What happens when the bank repossses your house
It's the worst-case scenario: you're unable to continue making your mortgage repayments so your lender sells your home to cover the outstanding debt.
Fortunately the vast majority of homeowners won't ever find themselves in this situation, but with interest rates expected to rise further and the current cost of living crisis going nowhere fast, it might become a reality for more people in the coming months.
An estimated 1,013,000 mortgage holders were already at risk of mortgage stress in the three months to October, Roy Morgan research released earlier this week found, while 619,000 were 'extremely' at risk - numbers which are expected to continue to rise if interest rates keep heading north.
Deb Shroot, a financial counsellor and industry liaison at Financial Counselling Australia, says that she's witnessed an uptick in the number of people feeling anxious about keeping up with their repayments.
"While we haven't seen a significant increase in calls related to mortgage stress, there's certainly more people calling about their ability to make their mortgage repayments. And a lot of people calling are expressing anxiety about meeting those payments in the future because they can see that they're not going to have enough money to make them."
So what is the actual process involved if you were to default on your loan, and if you are starting to struggle with your repayments, what can you do before things get worse?
Missing a payment
While missing one of your regular mortgage repayments won't be ideal, it's by no means the end of the world. Plenty of people do it by mistake, though depending on how long it takes to fix it, you may be charged a late payment fee and end up with the missed payment on your credit report.
If you miss a payment because you don't have the money to cover it, most lenders recommend contacting them as soon as possible and being upfront about your situation because there are likely options available, including financial hardship support.
"Don't be afraid to ask for hardship assistance from your bank," says Tom Abourizk, a senior policy officer at the Consumer Action Law Centre.
"A long-term deferral of a payment or a waiver of one month's payment might make a big difference, and it's probably in the bank's interest to strongly consider that at the very least."
The default and repossession process
If you can't rectify one or more missed payments, that's when the formal default process could start to kick into gear explains Abourizk.
"The first step in terms of the legal process is that a default notice will be issued. Default notices have to quite clearly set out that you're in default of your home loan, how you can fix it, what can happen if you fail to fix it and also provide a timeline for how long you have to fix it - I believe the standard is normally 30 days that they must provide at a minimum."
At this point, Abourizk recommends that anyone who receives a default notice considers lodging a dispute with the Australian Financial Complaints Authority (AFCA) - not only if they have any concerns, but because the repossession process can't go ahead until AFCA's assessed the dispute.
"The notice can be disputed with AFCA which would mean that an ombudsman would go through a process of exploring the options between them [the homeowner] and the bank to see if there is a way for them to retain their house, or at the very least, double-check that the bank is doing everything legally and reasonably."
Failing an AFCA resolution or a remedy for the default, that's when the lender can begin the process of repossessing the property.
"To start repossession proceedings banks generally need to go to court, so that would require formal written notice. The person who receives that notice then has ten days to file an appearance, and they then have 30 days to file a defense if they want to do that," Abourizk says.
"So there does have to be a court hearing, normally in the Supreme Court, but if that happens and the writ for repossession is granted, the bank can then go to the sheriff. The sheriff would normally go through a two-step process where they notify the person that they have received the writ and will give them a date that they need to vacate by."
Dealing with mortgage stress
That's the process if worst comes to worst, but it's also worth taking a step back, because there are actions that homeowners feeling the strain of higher repayments can take, starting with an assessment of their financial position.
"Interest rates are expected to rise further, so the first thing I would do is work out how much you can afford and the maximum you can afford if rates do go up. Knowing what that amount is can be really useful so that you can quantify and track how you are, versus what you need to pay," Shroot says.
"You could also start either paying that extra amount or putting the excess aside so that you do have a bit of a buffer when things do get a bit tight. And if your plan includes refinancing, don't wait until you are unable to make your payments before looking at doing it."
Though mortgage repayments may be the largest cost for homeowners, Shroot also reinforces the point that other home ownership expenses shouldn't be neglected.
"It's not just your mortgage that's really important to maintain payments on either, but also your strata and rate payments. Strata and rates are bound by either by-laws or legislation, so if you fall behind on these there's not the same flexibility of hardship that's available with commercial loans."
A home loan isn't necessarily going to be the only debt some households are paying off either, so how should a mortgage be prioritised?
"It depends on the individual, because everyone's finance ecosystems and value systems are different," Shroot says.
"Housing is a need, however, owning your house is not the only option. For example, someone's values might be that they want to continue sending their child to a private school, so they'll prioritize school fees and they might sell up and rent, whereas someone else would put their kids in a public school."
Seeking financial help
One bright spot for anyone struggling with mortgage stress is that there is support available in the form of financial counsellors who can provide advice which caters to an individuals' values and priorities.
"The options available are going to depend on a number of different factors, which include how much equity you have in your home, how big your repayments are and whether you've previously accessed hardship before. Also, if you have other debts, that's going to impact the options are available to you, so there's really no one-size-fits-all type of solution," says Shroot.
"That's why it's really important to reach out to professionals such as financial counsellors who can provide free, independent and confidential advice to help you work through the best options and the next steps forwards for your situation.
"There might also be flow-on consequences from someone's decisions, so we'll be able to discuss the consequences of choosing to pay your mortgage over your rates, or the other way around, and the pros and cons of doing that."
To speak to a financial counsellor you can call the National Debt Helpline on 1800 007 007, or you can find a counsellor in your local area or to fit your specific needs by visiting the National Debt Helpline's find a financial counsellor portal.
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