What happens if you can’t pay your home loan?

Fact Checked
Updated 13/06/2024
What happens if you can’t pay your home loan?

Time to read : 5 Minutes

Being unable to meet your mortgage repayments may be a worst case scenario you think will never happen to you, but unforeseen financial hardships can make it an unfortunate reality.

These include:

  • job loss

  • illness

  • separation or divorce.

According to CoreLogic, mortgage arrears rates are rising. It was at 1.0% in Q3 2022 and rose to 1.6% in the 2024 March quarter.

Understanding the implications of missing your mortgage repayments and the steps you can take to mitigate your situation can help if you find yourself struggling. 

What are the immediate consequences of missing a mortgage repayment?

Once you miss a mortgage repayment, there’s a series of actions that your lender will follow: 

A letter of demand: when you miss your first repayment, your lender will send out an alert. This warns you of the next steps and usually provides contact information so you can discuss your options with your lender. 

Late fees: missed repayments usually result in late fees, but there is typically a grace period. The amount your lenders will charge should be outlined in your mortgage agreement. This fee will be added to your next mortgage repayment, which can compound the issue if you’re struggling financially. 

Your credit score will suffer: once you’re late enough on your repayment to receive a late fee, (usually around 14 days), your lender will report it. Repayment history is a major factor in how your credit score is determined, so a recorded missed payment will mean your credit is likely to suffer. This can have a knock on effect for your financial future.

A default notice: if you’ve failed to pay your mortgage and any late fees for approximately 90 days you will receive a default notice. Typically, your lender gives you 30 days to settle your outstanding payments before foreclosure proceedings are initiated. Then they will begin the steps to recover their debt. Here again, your lender will outline your options, such as requesting a change to your loan or a pause on your repayments. 

From here, if you’re still unable to meet the conditions of your default notice and don’t enter into an alternative arrangement with your lender, they will begin legal proceedings against you. This include them filing a statement of claim against you in court, then applying to take possession of your home. If their application is approved, you will be formally evicted and the property will be sold to recover the lender’s debt. 

If there is any money leftover after your home is sold, you will receive it, but if the sale of the house doesn’t cover your mortgage debt, you will still owe money to your lender. If you can’t pay them back, they can bring a bankruptcy claim against you. 

What can you do if you can’t meet your mortgage repayments? 

The process following a missed mortgage repayment sounds pretty scary, but it’s a worst case scenario. If you’re experiencing financial hardship, there are options available to help you get back on your feet, and to stop you having to enter foreclosure. 

Firstly, it’s important to communicate with your lender. Don’t wait until you can’t afford to make a repayment before you speak with them, because you’ll be under pressure and less likely to be able to consider all your options calmly. 

Section 72: Hardship programs are mandatory

All lenders in Australia must conform to the National Credit Code. There’s a section in this code that helps you – because foreclosure is a last resort. 

According to section 72 of the National Credit Code, if you inform your lender that you are, or will be, unable to fulfill your credit obligations, your lender is required to work with you in adjusting your loan contract. 

There are required timeframes your lender must meet, and this process is watched closely by the Australian and Securities Investment Commission (ASIC).

Working with your lender’s hardship program can mean a temporarily pause or reduction in your repayments, or your lender may be able to change the conditions of your mortgage to reduce your repayments. Reaching out to them early also means a letter of demand won’t be the first communication you have with them about your missed payments, which can reduce the stress for you. 

Important Note: pausing your repayments temporarily (also known as a ‘repayment holiday’) does not relieve you of the obligations to make those repayments. Any skipped repayments are usually added on to your loan amount (plus accrued interest) so either your loan term is extended, or your repayments will be higher after your repayment holiday period is over.

If this is a short term problem, look at other areas where you can save money. Pausing other services, applying for financial hardship with utility providers, and cutting back where you can may buy you enough time to get back on your feet, and save you expensive late fees. 

There are a number of free services such as the government’s Moneysmart website, or the National Debt Helpline which can provide you with free financial advice and help you work out what your next steps should be. 

For longer term financial issues, consider a bigger change such as renegotiating the conditions of your loan or remortgaging your home. If you’ve previously been a good mortgagee, or you’re ahead on your mortgage, you may be in a good position to reduce your repayments or access sign up bonuses with another lender.

You can also look at switching to an interest-only loan for a time, or extending the length of your loan to decrease your repayments. 

If you do end up in a position where the only option is to sell your home, it’s usually better to do this on your terms than be forced into a foreclosure. Speak to an expert to work out your options and be clear about your budget.

Bottom line

  • Being unable to make your mortgage repayments is incredibly stressful, but there are options available to you. Many people experience financial hardship and it doesn’t need to be something you work through alone. 

  • Speak to your lender and other providers, take advantage of free resources, and put yourself in the best position to weather the storm. 

  • If you need to remortgage, the experts at Compare Club can help you find the best solution for you. 

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Financial Disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.