What Is Foreclosure and How Do I Avoid It?

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.

What foreclosure means

The process of foreclosure is a way for lenders to take possession of a property when borrowers fail to repay the mortgage according to its terms.

Foreclosure allows the lender or bank to recoup the outstanding debt by selling the property.

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

Foreclosure vs mortgagee repossession

Foreclosure and mortgagee repossession are often used interchangeably but they mean slightly different things.

A foreclosure occurs when the lender seizes ownership of the property, while mortgagee repossession is when the borrower remains on the title as the owner while the lender sells the property.

Mortgagee repossession is often easier because the lender doesn’t have to obtain a court order to replace the title of ownership, but both processes end with the lender selling the property to recoup their debt.

Understanding the foreclosure 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 30 days to pay the money you owe.

Failure to make these repayments or resolve the issue with your bank will 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 will 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 or two and are in arrears, 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 you can make your ongoing repayments.

You can apply for a hardship variation which will involve proving the changes (job loss, cost of living pressures etc) 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 can still apply for a financial hardship variation at this time.

After the 30-day default period, it’s important to seek legal advice as you will have a limited time to lodge a defence before your property is repossessed.

During this process, your credit score will 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 prevent foreclosure

Mortgage stress can lead to foreclosure, however there are steps you can take to prevent it.

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 was to increase by 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.
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.