Over the course of a 30-year mortgage, chances are borrowers will make a late repayment at some stage. Sometimes, it happens accidentally, whereas other times, it can be a sign that you’re struggling with your loan.
Luckily, making a late home loan repayment doesn’t automatically put you in trouble – although it’s still something to avoid.
In this article, we’ll look at how late you can make a mortgage repayment before facing the consequences and what to do if you get behind on repayments. We’ll also touch on what it means to default on your mortgage and how to avoid making late repayments.
How late can you be with a mortgage payment?
It can be easy to accidentally miss a repayment on your mortgage, which is why most lenders provide a grace period for late payments. However, after a certain number of days – typically between 7 and 15 days – they might charge you a late fee. This late fee is usually tacked onto your next home loan repayment.
If you’re more than 14 days late to make a repayment, it will likely be recorded as a ‘late payment’ in your credit report. While this infraction may not be as serious as a default, it can raise alarm bells to lenders reviewing your credit history in the future, especially if you’re a repeat offender.
It’s also worth noting that while you might not receive penalties for making slightly late repayments, your lender will start to take notice the more it happens. For example, if in the future you want to ask your lender to provide you with the lower interest rate new customers get, they might not be so willing to assist.
Can late payments impact your chances of getting a mortgage?
It can be easy to accidentally miss a mortgage repayment every once in a while, but as long as you settle up right away, it shouldn’t affect your credit score. However, if you let your repayments continually get away from you, your lender will start to notice and it could become an issue for you in the future.
But when it comes to missed payments, it’s not just your home loan repayments that matter. If you’re consistently late paying phone bills, utilities, credit cards and personal loans, it can impact your credit score.
Your credit score is one of the main elements lenders consider when assessing loan applications. A lower credit score signals to lenders that you could be a higher-risk borrower, potentially leading to higher interest rates or even a rejection of your application.
Missed payments can also affect your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income. A low DTI ratio indicates that you can comfortably manage your mortgage repayments, which is a green flag for lenders. Missed payments may indicate financial instability, increasing your DTI and making you less attractive to lenders.
What to do if you’re getting behind on repayments
If you’re struggling to manage your mortgage, it’s best to reach out to your lender sooner rather than later. The sooner you notify your lender’s hardship team about your difficulty making mortgage repayments, the more help they will be able to offer.
Depending on your circumstances, your lender might offer:
Help with restructuring your home loan (EG. lengthening the loan repayment term)
Temporarily providing you with a lower interest rate
Temporarily suspending your repayments
When does a late payment become a mortgage default?
In short, it depends on the lender. Most lenders won’t formally consider your mortgage to be in default until you’re at least 90 days behind on repayments. But that’s not to say that’s a standard benchmark across all institutions. In fact, some credit reporting agencies, like Equifax, consider a default to occur after just 60 days of not making repayments and will record it in your credit file.
Once you’ve been issued a default notice, you’ll usually have 30 days to fix your default by repaying the amount you’ve missed (plus late fees if you’ve been charged).
How does a mortgage default impact your credit score?
A default on your home loan is recorded in your credit report and will negatively impact your credit score. Defaults remain on your credit report for 5 years and can be an obstacle for borrowers looking to refinance their mortgage or apply for new loans.
While a borrower with home loan defaults indicates a higher level of risk for lenders, there are ways to improve your credit score. For example, you can:
Reduce your credit card limit or, better yet, cancel your credit cards completely,
Limit the number of applications you make for credit products, and
Pay your bills on time, including rent or mortgage payments, utilities, credit cards and other loans.
How to handle a mortgage default
If worst comes to worst and you receive a default notice, it’s essential to stay in close communication with your lender. If your lender is unable to contact you after issuing a default notice, you could have a clearout recorded on your credit report.
Clearouts stay in your credit file for 7 years, so they’re definitely worth avoiding. Essentially, a clearout suggests that you’re actively trying to avoid your home loan obligations and don’t plan on repaying the debt. This is obviously a huge red flag for potential lenders.
If you’re unable to repay the defaulted debt that you owe within the specified time period, you can ask your lender to provide you with an alternative option such as:
Ask the lender to alter your mortgage repayments,
Ask the lender to delay enforcement action (this is a statutory notice requiring you to take specific steps to remedy the situation), or
Both options 1 and 2 simultaneously.
Tips to avoid making late repayments
Regular late payments on your mortgage can quickly snowball into an even bigger problem. To help you avoid making late payments, we’ve pulled together a few helpful tips.
1. Assess your budget
Before reaching out to your bank, take stock of your current financial situation by reviewing your budget. This can help you to understand what you can afford to pay based on your circumstances. This information will also be useful for your lender when considering possible solutions to help you with your mortgage.
2. Speak to your lender if you’re struggling to afford your mortgage repayments
If you don’t think you’ll be able to afford your home loan repayments, it’s important to get in touch with your lender’s hardship team as soon as possible. They have 21-30 days to get back to you. During this time, they’ll review your situation and provide you with options to help alleviate your mortgage stress, like temporarily suspending your repayments or giving you a lower interest rate.
This could provide you with valuable time to improve your financial situation and figure out the best course of action based on your situation. It’s also worth noting that a formal financial hardship arrangement with your lender won’t impact your credit score. While it will appear on your file, so long as you stay on top of your repayments, the listing will be deleted after 12 months.
3. Consolidate your debt
Balancing multiple debts, like a car loan, personal loan or credit card debt, on top of your mortgage can leave you feeling overwhelmed. It can be challenging to manage multiple debt repayments, which can make it easy to miss a payment accidentally.
Debt consolidation allows you to roll your other debts under your home loan. That way, you only have to worry about a single repayment that’s charged at your home loan interest rate, which is typically much lower than the rate charged on other debts.
4. Set up direct debit payments
It’s difficult to accidentally miss a repayment if the money comes out of your account automatically each month. By setting up a direct debit transaction, you don’t have to remember payment due dates. You can even arrange for your direct debit to align with your payday.
5. Get help if you need it
Unfortunately, it’s not uncommon for borrowers to experience financial difficulties at some point. That said, it can be helpful to know there are several support services available if you need help managing debt, including:
The National Debt Helpline provides access to free financial counsellors,
Mob Strong Debt Help provides free assistance to Aboriginal and Torres Strait Islander peoples,
Way Forward is a charity that offers help to those dealing with financial hardship,
Beyond Blue offers mental health or emotional support.
