A mortgage default can affect your credit file and future borrowing options and, if unresolved, may lead to legal enforcement.
Repossession is generally a last resort, and lenders will usually try to recover arrears first through notices, hardship support or repayment arrangements.
If a repossessed property sells for less than the amount owing, you may still need to repay the remaining shortfall debt.
It may still be possible to get a home loan after a mortgage default, but lender options may be fewer and rates and fees may be higher.
If you are struggling with repayments, speaking to your lender or an Aussie Broker early may help you explore hardship support, restructuring or refinancing options.
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?
A mortgage default generally occurs when repayments are overdue and not brought up to date within required timeframes.
A lender may treat your loan as being in default when repayments are significantly overdue, often around 90 days. A credit file default is generally recorded after 60 days overdue and required notices.
A lender may issue a default notice, and you will usually have 30 days to remedy the arrears.
A home loan default will be recorded in your credit file and can impact your ability to refinance and borrow money. A default listing generally remains on your credit report for around 5 years.
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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. Repayment history information may show missed or late payments, depending on how overdue the repayment is.
As mentioned above, it takes longer for a mortgage default to occur. A default notice may be issued after ongoing arrears (it can be issued once a repayment is overdue, although some lenders may wait until the loan is 90 days or more in arrears), depending on the lender and loan contract.
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.
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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:
Altering your mortgage repayments
Delaying enforcement action (the statutory notice that requires you to remedy the situation through specific steps)
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 may have a clearout recorded on your credit file.
A clearout may indicate the lender has been unable to contact you regarding the debt. A clearout listing may remain on your credit report for up to 7 years.
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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:
Charge additional fees or interest in line with your loan contract
Charge other late fees
Seek possession of the property and, if required, sell it to recover the debt
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Can a bank repossess your home after a mortgage default?
Yes, but repossession is generally a last resort.
If you miss home loan repayments, your lender will usually try to resolve the arrears first. That may include reminders, default notices and hardship discussions. Repossession typically becomes a risk only when the default is ongoing and no workable arrangement can be reached.
If you are under financial pressure, speaking to your lender early may give you more options. These may include a hardship arrangement, reduced repayments for a set period, a repayment pause or deferral and/or another agreed repayment plan.
In this stage, acting early may help stop the default from escalating.
There is usually a formal legal process before repossession.
Repossession does not usually happen straight away. If the arrears are not resolved, the lender may start a formal enforcement process. This generally involves notices, timeframes and legal steps before the property can be taken and sold. That process may include the following:
A default notice setting out what is overdue and when it must be paid.
Further formal notices being issued if the arrears remain unpaid.
Court action to recover the debt or seek possession.
A court order allowing the lender to repossess the property.
Once legal enforcement starts, your options may narrow, and extra costs may be added.
If the property is repossessed, it may be sold to recover the debt.
If the lender obtains the right to take possession, the property may be sold to recover what is owed. The sale proceeds are generally used to cover the remaining loan balance, unpaid interest, enforcement and legal costs and/or any other fees or charges under the loan contract.
The sale of the property does not always clear the full debt.
You may still owe money if the sale price falls short.
If the property sells for less than the total amount owing, you may still need to repay the difference. This is commonly referred to as a shortfall debt. A shortfall can happen when the property sells for less than expected, the loan balance is still high and/or legal, recovery and sale costs reduce the amount left over. Even after the home is sold, you may still be required to repay any remaining shortfall.
Remember, a bank may repossess your home after mortgage default, but it is generally a last resort. The earlier you act, the greater your chance of exploring hardship support, repayment arrangements or other options before the situation becomes more serious.
Can you get a home loan after a mortgage default?
Yes, it may still be possible to get a home loan after a mortgage default, but it is usually more difficult. Borrowers with a past default may face fewer lender options, higher rates and closer scrutiny of their current finances.
A past default does not always disqualify you. Some borrowers may still qualify, particularly if the default is older, has been paid, and their financial position has improved. But approval is not guaranteed, and lender criteria vary.
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Some borrowers may consider specialist lenders.
If a mainstream lender will not accept a past default, some borrowers may need to look at specialist lenders. These lenders may consider more complex credit histories and look more closely at the circumstances behind the default, not just the credit report entry.
A major bank may have a stricter credit policy, while a specialist lender could potentially offer a path forward. But these loans are often a short-term solution rather than the end goal.
Expect higher rates and fees.
A past default can signal a higher risk to a lender. That often means a home loan after a mortgage default may come with a higher interest rate and, in some cases, higher fees than a standard loan.
Higher costs can affect your repayments, reduce borrowing power and make refinancing later an important step once your credit profile improves.
You may need to show a stronger financial position.
Lenders will usually look beyond the default itself. They will also assess whether you can afford the new loan now and whether the issues behind the default have been resolved. You may need to show:
Stable employment or reliable self-employed income
A clear recent repayment record
Lower overall debt levels
Genuine savings or a stronger deposit
Evidence that the circumstances behind the default have changed
The stronger your current position, the easier it may be to show that the default reflects past hardship rather than ongoing risk.
Waiting periods can apply.
Time can make a difference after a default. Some lenders may want to see that the default has been paid and that you have rebuilt a stronger repayment history before they will consider an application. In practice, that may mean waiting until the default is paid, building a stronger recent repayment record and/ or allowing more time to pass since the default was recorded.
There is no single waiting period that applies to every borrower. Policies differ by lender.
A mortgage default does not always mean you can never borrow again. But it may narrow your options, increase your costs and raise the bar on income, savings and credit strength. Rebuilding your position early can make a real difference.
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 may consolidate debts into your home loan, which could change your repayment structure and total interest costs
Home loan interest rates are often lower than some other forms of debt, but this depends on the loan and borrower profile.
You might also be interested in: Benefits of consolidating personal debt
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.
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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 explore options which could better suit your needs and help potentially help reduce the overall 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, which may reduce your regular repayments but increase total interest over time. 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 our mortgage repayments calculator.
Get clear support if you’re under mortgage stress.
A mortgage default can have serious consequences, from damage to your credit file through to legal action and, in some cases, repossession. But it does not always mean the situation is beyond repair. Acting early, staying in contact with your lender and understanding your options may help you reduce the impact and avoid the issue becoming more serious.
If you are already behind on repayments or worried you may fall behind soon, the most important step is to act quickly. Hardship support, repayment changes, loan restructuring or refinancing may be available, depending on your circumstances and lender criteria.
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.
An Aussie Broker can help you review your current loan, understand whether hardship support, restructuring or refinancing may be worth exploring and compare lenders based on your circumstances. They can also help you weigh up the impact on repayments, loan term and total interest and guide you through the next steps with clearer, more practical support.