15 June 2020

What happens when you can’t pay the mortgage

Economists are predicting Australia is about to enter a recession. If this happens, many of us may find ourselves struggling to pay the mortgage. Although each lender has a hardship team that may be able to relieve some of the pressure (i.e. by deferring or reducing payments), it is inevitable that for some, keeping the property will simply not be an option.

If you find yourself unable to keep the property, you’re left with three real options:

  1. sale
  2. voluntary surrender; or
  3. allow the property to be repossessed.

“Making the right choice here is vital.”

The worst of the three is to allow the property to be repossessed. Some find this tempting, believing it will allow more time in the property before eviction, but that extra time comes at a significant cost. If the lender is forced to commence legal proceedings to repossess, there are several court-imposed waiting periods involved in this process, usually meaning at least a few months from service of the default notice to eviction (thereby buying you some time).

However, the lender will usually recoup much of the legal costs of that costly process from the proceeds of sale as well as the full debt owed plus interest. Legal fees, court fees, and service fees, to name a few – will ultimately be passed on to you. That means that if the property doesn’t fetch a high enough price to cover the full debt, as well as any additional costs incurred by the lender in repossessing the property, you’re still on the hook for the shortfall. And don’t think that a lack of funds on your part will mean the lender will simply walk away – that’s where your guarantors could find themselves in the crosshairs.

Of course, you may be lucky, and the proceeds of sale might exceed the debt and associated costs, meaning that any surplus lands in your pocket, but if a recession is on the way, property values might drop too.

A voluntary surrender of the property is usually a far better option than repossession. Although there will likely be costs involved in the surrender, which your lender will probably require you to pay, they are going to be considerably less than what will be added to your debt if the lender repossesses the property.

The big trade off here is that your lender of course is only interested in recouping the debt and any costs, so a ‘fire sale’ is a significant possibility, reducing the chances of a surplus ending up in your pocket.

Remember that there is no obligation on the lender to sell the property for its best price – although lenders will usually try and sell for a fair price, their primary concern is always getting their own money and costs back – not putting money in your pocket.

The best choice is almost always going to be managing the sale of the property yourself.

If you can make the mortgage payments in the interim, great. If not, then the bank may agree to suspend repayments until a sale. Managing the sale yourself will give you the opportunity to obtain the best possible price for the property, and maximise any surplus coming your way after the debt to the bank is repaid. If there is a shortfall of course you remain liable for that, but you might even be able to negotiate with the lender to discharge that amount after payment to them of the sale proceeds – and for more on this option, check out our earlier piece here written by my colleague Andrew Bower.

There is no doubt that if a recession hits, for many of us there are challenges ahead. The sale of a property due to financial hardship is highly stressful and never easy, but a proactive approach will almost certainly lead to better long-term outcomes than putting your head in the sand. If you are feeling overwhelmed and in financial distress, don’t ignore the warning signs, get in front and take action. We can start by having the right conversations with you re your possible negotiations, and pointing you in the right direction. On top of that there are many services out there to help you, and you’ll find some links and contacts below.

Andrew Bower began his legal career as a law clerk in 2008, whilst studying a Bachelor of Laws and a Bachelor of Commerce majoring in finance at Murdoch University.