Well, one outcome may be that the lender repossesses and sells your home in what’s called a foreclosure. Although they’re extremely rare in Australia, we’ve put together this simple guide to explain foreclosures and how they typically work.
- What does foreclosure mean?
- Foreclosure vs mortgagee repossession
- What can cause a mortgage foreclosure
- What is the process for a foreclosure?
- What can I do if I am struggling to make home loan repayments?
- What are the pros and cons of buying a foreclosed or pre-foreclosed property?
- Where can I find foreclosed or pre-foreclosed property?
What does foreclosure mean?
A foreclosure is the legal process by which a lender takes possession of a property and sells it when the homeowner fails to make their mortgage repayments. The lender repossesses the property to try to recoup money owing on the loan. Generally, foreclosed properties are either sold at an auction or directly by the lender.
Pre-foreclosure refers to the initial stages of a foreclosure action. It is the period of time between when a homeowner misses their first repayment, and the date when the lender begins their legal proceedings. During this stage, the owner may opt to sell the property to reverse the debt owed prior to legal proceedings commencing.
Foreclosure vs. mortgagee repossession
The terms ‘foreclosure’ and ‘mortgagee repossession’ are sometimes used interchangeably, but there is a legal difference. A foreclosure sees the lender go through the legal process of transferring the title of the property from the borrower to the lender. Meanwhile, a mortgagee repossession sees the borrower remain on the title while the lender sells the property. In Australia, a mortgagee repossession is often a simpler and more cost-effective method than a foreclosure.
What can cause a mortgage foreclosure?
- Divorce: When a married couple who are jointly named on a mortgage get divorced, often one of them will end up solely responsible for making the repayments. This can cause financial stress on the individual paying the mortgage.
- Illness or disability: When someone faces an illness or disability, medical bills can be expensive. They may also have to reduce their working hours or resign. All of these factors can make it difficult to meet mortgage repayments.
- Death: An unforeseen death in the family can cause a strain on making mortgage repayments.
- Unemployment: Whether being made redundant, fired, or choosing to quit, unemployment can significantly affect income and, as a result, the ability to make repayments.
- Interest rates: If the variable home loan interest rate increases, the cost of mortgage repayments will rise too. If the home owner, or owners, are not able to keep up with the rising costs, it can be hard to meet repayments on time.
What is the process for a foreclosure?
According to MoneySmart, there are a number of steps the lender must take before your home can be foreclosed:
- If you fail to make your repayments, the lender can send you a default notice. This gives you at least 30 days to pay back the missed repayments, plus the regular repayment on your loan. If you’ve received a default notice, the government recommends you seek legal advice straight away. MoneySmart has a list of legal services offering free legal advice.
- If you don’t make your repayment within 30 days of receiving the default notice, the lender can serve you with a Statement of Claim or a summons. You’ll be given a certain number of days to either file a defence, go to court or lodge a dispute with the Australian Financial Complaints Authority (AFCA). If you don’t respond, your lender can proceed with legal action to take your home.
- If the lender is granted a court order to repossess your home, you will get a ‘Notice to Vacate’ or a Sheriff’s letter. This means a sheriff (or bailiff) will evict you from your home and change the locks. The lender may sell your home to make up for any financial losses and make a claim to sell your other assets.
What can I do if I am struggling to meet home loan repayments?
There are several options to explore if you’re struggling with your home loan repayments. It’s important that you get in touch with your lender’s hardship department if you’re experiencing a tough time financially. You may be able to temporarily reduce or pause your loan repayments. This is called a hardship variation.
If you apply for a hardship variation, you’ll need to:
- Give your lender the details of your loan (e.g. account name and number).
- Let them know that you are experiencing hardship and would like to change your loan repayments.
- Explain why you’re having trouble making repayments and how long you think that your financial problems are likely to persist.
According to the National Debt Helpline, the ACT and Queensland have government-funded relief schemes that provide short-term assistance to eligible people having difficulty with their home loan repayments.
Another option you may consider is to sell your home to avoid having it repossessed by your lender. If your lender repossesses and sells your home, they are required to get a fair or reasonable market price for your property. However, it is possible you may get a better price for your home if you sell it before the lender takes possession, and avoid paying any legal fees associated with the repossession.
What are the pros and cons of buying foreclosed or pre-foreclosed property?
- Below market value: Foreclosed properties can be sold below market value, which can be a bargain for buyers looking for a great deal on a home and investors looking for a return on their investment.
- Fast settlement: As the lender ideally wants to get rid of the house as quickly as possible, it can mean a shorter settlement period. This is ideal if you’re looking to buy property as soon as possible.
- Most are sold as is: Foreclosure properties are usually sold ‘as is’, which means if there’s damage, the owner isn’t likely to fix it. It can also be difficult to know what maintenance has been done, especially if the previous homeowner isn’t directly involved with the sale.
- Less flexibility: While the settlement period of a foreclosure property can be fast, it also means there’s less flexibility. Often, buyers don’t have the option to negotiate as many conditions on the contract as with other sales.
- Need to have finances ready: Most foreclosed properties are sold at auctions, so you want to make sure you have your finances in order and consider pre-approval of your home loan.
Where can I find foreclosed or pre-foreclosed property?
In Australia, foreclosures are actually quite a rare occurrence, compared to mortgagee repossession. In fact, Queensland reported its first foreclosure in 35 years in 2018. However, this doesn’t mean finding a pre-foreclosed or foreclosed property isn’t impossible.
As mortgage stress levels rise with the COVID-19 pandemic and Australia’s first recession in nearly 30 years, we may see an increase in properties being sold by home owners who can no longer meet their mortgage repayments. According to data from Roy Morgan, for example, the rate of mortgage stress reached 26.7% in October 2020 for Australians with negative employment changes due to COVID-19. Mortgage stress is a form of financial stress caused by paying more than 30% of your household income (before tax) towards your mortgage repayments.
Banks and lenders are required by law to market repossessed properties through public auction. This allows the lender to sell it as quickly as possible and offers a higher level of transparency compared to a private sale treaty. The lender is also required to get the highest possible retail price for the property.
It could be a good idea to speak to a local real estate agent to find out whether there are any properties in their portfolio that are foreclosed or pre-foreclosed, or that need to be sold quickly by owners facing mortgage stress. In addition, you can browse real estate websites, local ads and property magazines to find foreclosure properties.
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About Kurt Bornhutter
Kurt Bornhutter is Head of Growth at Jacaranda Finance. He has a Master of Business Administration and a Graduate Certificate in Management from the Australian Institute of Business. His background is in computer science and technology, with over two years’ experience working in finance. You can find him on LinkedIn.
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