What Happens If You Can’t Pay Your Mortgage?

What happens if you miss a mortgage payment?

If you miss a mortgage repayment for the first time, the immediate consequence may be a late fee and a notice from your lender.

This notice will explain:

• how much you owe 
• when you need to pay it by 
• any future penalties you may incur if you don’t repay within the time frame.

Penalty fees will change depending on your lender, but contacting them directly about a missed payment is important. 

Options and next steps

All lenders offer some hardship services for their customers. If you are concerned that you may be at risk of mortgage stress or may struggle to meet your repayments in the future, you can discuss your options for a revised repayment plan. 

» MORE: 10 questions to ask your mortgage lender

What happens if you fall behind on multiple payments?

If you miss more than one payment, your lender will likely contact you to notify you that you are in mortgage arrears. 

Arrears refers to payments that are overdue or unpaid. For example, your lender may contact you explaining that you are in arrears for two months, which will most likely incur fees and could negatively impact your credit score. 

Options and next steps

When you contact your lender, you can ask to speak to a hardship officer or ask for a financial hardship variation. To be eligible for hardship, you must provide proof and be clear about why you can’t afford your repayments, how long you expect this to last and how much you can afford to pay. 

Their hardship team will assess this and must legally give you a response within 21 days. If they approve that you are in financial hardship, they will outline what options are available to you. 

Depending on your lender and your situation, you may also be able to: 

• Have a repayment holiday. This holiday allows you to temporarily reduce or stop your repayments until you can afford them. This option may be available when you are injured and unable to work or are switching jobs. However, the interest may capitalise during the repayment holiday period. 
• Switch to interest-only repayments. In this case, you would only pay the interest portion of your home loan. That means the principal stays the same, but your repayments would be lower for some time. 
• Refinance to a better loan. A better interest rate may be available on another home loan product with the same lender. A lower rate can reduce the amount you repay each instalment. 
• Reduce fees for unused or unwanted features. It’s also possible you are paying fees for features on your home loan you don’t need, and by dispensing with these, you could lower your ongoing costs. 

What leads to a default notice?

If you don’t make your repayments and avoid contacting your lender, they may issue you a default notice.

A default notice or mortgage default is a formal document issued by your lender in which you have a certain amount of time, usually 30 days, to make your missed repayments.

Options and next steps

It is best to contact your lender, as you can still apply for financial hardship at this stage. 

If you do not contact them and continue to miss repayments, your lender can issue a statement claim or summons against you. This step marks the beginning of the legal process to recover the entire home loan amount. 

You should also let your lender know of any significant changes to your financial situation. From their perspective, working with you to resolve debt issues is in their best interests so they can recoup the money you borrowed. 

If you receive a statement claim or summons, you will be given a timeframe to file a defence or dispute. The number of days is different in each state and territory, but if you don’t take action, your lender can begin the process of repossessing the property. 

What leads to mortgagee repossession?

If a repayment is not made after the default notice, the lender can begin ‘mortgagee repossession’.

During this process, they take possession of and sell a property to recover the debt from a homeowner who has defaulted on their mortgage. 

The lender can go to court and receive a mortgage repossession notice to begin the process. This notice means the homeowner now owes the entire remaining mortgage, and the lender has the right to sell the property to receive this repayment. 

Once issued with this court order, the homeowner typically has one month to file a defence. If they fail to do this, they may have to leave the property and law enforcement will come with a locksmith to change the locks. The lender will then begin the process of selling the property. 

Options and next steps

For the borrower, mortgagee repossession has significant consequences. You may still owe money following the sale of the property, depending on how much it sells for, and your credit score will be significantly affected. 

Personally, dealing with repossession will also undoubtedly cause stress as you and your family will likely need to search for a new home. It is important to contact legal professionals to understand your rights based on your situation. 

There are also resources for emotional support, such as LifeLine and BeyondBlue. 

It is quite possible that your financial circumstances will change throughout your mortgage, and you may face difficulty at some point as a homeowner.

If this happens, it’s important to remember there are structures in place to help you. Quick action can negate some of the damage, and seeking professional help can provide critical relief. 

Some resources that may help you include: 

• Financial Rights Legal Centre 
• Free Legal Advice
• Debt Management Support
• National Debt Helpline.

These resources will give you a better understanding of your rights, offer counselling, and help you apply for hardship. 

Mortgage prison occurs when you cannot afford the repayments on your current mortgage or obtain refinancing for a new home loan. 

This mortgage stress often occurs when interest rates rise, pushing your repayments too high while pushing you past the APRA serviceability buffer a lender uses to assess if you can afford a new loan. Being outside of this buffer can leave borrowers in danger of missing repayments and eventually having their property repossessed. 

If you are struggling to meet repayments and are worried about falling into mortgage prison there are, however, things you can do: 

1. Communicate with your lender. You must communicate with your lender during any periods of financial stress to avoid fees and charges and to understand how they can potentially help you. 
2. Request a hardship variation. Applying for hardship variation will provide your lender with proof of your situation, allowing you to take advantage of hardship services such as repayment holidays, interest-only repayments or reduced fees if available. 
3. Government support/assistance programs. You may also be eligible for government financial support. Centrelink and MyGov provide information on what may be available to you. 
4. Refinancing. If you anticipate falling into mortgage prison, consider refinancing to a lower-rate home loan with fewer features to lower fees and repayments. 
5. Superannuation. For some Australians, you may be able to access your super to assist with mortgage repayments. 
6. Sell. While not ideal, selling your home before you fall into mortgage prison could help you walk away without significant debt, depending on market conditions. 
7. Reduce payments. Chat to your lender about lowering repayments by cutting out unused mortgage features you may pay extra for.