Home loan check-in: What happens if I can't afford my mortgage?

As a result of the rising cash rate and the cost of living crisis, some Australians have grown worried about their mortgage repayments.

Even the Reserve Bank of Australia warns that homeowners may fall behind on their home loan repayments in the months ahead.

"Although most households are likely to be able to weather increased pressure on their finances for some time, many will need to curtail their consumption, and some could, ultimately, see their savings buffers exhausted," says a recent RBA report.

"If these households have limited ability to make other adjustments to their financial situation — e.g., by increasing their hours worked — and pressure on their finances continues, they could fall into arrears on their loan obligations. Some may eventually need to sell their homes or may even enter into foreclosure."

Sadly, a few Australian homeowners are facing a tough road ahead. But there are some ways to protect yourself in these challenging economic times.

Here is what you need to know.

It's common for homeowners to face financial difficulties often due to circumstances out of their control. 

In fact, when lenders calculate ‘borrowing power’, they consider the potential hike of interest rates - confirming that you'll be able to make repayments during the loan's lifetime.

But no one can predict the future, so if you're concerned about missing repayments, here are a few things you can do.

1. Review your budget

Look at your current spending and assess your financial situation. Where is your money going, and what can you do to reduce expenses? Can you make adjustments to lower costs in energy, NBN or phone plans? Even a couple of dollars here and there can create a buffer to help you keep making those repayments.

Also, consider cancelling subscriptions until your financial situation improves. This could be cutting down on streaming services, food delivery boxes and gym memberships.

2. Contact your lender

Lenders have hardship teams available to help you through difficult times. It's in their best interest to help you keep making those repayments because if you default on your loan they end up losing money.

If you're honest and explain to the lender why and how you have financial hardship, they might find a solution that will work for you.

It's easier for a lender to help a borrower than closing a mortgage, seizing property and then trying to sell it in a waning market. So it's a good idea to reach out to them sooner rather than later.

Moneysmart, a government-owned financial literacy website, says that the earlier you contact the hardship team the more options you'll have.

3. Research hardship options

After contacting your lender about your financial situation, they might offer you hardship variations. 

A hardship variation is a change to the terms of a loan based on your financial situation.

This could be:

• Changing loan repayments to interest only.
  
• Pausing repayments for some time.
  
• Temporarily lowering your interest rate.
  
• Reducing your repayments.

Keep in mind that a lender could refuse to offer a hardship variation. If this happens and you're not happy with the response, you can contact the Australia Financial Complaints Authority, file a complaint, and get a free dispute resolution.

4. Refinance your home loan

By refinancing your home loan to a lower interest rate, you could cut down hundreds of dollars from your monthly repayments. Not only will you have the extra money in your pockets, but you could also use it to pay off your mortgage faster.

It's worth reaching out to your lender to renegotiate your loan to a lower interest rate. You'll want to research and find out what they’re offering new customers versus the competition. Use that information to put yourself in the best possible position. 

Be bold and ask for a discharge form, even if you have yet to commit to switching. By hinting to your lender that you're considering leaving, you may have an advantage as they'll try to figure out what to do to keep you on. 

If that doesn't work, there are plenty of other home loans to consider.

5. Switch to a fixed rate

While fixed rate home loans aren't as low as they used to be, they could be lower than your current variable interest rate loan. By getting on a fixed rate, your mortgage repayments will stay the same for a specified period of time–even if the cash rate fluctuates. 

Plus, if you refinance to a lower fixed interest rate, you could save some extra cash to use as a financial buffer.

6. Sell your home

While this is the least ideal solution, selling your home can provide you with the financial relief you may need.

As long as you don't have negative equity, selling your home should allow you to pay your home loan in full. After that you could downsize to a smaller home, move to a more affordable location, or rent for a while as you try to get your finances back in order.

If you're against selling your home, consider renting it out and moving in with family. The rent money should cover the mortgage expenses while you find your financial footing.

If you fail to pay your mortgage on time your loan goes 'on default.' However, a lender will only follow up about a missed payment after several days or weeks.

Leave it too long and not only will you be hit by penalty fees, but you run the risk of hurting your credit rating. More importantly, you run the risk of losing your property! 

So, if you think you might default on a loan, contact your lender or follow the steps listed above. Most want to retain their customers and are willing to figure out a solution. 

If you're looking for more information about home loans, read Mozo's home loan guides. Alternatively, if you're thinking of refinancing check out some excellent refinancing home loans on offer.