If you’re struggling to keep up with your mortgage payments, you have to be careful not to default on your mortgage. When you default, you stop paying your loan altogether, and you run the risk of giving up the possession of your property to the lender of your mortgage.
When you stop paying for your mortgage, your home is no longer yours to live in. It belongs to your lender, and you’ll be forced to move out. Luckily, a mortgagee in possession is an extreme step. There are many opportunities to turn around the situation to get your home loan back on track. In this guide, we’ll explore everything you need to know about this situation and how to avoid it.
Who Is the Mortgagee?
First, we need to define some of the terms around this situation. If you borrow money from the bank to buy your home (like most people), you’re now a “mortgagor.” This means you’ve taken out a loan for your property. The property itself becomes security or collateral.
If you don’t pay your loan on time, your home could be taken away. A home loan is a type of secured loan because the bank has the added security of your home being on the line, unlike with other types of debt like credit cards that don’t have security.
In this case, the lender or bank becomes the mortgagee. This is a formal name for the institution that lends you funds to purchase your property. You pay your mortgagee each month. Until you’ve fully paid your mortgage, the mortgagee can take steps to recover their losses if you fail to pay.
What Is a Mortgagee in Possession?
A mortgagee in possession is what happens when the lender takes control of the property. They do this due to the nonpayment of the mortgage. Since your lender technically owns the home, they need to recoup their losses (from you not paying) however they can. This typically means they will sell the home.
What might cause a mortgagee in possession? While it might seem like this is a far-fetched scenario, many Australians find themselves facing a mortgagee in possession every year. Some of the most common reasons for being unable to pay one’s mortgage includes:
- Job loss – One of the most common reasons is losing one’s job. If you go through a period of unemployment, it’s difficult to find the extra funds to put towards your mortgage without an emergency fund.
- Variable loans – A variable-rate loan might have a low introductory rate, but it can rise over time based on the market interest rate. If interest rates rise, then your monthly repayment rises as well. This will make it harder to pay on time.
- Medical expenses – We can’t usually prepare for medical expenses. If you experience a long-term or permanent medical crisis, your finances could also be impacted.
- Divorce – Changes to your family also result in new financial situations. Many spouses share the cost of the mortgage. A messy divorce might leave you without enough funds to make ends meet.
- Debt ratio – If you have other debts like student loans, auto loans, or credit cards, you might not be able to afford your mortgage payment on top of this. Having a debt repayment plan in place is a must.
- Death in the family – Last but not least, if you experience a death in the family, this could leave you unable to afford your home payments. If you were in a sole-income household, losing one family member might be catastrophic to your mortgage.
These things above are a reality for many Australians, but that doesn’t mean a mortgagee in possession is inevitable. If you find yourself unable to pay your mortgage for any reason at all, there are steps you can take to manage the situation before it escalates.
When Can Mortgagee Repossess a Home?
As you might imagine, there are a lot of things the mortgagee has to do before they can take possession of a home. This is a lengthy, drawn-out process, leaving a lot of time for individuals to take action before they lose their place of residence.
The first thing that happens once the borrower misses payments is that a formal letter is sent. This is a notice given to the borrower to let them know that their loan is now in default. The lender also assigns a date by which the missed payments must be paid. There likely will be additional fees on top of the amount owed.
If the homeowner pays on time, the situation doesn’t escalate any further. While a home loan default might affect your credit rating, you’re not at risk of losing your home yet. Multiple notices about the default are given, and if they’re ignored, the lender moves to the next step.
If the homeowner doesn’t pay by the deadline, the lender uses what’s called the “acceleration clause.” This is a special clause that makes the loan due in a lump sum. The mortgagee then can apply with the local court to force the borrower to vacate their home. The lender then owns the property and puts it up for sale. All of this is outlined in the initial contract.
The borrower will know the date they need to leave the property. If they don’t leave on top, local law enforcement will secure the property on the lender’s behalf. The entire process takes several months and can be very stressful.
How to Avoid Mortgagee in Possession
Is there anything you can do to avoid a mortgagee in possession, even after you’ve received notice that your home is in default? The simple answer is yes. There are several steps you can and should take as soon as you know you’re unable to pay your loan on time. In addition, there are things you can do to avoid losing your home.
A lot of people think their lender is out to get them and that their lender wants to take possession of their home. This is far from the truth. The lender doesn’t want your property, and they don’t want to go through the trouble of dealing with the court to possess your home. They typically end up losing money, and it’s also a drain on company resources.
Because of this, most lenders are very willing to work with you. They want to come to a solution that enables you to keep your loan and keep making payments. Some lenders even have hardship programs to help if you’re in a temporary financial situation. Here are some of the options available:
- Hardship – Many lenders have temporary hardship programs. These might allow you to defer your payments or reduce payments for a period of time, usually up to 3 months. This could be helpful if you lost your job or you need a bit of time to get your budget in order.
- Loan terms – Some lenders might be willing to adjust your loan terms or interest rate to make your payments more affordable on either a temporary or long-term basis.
- Refinancing – Even if your lender won’t work with you, there are still options. Refinancing with another lender allows you to get better terms and a lower monthly rate.
- Debt consolidation – If you’re struggling to pay off multiple debts at once, a debt consolidation solution might help you lower your overall payments and put your finances back on track.
- Downsize – Finally, many choose to sell their home and downsize. Selling your home before you default enables you to pay off the remainder of your loan and avoid repossession.
The first step is to contact your lender sooner rather than later. The sooner you make contact and explain your situation, the more options are available with you. When in doubt, consult with a debt expert. Our team is skilled with all things mortgagee in possession, and they can create a plan to put your finances back on track.
Protect Your Home: Mortgagee in Possession
Nobody wants to risk losing their home. If you’re unable to keep up with payments, it’s time to take action. The last thing you want is a notice from your lender that they’re taking action against you. This is a lengthy, exhausting process that leaves you without your home and financial security. It also is extremely damaging to your credit, so it should be something you avoid at all costs.
Luckily, you have a lot of options when it comes to debt solutions that work. From refinancing to applying for a hardship program, don’t accept that your home is doomed. You deserve to keep the home you love. As long as you’re able to work with your lender to decide on a mutual solution, you have options.
Is your home at risk of mortgagee in possession? Don’t delay. Even if you suspect you won’t be able to make mortgage payments in the near future, take action now. Contact an expert at Debt Busters for a custom debt plan on 1300 368 322. We have over 15 years of experience helping Aussies avoid a situation where they default on their loan. You don’t have to face this situation alone. Even if you’re in the middle of a financial crisis, we can help.