine Gearie
Jasmine Gearie
Senior Money Writer

Jasmine joined Mozo from TechRadar Australia, where she covered the telco and NBN sector for over three years. She’s now turned her attention to the world of personal finance, with a special interest and expertise in home loans and savings accounts. Jasmine studied a Bachelor of Communication (Journalism and Public Relations).

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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