Taking on a mortgage is a big responsibility spread over many years. It is impossible to predict how our finances will progress over this time with unforeseeable events like a loss of employment or health issues always a possibility.
While you can be financially prepared for emergency situations such as these, prolonged periods of hardship can lead to trouble in keeping up with mortgage repayments. This is where some people find they have no choice but to default on a mortgage repayment. But what does this mean and how can it be avoided?
What’s a mortgage default?
A mortgage default is typically when a borrower is 90 days or more behind in making a repayment on their home loan.
The fee charged for missing a mortgage payment is not going to send you to the cleaners but it’s still costly and will not assist your already tight financial situation. Fees range from about $9 up to around $195, depending on who you borrow with.
But your main concern is not the mortgage fee, it’s the interest that will add up and put you further behind on paying off your home loan.
If you skip a mortgage repayment once each year over the life of your loan, you could be extending your mortgage by more than two years, which will cost borrowers significantly more in the long-term. For an average 25-year home loan of $300,000 and with a rate of 7 percent, you’ll also be adding around $33,000 in interest and late fees.
What are the consequences of defaulting on your mortgage?
If you do find yourself defaulting on a mortgage payment, then there are several consequences you should be aware of. The first two are the financial implications outlined above; you will be liable to pay a fee and the overall interest charged on your loan will increase.
Secondly, a default on a payment will be listed on your credit file which will in turn affect your credit rating. This could have negative implications on further applications for loans and credit in the future.
The final and most severe consequence of defaulting on a mortgage repayment comes if the problem is continual. If you are consistently unable to pay your mortgage repayments, even after seeking financial assistance, the bank will be forced to sell your property to recover the debt.
How can I avoid defaulting on my loan?
Of course, no one takes out a mortgage expecting to default on their repayments but there are some preventative steps you can take so that you are prepared if you do come into a financially difficult time.
The first thing to do is, before you take out your loan, make sure you thoroughly research how much you can afford to borrow and be as realistic as possible.
Looking for a mortgage that offers a repayment holiday feature or an interest only period is another way of keeping your options open if you do run into trouble later on.
Compare interest only home loans:
Once you have determined this and taken out a loan, build up an emergency fund of cash that can be used to make home loan repayments should you lose your normal income for a period of time. Having a fund that will ideally cover three months of payment gives you a good buffer to get your bearings if you are faced with an unforeseen complication.
If you already have your loan and are currently at risk of defaulting, you should contact your lender to let them know that you are experiencing a difficult financial period and they will be able to assist you in figuring out the best course of action. Do not put this off out of fear and embarrassment, contacting your lender and being proactive is one of the best moves you can make.
What can I do after the fact?
If you have already defaulted on your loan repayment, then you need to swing into action fast. Call your lender to discuss your situation and what you can do going forward. Avoiding the problem will only make it worse in these circumstances.
If you have missed several repayments and your bank has made formal contact with a statement of claim or summons, then it is time to seek legal advice. Free legal advice is available in every state and territory and more details can be found at ASIC’s Money Smart website.