More than 800,000 Australian mortgagors have arranged payment deferrals with their lenders since March. But now that these repayment holidays – and government stimulus payments – are being wound back, some households may face a mortgage crisis if their income levels haven’t rebounded as Covid-19 has receded. What many mortgagors don’t realise, though, is that they can negotiate with their lender to reduce their repayments or get out of their mortgage with as little a fallout as possible.
The lengthy process of a property repossession to recoup the funds – which, most of the time is for a lesser amount – is the last step your lender will want to take. Many will want to cut a deal with you – such as reworking the terms of your loan, temporarily reducing your interest rate or repayments or, as a last resort, allowing you to sell the property for them.
As a debt management adviser, I’ve had much success on behalf of my own clients who could no longer make loan repayments by using these negotiation tactics. The key is to have an open line of communication with your lender, show you’re willing to work with them and know your rights. They won’t foreclose on you as long as you’re trying to work through the situation with them.
These are your options if your mortgage repayment holiday has ended and you’re struggling to restart repayments.
A repayment plan will allow you to make smaller, regular payments until your temporary hardship period eases. The catch is that once you return to normal repayments, your lender will want to negotiate higher repayments to cover the period where you paid less. The key is to go to your lender with a realistic repayment plan that you know you can stick to. For instance, if your household is on a single salary temporarily, demonstrate to your lender that once you find work, two salaries will be able to fix up all arrears within a short time.
If your income is reduced for an indefinite period, you could negotiate modifications to your loan with your lender. You could either extend the term of the loan to reduce the size of each repayment or switch to an interest-only loan. A little-known secret is that occasionally banks are also known to temporarily reduce mortgage interest rates, particularly if the only other option is foreclosure.
This is applicable for mortgagors who can’t make loan repayments in the short term but are expecting a lump sum payment that will cover repayments in arrears. Forbearance is where the lender agrees to forego loan repayments for a while and will accept the lump sum down the track. It could be money coming from an insurance claim, redundancy package, inheritance or sale from another property.
This prevents the bank from repossessing a property. This is where the lender allows you to put the property on the market yourself, then present all purchase offers to them. The lender then chooses the offer they’ll accept as the final settlement of your outstanding debt. The negotiation process for a short sale is very delicate and nuanced, but remember there are some powerful consumer protection laws on your side. I’ve negotiated short sales dozens of times and saved clients millions on their mortgage debt.
Having a lender repossess your property is always a last resort for them – and should be a last resort for you. A lender would like to avoid going to court and get orders for repossession of your home and a judgement against you for the value of your loan. As a borrower, you will also want to avoid incurring all of their legal costs. Rather than wait for court orders, you could proactively approach your lender and request that you be involved with the sale. Your assistance with the sale will go on record, and is likely to soften the blow to your credit rating.
If your circumstances change when the dust settles after repossession, you may be able to repurchase the property from your lender at the auction or after the sale. While these cases are complex, nothing is impossible. I’ve negotiated such an arrangement for a client, who bought back thee property at a much lower price.
Lenders are obliged by law and their own codes of practice to help you in times of difficulty if you have reasonable cause to request financial hardship. Keep in mind that most lenders also have hardship officers who can review your situation and determine what assistance they can offer you.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.
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