What happens if I fall behind on my home loan repayments?

Paying off a mortgage is no easy task, and sometimes borrowers can find themselves struggling to keep up with their monthly repayments. If you have fallen behind on your loan, here are a few things to expect.

If you fall behind on your repayments, your lender can send you a default notice. This is a letter informing you that your mortgage account is in default and requesting that you pay the overdue amount.

At this stage, you will have around 30 days to either pay the amount owed plus your usual repayment, in which case you will no longer be in default, or apply for a hardship variation.

A hardship variation is an agreement with your lender to change the terms of your loan so that it is easier for you to manage. This might involve extending the life of the loan or temporarily pausing repayments.

To apply for a hardship variation, you should:

• Contact your lender's hardship team.

• Provide them with the details of your loan.

• Request to increase the life of the loan or temporarily pause or reduce repayments.

• Explain if you are a vulnerable customer, e.g. if you are elderly or disabled.

• Explain why you are currently struggling to make your repayments, how much you can afford to repay, and how long you think the hardship will last.

If your lender agrees to make changes to your loan arrangement, you should receive a notice confirming the decision. 

But your lender can also reject the request if you don’t have a valid reason for falling behind or they determine you’ll be unable to service your loan even if such accommodations are made.

If you fail to respond to the default notice, your lender can lodge a ‘Statement of Claim.’ This is a court document outlining what your lender claims you owe them and why they are making the claim. 

Once you are served a Statement of Claim, legal action against you has officially commenced and it’s advised that you seek legal advice as soon as possible.

At this point, there are a few options available to you. If you’ve managed to scrounge up the full amount owed, you can pay your lender and notify the court by filing a notice of payment. This will put a stop to the legal proceedings.

You might also be able to negotiate an alternative with your lender, in which case they will discontinue the claim. 

If you believe you are being treated unfairly, or don't owe all or part of the claim, you can file a defence or lodge a dispute with a dispute resolution scheme. Just keep in mind you’ll have a limited amount of time to do so. 

Failure to respond to the Statement of Claim within 28 days can lead to a judgment made against you without a case being heard in court. You will then be ordered to pay the amount owed.

Your lender can then move to sell your home. Though lenders are not required to go to court to repossess your home, they will almost certainly do so. This is so a Sheriff can evict you from the property and arrange for the locks to be changed.

The main exception is if the property is rented, vacant or consists of undeveloped land. In these cases, your lender can repossess your home and arrange to receive rent without a court order.

If property prices have dipped in value since you bought, or if you overpaid for your property and not enough time has passed for equity to build up, you might find your home’s sale price is not enough to cover your outstanding debt.

To make up the difference, your lender might ask you to draw from your savings or even make a claim to sell your other assets.

If there is still a shortfall, your lender may sell your debt to a debt collector, who will take steps to retrieve the amount you owe.

If you purchased your home with a deposit below 20%, your lender will have taken out Lenders Mortgage Insurance (LMI) to protect them in cases just like this. They will recoup what they’re owed from the proceeds of the sale and the mortgage insurer will pay them the difference.

Your debt obligation will then be transferred to the mortgage insurer, who will commence the process of recovering the amount owed from you or any guarantors on the home loan.

Use an offset account: Every dollar held in an offset account is offset against your loan amount. So if you owe $300,000 on your mortgage and have $20,000 in your offset, you’ll only be charged interest on $280,000.

Make extra repayments: Any extra contributions to your mortgage will go a long way towards reducing the amount of interest you pay overall. And if your loan comes with a redraw facility you can draw upon those extra funds if you find yourself in a pinch.

Most variable rate loans let you make extra repayments at no cost. If you have a fixed home loan, you might find your lender charges fees or only allows a set amount of additional repayments per year.

Take out mortgage protection insurance: This will cover your home loan repayments for a set period if you lose your job, become ill or suffer from injury.

Request a lower interest rate: If you feel you’re paying more than you’d like to, ask your lender if they are able to reduce your current interest rate. To improve your chances, find out what your lender is currently offering new customers, or take a look at the home loan rates being offered by competitors.

Refinance: If you have requested a lower interest rate and your lender is unwilling to budge, consider refinancing to a cheaper home loan.

An unexpected turn of events - such as job loss, divorce, injury, or death of a loved one - can make it extremely difficult to keep up with your financial obligations.

If you find yourself in such a position, it pays to get in touch with your lender sooner rather than later. They will put you in touch with a hardship team that will walk you through possible solutions.

If it comes to the point that you are receiving default notices, you should not ignore them. Your lender likely doesn’t want you to lose your home any more than you do, but you’ll need to work together to keep things from getting to that point.