Recently I was talking to someone who shared the financial struggles they’re experiencing. After a relationship breakdown and their ex moving out, they shared how they’re no longer able to maintain the mortgage repayments, and calculated that they’d go into arrears on their home loan within the month.
Unfortunately they’re not alone. According to the industry, the number of borrowers experiencing 'mortgage prison' is growing, and those trapped in more expensive mortgages unable to refinance to something cheaper will continue to rise.
Whether due to serviceability constraints and higher assessment rate buffers, falling house prices and lower equity levels, or being unable to meet other lending criteria, being locked in mortgage prison is a real possibility for many Australians (and already the reality for over 700,000 homeowners).
So the question is: what do you do if you can’t afford your mortgage repayments anymore?
Rather than wait for the bank to knock on your door and foreclose, I spoke to mortgage broker and director of Savvy Home Loans, Leanne Pon, to ask her advice. This is what she recommends:
1. Accept the situation
Leanne recommends tackling this issue head on “because it can get serious quickly.” She says, “What works best is to accept the situation you’re in. Once you acknowledge it, you can do something about it and get into action.”
2. Look at your cash flow Know how much money is coming in, and what’s going out. Grab a pen and paper, or create an excel spreadsheet with an ‘Income’ column and ‘Expenses’ column. Then note everything down - what money you have flowing in each month, and what you’re spending that money on each month. Once you know these numbers, you can calculate your cash flow position. To calculate your cash flow, take your total income and subtract your total expenses (income - expenses = cash flow). If you calculate a shortfall (or a negative cash flow position), this is helpful information. With this number, you now know how much extra money you need to make each month to breakeven. Or on the flipside, how much you need to reduce your expenses by to get yourself back in the black.
Looking at your income and expenses in this straightforward way can help you see what's necessary (what costs must be covered), and what's not - showing you in what areas you have room to move. Leanne says, “see if you can pull back in any areas and refocus that money to more urgent places”. While it could be time consuming, this is an important step to take as it will come in handy later.
3. Phone a friend Contact your broker and let them know the situation you’re in. They can bounce ideas with you and conduct a home loan review to see if any tweaks can be made to your mortgage to save money.
It’s great to talk to your broker before things start to get bad, but it’s okay if things are already rocky too. The simple act of sharing your situation with someone can help lighten the mental load, and often others can see things you can’t when you’re in the thick of it. Your broker can explore all your options with you, and then if needed, they can talk you through the next step and prepare you for what you can do next.
4. Be in communication about your financial hardship
When you’ve exhausted all other options after talking to your mortgage broker, the next step is to be in communication with your lender. Leanne recommends that you “contact the hardships department of your bank. There are provisions in there under financial hardship to organise a lesser repayment, something that you can afford and commit to.”
This is where knowing your cash flow comes into play, as the bank will want to look at your budget and see what your shortfall is each month, so they can work out how to get you back into a positive position with your repayments. The purpose of being in communication with your bank is to negotiate a repayment plan you can afford and so they don’t foreclose on you.
Leanne stresses, “it’s all on an exception basis and according to individual situations.”
For that reason, “it’s smart to contact early. If you are going to get into trouble, contact your bank early.”
NOTE: In cases like this, as you’re not making your full mortgage repayment, you will be in arrears on your mortgage. As such, default interest is charged in accordance with the loan contract you signed before your loan settled. This is something to be aware of and unfortunately it can’t be avoided, but it can be addressed and managed when you’re back on your feet.
5. Keep to your agreement
Once you have a financial hardship agreement in place with your bank, stick to it and don’t mess with it. Often it’s an agreement that your bank will want to review with you after 3 months. So make sure you’re on top of it - pay what you’ve agreed to pay, and if for whatever reason you’re not able to keep to your agreement, Leanne advises, “be in communication.” That’s the big takeaway here if you find yourself struggling to meet repayments… Communication is key!
6. Create a new plan If you can work the steps above and stick to the plan, you can get through. Leanne has seen it with her clients over the 25 years she’s been doing this work and says, “you’re not alone and you can get through. And when you do get back on your feet, the next step is to be in communication to catch it up”.
As mentioned, there will be repayment shortfalls and default interest to catch up on. To sort that out, all you need to do is call your bank and create a new plan; one that is affordable for you and that you can manage, on top of returning to paying your minimum mortgage repayments.
In summary, if you can’t afford your mortgage repayments right now, you’re not alone and it’s okay. With communication, help from others, and by following a clear plan, you can get through. Because as they say, where there is a will, there is a way! And if you’re reading this blog post, something tells me that you’ve got what it takes… you’ve got the will and you’ll find a way.
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