RateCity
The real cost of defaulting on your mortgage
May 26, 2011
Skipping a mortgage repayment once per year over the life of your home loan could extend your mortgage by two years and see you paying an extra $33,000 in interest and late fees. That's the cost of defaulting annually on an average 25-year, $300,000 home loan (based on a projected average interest rate of 7 percent).
It's a reality that many more Australians may be facing, given that mortgage defaults are on the rise, according the major banks.
Westpac Bank, which holds the largest slice of the mortgage market pie, recorded a 12 basis point increase in the number of defaults since September 2010. That's a 0.59 percent increase since September 2010 for the number of mortgage customers that are more than 90 days late on repayments.
ANZ reportedly also saw an increase in the number of borrowers who missed repayments in the past six months.
Damian Smith, chief executive of RateCity, said that missing a repayment will cost borrowers significantly more in the long-run.
"While the fee charged for missing a mortgage repayment is not generally a lot of money for most borrowers, you must remember that every time you skip a payment that month is added to your loan term," he said.
What the banks charge
The average mortgage "arrears administration fee" or late fee charged is $34 per month but it can be up to $195 per month. Of the big four banks, the average monthly arrears fee is $19, with Westpac the lowest at $9 per month. ANZ charges $20, although it does have some no-late fee loans, NAB charges $35 but also has some no-late fee options, while Commonwealth Bank ranges from $0 to $45 on its late fees.
"Missing a payment here and there can really add up, making it not worth the short reprieve," Smith said.
There are alternative measures that borrowers can take to avoid being hit with these unnecessary fees, extra interest, and the risk of repossession, Smith said.
"The first thing borrowers should do is be on top of their finances and budgets," Smith said.
"If you know you will be short of money next payment you should call your lender immediately. They can suggest several financial hardship options such as switching to a cheaper loan, a rate discount, extending your loan term of interest only repayments," he said.
"If you can't avoid missing a repayment, you should try to double your repayment the following month. And all borrowers should think about preparing for just in case of financial hardship down the track such as losing an income or higher interest rates."
One way to do this is to accelerate repayments each month. For instance, by adding just $50 per month to a $300,000 home loan, you could accumulate $600 in a year to be used as payment reprieve if you need it. By adding this amount extra each month over the life of the loan, you could also save more than $24,000 and reduce your loan by 18 months.
For further information or financial assistance for those under financial hardship, the Australian Financial Counselling and Credit Reform Association has information and contact details for local services across Australia.
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