What happens if I fall behind on my mortgage repayments?
It’s every investor’s worst nightmare – falling into the trap of missed mortgage payments, with the threat of the bank taking back all that you’ve worked so hard for. But what should you do if this nightmare becomes your reality?
What is a mortgage default?
First things first: being in default on a mortgage refers to having missed a mortgage repayment by a set period of time, typically 90 days or more. You are in default on your mortgage when you are in arrears, meaning there are outstanding repayments on it.
First steps after missing a mortgage repayment
When you first miss a payment, your lender will be in touch with you, via letter or phone, to inform you. They will then follow this with a default notice – giving you a minimum of 30 days to rectify the situation. If you have the funds available, you can choose to pay the outstanding amount owed in addition to your usual repayment amount – as well as any missed payment fees that your lender may impose.
As a result of this, you will typically incur a missed repayment fee from your lender – from as little as $9 up to as much as $195, according to mortgage comparison website RateCity.
If you do this, then the matter will be closed, and your lender will have no further options to seek recompense for the missed payment.
This is also your opportunity to get in contact with your lender and negotiate new terms on the loan to alleviate short-term mortgage stress. These are typically labelled as a hardship variation, and might involve reducing the mortgage repayments for a period of time, or delaying your repayments.
This might be an ideal option if you find yourself between employers, or an unexpected emergency expense has arisen.
Should I consider selling my properties?
You might have managed to negotiate new terms on your loan, or found the extra funds to make up for your missed payment. But a mortgage default notice might be a good opportunity to start considering whether your portfolio is structured in the correct way to fit in with your financial circumstances.
A property investment should be a way of generating wealth first and foremost – be it in terms of long-term capital growth or cash flow. It should not be something that cripples your personal finances and results in copious amounts of stress.
It’s also important to consider that your hard work paying off a mortgage will mean nothing should your property be repossessed by a lender, and you will miss out on any future growth (one of the primary advantages of investment).
If you're finding yourself consistently having issues meeting your mortgage repayments, it might be time to think about selling your investment, and turning to a property that is more appropriate to your current financial situation.
It may also be time to consult with a professional, who can advise you on a better structure for your investment portfolio and finances.
You might be tempted to increase your tenant's rent to meet the shortfall you're having on your mortgage repayments. However, this can be a risky strategy, and it is important to consider how your current rental amount stacks up with the rest of the local market before making any move. After all, it's going to be far harder to meet your repayments if your tenant disagrees with the rental increase, vacates and you can't find a new tenant!
What happens next?
If you're unable to make up your repayments, the process tends to follow the steps outlined below. The lender can seize your investment property in response to you falling behind on your mortgage repayments, but they must follow the prescribed process in order to do so. If you have multiple properties, with separate lenders, and you’re in default on all of these loans, the process will be repeated for each property/loan.
1. You’ll be issued with a statement of claim. This is also referred to as a summons, and outlines the lender’s claim for the debt outstanding or the repossession of your home. It is a court document that will outline why the plaintiff (the lender) is making the claim. You have a fixed number of days from the date the statement of claim is served to file a defence or dispute. A defence will state that you deny owing all or part of the money the lender has claimed you owe them.
2. This will then be heard by the relevant court. If you file a defence and lose, or you fail to file a defence, the lender will receive a court judgement giving them the go-ahead to apply for a writ to take possession of your home.
3. Once the lender is successful in applying for the writ, you will receive a letter from the sheriff, advising when they will come to change the locks on your property. This may be referred to as a Notice to Vacate.
4. Once this has occurred the sheriff will physically attend your investment property and change the locks – the eviction. You can still take steps to repay the full amount left owing, and any additional enforcement expenses asked for by your lender, for a period of time after this eviction takes place (days specific to each jurisdiction).
5. Once this period has lapsed, the lender will take steps to list your property on the market. The lender will take steps to sell the property at the best price achievable, but if the property’s sale price is less than the amount left owing on the mortgage, the borrower will still remain liable for these costs – meaning other assets may be at risk of repossession.
Rights and responsibilities
It is important to remember that both you and your lender have clear rights and responsibilities set out in the law when it comes to mortgage defaults, including prescribed periods of time for notices and options to repay the outstanding debt. Make sure that you familiarise yourself with these to ensure that you don’t miss out on the opportunity to save your investment property from repossession. The ASIC MoneySmart website is a good place to start, as well as free legal advice resources available in each state. In addition to this, you may wish to engage a legal specialist to assist during the process.