Mortgagee In Possession And Foreclosure In Australia

If you are unable to repay your mortgage, the lender may use the foreclosure process to seize ownership of your property and recover the debt. However, this is unlikely in Australia, with most lenders opting to sell via mortgagee in possession.

Mortgagee in possession vs foreclosure

Foreclosure and mortgagee in possession are often used interchangeably but they mean slightly different things:

Foreclosure occurs when the lender seizes ownership of the property when borrowers fail to repay the mortgage according to its terms. This process allows the lender or bank to recoup the outstanding debt by selling the property.
Mortgagee in possession is when the borrower remains on the title as the owner while the lender sells the property. This process is often easier because the lender doesn’t have to obtain a court order to replace the title of ownership which can be a lengthy and costly process.

Both scenarios end with the lender selling the property to recoup their debt.

In Australia, foreclosure is less common as banks and lenders often use a process called mortgagee in possession instead.

Understanding the mortgagee in possession process in Australia

There are many reasons an individual might miss repayments and have their property repossessed, such as:

job loss
sickness/injury
cost of living pressures
rising interest rates
natural disaster.

Initially, if you miss mortgage repayments, you will end up in arrears. Typically, after 90 days, if there has been no communication, your lender will issue you with a Default Notice which gives you around 30 days to pay the money you owe.

Failure to make these repayments or resolve the issue with your bank may result in a Statement of Claim, which is the start of legal action against you to claim the whole amount of your home loan.

You have a set number of days to file for a defence or dispute the claim. If you do neither, the lender may take action to repossess the property and evict you from the premises.

What to do if you’re facing foreclosure

Initially, if you miss a repayment, you should contact your lender directly to explain the situation. All lenders have a hardship officer and their role is to help you find a solution so that you can manage your ongoing repayments.

You can apply for a hardship variation which will involve proving the changes (job loss or cost of living pressures, for instance) have impacted your ability to repay your mortgage. If approved, your lender will adapt the terms of your loan to give you some relief through strategies such as:

reduced repayments
repayment holiday
interest-only repayments
extending the loan term.

If you have received a default notice, you may still be able to apply for financial hardship assistance at this time. However, we strongly recommend engaging with your lender before it gets to this point, in fact as soon as you feel that you may be unable to meet your future mortgage repayments. The earlier you engage, the more solutions will likely be available.

It’s also important to seek legal advice as soon as possible if you receive a default notice or demand. Your legal advisor will be able to provide you with the advice that you need to arrive at the best possible outcome given the circumstances.

During this process, your credit score may also take a hit, which may make it difficult to refinance to a more affordable loan, reinforcing the importance of being transparent with your lender when you face mortgage stress.

How to reduce the risk of mortgagee in possession

Mortgage stress can potentially lead to your lender taking possession of your property if your home loan remains unpaid. However, there are steps you can take to reduce this risk.

Take out an affordable loan: When you apply for a home loan, a lender is obliged to assess your ability to repay it, not only at its current interest rate but if that rate were to increase by 2% to 3%. However, it’s important you also consider what you can afford and estimate how much of a rate increase you can handle. Since 2022, interest rates have risen steadily, pushing many borrowers with variable rate loans into mortgage stress.
Communicate with your lender: If you are in mortgage stress, or face unexpected changes like job loss or injury, chatting with your lender can help you qualify for financial hardship until you get back on track. This can help prevent falling behind on repayments.
Use superannuation to pay off mortgage: In some cases, you may be able to use your super to pay off your mortgage, which can help provide some financial relief. The rules around accessing your super to pay off your mortgage are complex and you should speak to a financial advisor before considering whether this option is available to you or the right one to pick.
Sell: Unfortunately, selling your property to pay off your mortgage can be a last resort for borrowers at risk of falling behind on their repayments. Before making that decision, seek expert advice.