Mortgage default: what is it, what happens and how can you avoid it?

Find out what defaulting on a home loan means, how it differs from a late payment and how to prevent it

04 August 2022|4 minute read

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Mortgage defaults happen, and they’re more common when you’re experiencing difficult personal or financial circumstances.

If you’re facing a tough financial situation and have defaulted on your mortgage or think you might in the future, it’s good to be informed.

In this article we’ll explain what a default is, what happens, the consequences and how to avoid defaulting.

What is a mortgage default?

When you default on your mortgage, it means that you have missed a home loan repayment and have failed to correct this issue quickly.

Many lenders consider a mortgage to be in default if you’re 90 days late on repayments. However, some credit reporting agencies like Equifax will record a default in your credit file after 60 days of being behind on a repayment.1

You will be sent a default notice and will usually have 30 days to amend the default by repaying the amount you’ve missed and any late fees.

A home loan default will be recorded in your credit file and can impact your ability to refinance and borrow money. It will likely remain on your credit report for 5 years.

What is the difference between a late payment and a default?

A late payment has varying consequences depending on the lateness. Many lenders have a ‘grace period’ between 7 and 14 days, but after this you could be subject to a late fee.

Additionally, being more than 14 days late on a repayment will be recorded in your credit file as a ‘late payment’.

As mentioned above, it takes longer for a mortgage default to occur. A mortgage default notice will be issued after 60-90 days – depending on the lender and credit reporting agency.

To get clarity on the consequences of late payments and default timelines, it’s worthwhile speaking to your lender.

Another difference between a late payment and a default is that a default is a much more serious infraction.

A late payment recorded in your credit report could be a red flag for lenders reviewing future credit applications. But, it doesn’t have as substantial an effect on your credit score as a default does.

What happens if you default on your mortgage?

If you default on your mortgage, you will be sent a default notice asking you to rectify the default by repaying your missed payment(s) and any related late fees.

You’ll likely have about 30 days to respond to the default notice. If you are able to repay what you owe, do this quickly. If you are unable to repay the defaulted debt, you still have options.

You may be able to ask your lender to provide you with a different option:

  1. Altering your mortgage repayments

  2. Delaying enforcement action (the statutory notice that requires you to remedy the situation through specific steps)

  3. Options 1 and 2 at the same time.

It’s essential that you keep in close contact with your lender after being sent a default notice. If your lender tries to contact you multiple times in this kind of situation and is unable to get in touch, you could have a clearout recorded on your credit file.

Clearouts indicate that you have no intention of repaying the debt and are neglecting your mortgage obligations. They stay on your credit report for 7 years.

What are the consequences of a mortgage default?

One of the obvious consequences of defaulting on your mortgage is the impact this will have on your credit score. You may experience difficulty trying to refinance or apply for new loans and credit cards in the future.

It’s not impossible to improve your credit score, however, but it can take time.

If you don’t remedy your mortgage default, your lender may have the power to:

  1. Charge debt recovery fees

  2. Charge interest at a higher default rate

  3. Charge other late fees

  4. Potentially repossess your property

  5. Potentially sell your property.

The non-financial impacts of a mortgage default

In addition to the possible consequences listed above, experiencing this level of financial stress can place a heavy burden on your physical and mental health. Your interpersonal relationships may be damaged too.

Don’t be afraid to ask for help. A number of organisations offer free financial counselling to help guide you towards your next steps. The National Debt Helpline takes calls between 9:30am and 4:30pm Monday to Friday on 1800 007 007.

For 24/7 advice and support for yourself or a loved one experiencing mental health struggles, contact Beyond Blue on 1300 22 4636.

How to avoid a mortgage default

Prevention is always the best way to avoid risking mortgage default. Here are some tips to avoid a mortgage default:

1. Struggling with repayments? Speak to your lender

If you’re worried about not being able to afford your mortgage repayments, speak to your lender’s hardship team as soon as possible.

They will be able to walk you through your options, and may be able to temporarily pause your repayments or provide you with another way to get back on your feet financially.

2. Set up direct debit mortgage repayments

If your issue is forgetting to make repayments, or that you’re bad with budget prioritisation, it may be wise to set up direct debit repayments.

This way you won’t miss a repayment as it’ll be withdrawn automatically from your account each month. Consider aligning it with when you get paid to get that big expense out of the way.

3. Look into debt consolidation

Having multiple kinds of debt on top of your mortgage, like a car loan, personal loan and credit card, can be exhausting and make payments hard to manage.

By consolidating your debt, you bring together your other debts under your home loan. So, you’ll end up making a single monthly payment that is charged interest at your home loan interest rate. Typically, home loan interest rates are much lower than other debt interest rates.

4. Access the funds in your offset account or redraw facility

If you have funds in an offset account, consider withdrawing some of these to help make your repayments.

Similarly, if you’ve made extra repayments in the past, these might be pooled in a redraw facility.

As with an offset account, any funds in a redraw facility can be withdrawn and spent however you like.

If you’re experiencing mortgage stress, these extra repayments could go towards relieving some financial pressure.

Remember that if you tap into funds in your redraw facility and offset account, you may increase the term of your loan.

5. Review your home loan

It’s a good idea to have your local Aussie Broker periodically review your home loan to make sure it still aligns with your goals and needs. They may be able to help you refinance to a loan that you can more easily manage.

For example, your broker could potentially help you secure a lower home loan interest rate which would reduce the cost of your mortgage.

They can negotiate with your existing lender on your behalf or help you refinance to a new loan with a different lender if they think you could get a better deal elsewhere.

Alternatively, your Aussie Broker may be able to help you restructure your loan. For example, you may be able to extend your loan term to reduce your monthly repayments. Bear in mind that the longer your home loan repayment term, the more interest you’ll pay in total.

To see what your repayments would be like with a lower interest rate, try out Aussie’s Mortgage Repayments Calculator.

If you’d like to learn more about your home loan options, book an appointment with an Aussie Broker today.

Book a chat with an Aussie Broker

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