It’s very common for people to be worried about their financial security. In fact, some individuals find themselves in the position where they frequently worry about making their mortgage repayments.
But have you ever paused and wondered if the reverse of this situation were to occur. In other words, what would happen if your mortgage company went bankrupt?
What happens to your home loan if a mortgage lender goes bust?
Before we answer that question, you’d perhaps find it comforting to know that it’s unusual for Australian mortgage companies to go bankrupt. However, if your mortgage lender went bust and it was classified as an ADI, you needn’t worry, as it’s likely it would be taken on by another lender.
ADIs, otherwise known as Authorised Deposit-taking Institutions, refer to banks, building societies, credit unions and other financial institutions that are licensed to accept and hold deposits of money from the general public. Not every home loan lender is an ADI, so it’s worth checking before you apply if this is something important in your mortgage comparison.
So, if a mortgage lender goes bankrupt and they are an ADI, your loan is covered by the Financial Claims Scheme (FCS). The Australian government guarantees deposits up to $250,000 under ADIs. The same guarantee also protects your savings and deposits with banks up to a limit of $250,000.
Generally speaking, your home loan will most likely be transferred to a new bank that chooses to absorb the bankrupt mortgage lender. The net effect is that you get a new lender and continue making your mortgage repayments as before, albeit to the new lender.
It is also unlikely for the new lender to change the terms of the agreement. However, the interest rate could move up or down depending on the terms set by the new lender. You also have the option to refinance your home loan if you’re not satisfied with the new rate on your home loan.
If you’re worried about losing your home if your lender goes bankrupt, don’t fret. Lenders cannot call up your loan or ask you to pay it down early unless you’re in default.
However, regarding the bells and whistles on your home loan, you might find your redraw facility restricted or waived. While you won’t lose out on the extra repayments you’ve made, the extra funds you paid into your loan could become inaccessible, at least for some time. On the other hand, if you’ve been using an offset account linked to your mortgage, you may be covered by the FCS as well.