What happens if.. I'm late on my home loan repayments
Average property prices in Australia are expensive sitting at a whopping $563,100, which would make the average monthly repayment on a 5% loan over 25 years $3,292. So it’s no surprise that many homeowners get a little behind every now and then, due to unforeseen events like a job redundancy, relationship breakup or illness. But what exactly happens when you miss a payment?
Here are some of the things that could happen if you get behind:
You’ll receive a late payment notice
First of all you’ll open your mail to that dreaded late payment notice, detailing the amount you’re behind. It’s wise at this stage, to use an online budget calculator to get an idea of where your money is going and the areas you can cut back.
Once you’ve settled on a reasonable amount you can afford to repay for the foreseeable future, you should contact your lender directly to talk about your situation with one of their hardship officers, before things get out of hand and you face the risk of losing your home.
There are plenty of options available that will help you through this tough time like extending the term of your loan which will reduce the amount you pay each month or if you’ve never missed a payment before you may be eligible for having a break from your repayments for a set period.
Let’s use the example of homeowner Trish who has just lost her job. She only has 15 years left until she pays off her $400,000 home loan. If she increases her loan term from 15 years to 25 years temporarily until she gets back on her feet, our home loan repayments calculator shows her monthly payments would reduce from $3,163 down to just $2,338.
Remember, even if you can’t make the full repayment amount it is better to pay off some of the amount owing than skipping the repayment all together, unless you have agreed on a payment pause with the provider.
Your lender will send you a default notice
If you don’t contact your home loan lender after you’ve received your payment notice, then you will receive a default notice, which will give you at least 30 days to catch up on those home loan repayments you’ve missed.
While it may sound like a threatening letter, at this stage, you can still talk to your lender about the options available, such as the hardship variations we mentioned above of increasing the term of the loan or having a pause on your repayments for an agreed timeframe.
Now’s also a good time to think about the ways you can make some extra coin. We’ve all heard the saying “One man’s trash is another man’s treasure”, so if you have any antique items, high fashion clothes or musical instruments, cash in and sell them online on trading websites like eBay and Gumtree. You might be surprised by the amount you can make on antique/specialist items.
If you are behind on your repayments due to a job loss and are finding it hard to get a full time job, have a look for other casual jobs that are available. Whether it’s working in retail/cafes/bar or going for a customer service role for a stint, there are plenty of jobs you can do that will bring in some extra income to help you through this financially tough time.
And last but not least, consider renting out some of the extra rooms in your home to boarders or you could make even more money by listing your home on holiday websites like AirBnB and stay with a friend or relative until you’re back in the black.
You’ll be issued a vacate notice and be evicted
According to moneyhelp.org.au after you’ve been served a default notice the timeframe the lender takes to sell your home could be as soon as after the 30 day period.
After this the next step your lender is likely to take is serve you with a ‘Statement of Claim’ for the debt or for the repossession of your home. Once this has occurred and you still can’t service your loan, then your bank is likely to apply for a writ, which once approved means they can seize your home to sell and recover their loss.
The last stage is your bank will organise for your locks to be changed and you will be evicted from the property.
As you can see, it’s best to contact your lender as soon as you get behind on your repayments, to take the necessary steps that could save your home. If things are really dire, you are better off selling your home than ignoring the problem and facing eviction.
Ways to protect yourself from default
Life is full of unexpected events, so here are some ways you can protect yourself in the future from getting behind on your repayments:
- Make extra repayments. Whenever you come into extra cash put it straight towards your home loan, as this will mean you will be ahead of your repayments and can draw on that amount to cover your regular repayments in financially tight times.
- Ensure you can afford a rate rise. Losing a job or becoming ill isn’t the only reasons you could get behind on your repayments, as a rate rise from your bank could also push you over your budget. So make sure you have a buffer in place in case the RBA changes the official cash rate and your lender decides to follow suit. You can use Mozo’s rate change calculator to get an idea of how your repayments could change.
- Stash your cash in an offset account. It’s wise to sign up with a home loan that comes with a 100% offset account facility, which will mean any money that is in the account will be offset against the home loan amount and bring down the amount of interest you pay each month. For example, if you have $10,000 in an offset account and have a home loan of $300,000, you would only be charged interest on $290,000.
- 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.