In this report, we explain a range of options available if you’re experiencing mortgage difficulties. The option (or mix of options) that's best for you will depend on your personal situation and the degree of financial difficulty you’re experiencing. We also tell you about dodgy solutions to avoid, explain where to get help, and give links to other useful information.
Mortgage stress is generally defined as having to pay more than 30% of after-tax income on housing loan repayments. In severe cases, mortgage stress can lead to missed repayments and repossession. If this describes you, here are some options for coping with the situation.
Contact your lender and negotiate
If you’re really struggling and likely to default on a mortgage payment, your first priority should be to contact your lender and negotiate an affordable repayment arrangement. Avoid a situation where your lender repossesses the house and sells it. Mortgagee sales are often sold at well below market value.
As soon as you get a default notice you need to act, as the lender can repossess your house within a very short period. Be honest and explain what the problem is. Lenders who are members of the Code of Banking Practice or the industry body Mortgage and Finance Association are obliged to explain your options and what temporary relief or assistance might be available.
The Uniform Consumer Credit Code (UCCC) allows those in temporary difficulty to extend their loan term to reduce regular repayments, and to postpone the date when payments are due.
The Consumer Credit Legal Centre NSW has a series of factsheets covering the hardship provisions and the Consumer, Trader and Tenancy Tribunal (CTTT). For other states, contact a financial counsellor for advice.
If the lender refuses you a hardship variation, you can apply to have the matter considered by the relevant tribunal or court in your state. You could also complain to the lender’s External Dispute Resolution Scheme, or if you live in NSW, the CTTT.
You may also be able to negotiate with your lender for other changes to your loan. For example, a loan repayment 'holiday', accessing equity that you’ve built up in your home, restructuring your loan, or refinancing (see below).
Consumer lawyers say many people don’t know about their right to a hardship variation and the law doesn’t require lenders to explain it. "From our experience borrowers are generally not aware of their right to make a hardship application and we see many tragic situations where, had they been aware, the borrowers could have avoided an improvident refinance and eventual loss of their home," says Legal Aid NSW. It strongly supports a recommendation made in a 1999 review of the Code, that borrowers should be advised of the right to make a hardship application when they are sent default notices.
Should you withdraw super?
Hardship provisions allow for early withdrawal of super by people who are in serious financial difficulty. There’s been a dramatic increase in withdrawals for this purpose – $175 million in 2007, a 130% increase since 2005.
This option is a dangerous last resort. For most people, early super withdrawal is a trap, and one that’s been used by unscrupulous and predatory lenders. “These poor people end up with no home and no superannuation,” said Allan Shearan, Member of Londonderry, in the NSW Legislative Assembly in May. “The only beneficiaries are the predatory lenders.”
It pays to be aware of the risks, and watch out for illegal early access schemes. Some lenders are sending 'super access' forms to consumers, but there may be better options. Avoid accessing super if it is inevitable that you will lose your home. If you have to declare yourself bankrupt following repossession of your home, your super will only be protected if you didn't access it. You don't want to lose both your home and your super.
Get your lender’s best rate
If you’re making repayments at your bank’s standard variable rate, you could be paying over the odds. Discounts of up to 0.7% are available if your loan balance is more than about $150,000.
You may save interest by switching to your lender’s 'basic' loan. It probably won’t have the bells and whistles or flexibility of a standard variable loan — such as a redraw facility or offset account — but it should have a lower interest rate.
Remember that you'll need to make these changes before defaulting on a payment, as it's unlikely you'd be able to do so if your loan is already in default.
Refinancing means switching to another type of loan from your lender, or changing to a completely different lender. If you’re paying an interest rate or fees that are way above the best on the market, you might save money by refinancing. But be aware of the traps.
There are risks with switching, particularly if it’s a response to mortgage stress. Refinanced loans are more likely to go into default. According to ANZ, traditionally about 30% of defaulting customers refinance with another lender, although the figure has decreased to 12.5% recently
Don't refinance to a high cost lender and avoid predatory lenders and dodgy refinancing brokers. Also, bear in mind there can be significant costs to leave your current lender — for example, exit fees, legal fees and early repayment fees — while setting up a new loan can incur establishment fees and other costs. Weigh it up carefully before making a decision.
See our report on Refinancing your home loan for more information.
Ask your lender to extend the term of your loan
This means asking your lender to reset your loan to a term of say 25 or 30 years, to reduce your monthly repayments. But remember, even though your immediate repayments will be reduced, you’ll pay much more interest in the long run.
A range of new loans with terms of up to 40 years are now available, but be aware of their risks. See Risky home loans.
Sell up and move
If you’re struggling to make your present mortgage payments, you’ll need to decide at a pretty early stage whether you can afford to keep your home or whether selling is inevitable. It's better to sell on your own terms.
It may seem drastic, but in some cases it could be sensible to sell your current property and move to a more affordable suburb or smaller property (downsizing). You could also consider renting for a while.
Earn more income
If you have a spare room in your house, renting it out could provide you with a much needed source of extra income, and help with your loan repayments. However, check out the tax consequences with a professional first. You’ll have to pay tax on the rent and capital gains tax when you sell your home. Get advice before acting.
Another option could be to lease your property and use the income to repay your mortgage, while living temporarily with a relative or friend.
Have you tried asking your employer for a pay rise, or considered looking for a second job for a while?
Examine your investments
If you have investments and are experiencing difficulty paying your home loan, consider selling your investments or getting licensed financial advice. Given all the recent turmoil in stock markets, if you have risky investments in your portfolio, now could be a good time to reduce your exposure to volatile markets (licensed professional advice could also be needed).
Don’t borrow too much
If you haven’t yet entered the property market, wait until you’ve saved a sufficient deposit before buying a house. That’ll mean you can buy a nicer place and/or have to borrow less. In the long run this will save you a fortune in interest.
Try not to put yourself under too much pressure with a loan that you can’t really afford to repay.