Just missing your home loan payments by a few days is not enough to cause you default. But it does provide your lender the opportunity to collect even more money through penalties. This can result in severe financial consequences, including fines and foreclosure. Now, knowing the possible threats and how you can avoid them are really important to keep in control of your finances. Luckily, mortgage brokers in Sydney can help steer you to avoid default.

You’ve Defaulted – What Happens Next?

By defaulting, this means that you did not pay your loan for a specified amount of time. It can begin with making late payments. However, the repercussions can escalate very fast. This is what often occurs:

1. Late Fees and Additional Interest

Lenders can impose late fees when you miss a payment. This adds to your outstanding balance over time. You will eventually find it harder to catch up. Your interest continues to accrue because of this (sometimes even at a higher rate) and you’ll end up with more debt.

2. Bad Credit Score

A missed home loan payment will affect your credit score negatively. The more payment you miss on your home loan, the worse your credit rating will become. Applying for loans from other organisations in the future will be very hard. And you might get very unfavourable terms and high interest rates even if you eventually succeed.

3. Foreclosure

Foreclosure happens when your property gets taken by your lender. They will have the right to initiate this process when you default on your home loan. Since you can no longer pay, they have to get back the amount of money loaned to you through foreclosure.

4. Loan Acceleration

Your lender may invoke an acceleration clause in the case of defaults. The lender can demand that you pay the remaining balance for the home not just the missed payments. This means you need to shell out a lot of money faster than you can, resulting in overwhelming financial strain.

Home Loan Default Vs. Late Payments

Late Payments

Late payments occur when you miss a scheduled repayment but catch up on it relatively soon. Lenders usually provide a grace period before imposing late fees (usually between 7 to 14 days), and one or two late payments may not drastically impact your financial situation. However, late payments made repeatedly can lead to more significant problems down the road. These can include additional fees and potential credit score damage.

You can avoid taking a bad hit to your credit rating by making your missed payment within the grace period. Sadly, you can still be considered as a high-risk borrower for lenders if this happens too often. This will affect future refinancing or loan applications.

Home Loan Default

After multiple missed payments, often two to three months of non-payment, you will default. You are given a mortgage default notice at which point you will likely have up to 30 days to take correctional action. Consequences are far more severe and ramifications felt over a much longer period than merely being late on your payment. Lenders may take legal action to recover their debt. Foreclosure is a possibility if it comes to extreme debt recovery processes. Defaults are listed on your credit file for up to five years, making it difficult to get a loan in the future.

Steps To Prevent Home Loan Default

Better financial planning and talking with your lender will be necessary to avoid default. Here are some tips to manage your home loan efficiently:

1. Borrow Within Your Means

Always borrow within your capacity before taking a home loan. How much income do you make? What about your expenses and other financial obligations? Think about these things when you calculate how much you can repay. Remember that taking out more money than you can afford escalates the chances of default.

2. Create a Buffer with an Emergency Fund

You should have an emergency fund because life happens and expenses arise from something like losing your job or some medical emergencies. Saving three to six months of living expenses is considered a sufficient emergency reserve that will prevent what would be just a missed payment from turning into default.

3. Make Extra Payments

You should pay extra on your home loan if it’s allowed. That way you can reduce your principal balance more quickly. This not only saves you interest but gives you a buffer for when money is tight.

Avoiding Home Loan Default? Here’s How Mortgage Brokers in Sydney Can Help

Trusted brokers can give you guidance and resources to help you manage your loan better. This way, you can avoid defaulting. Here’s what they can do:

1. Helping You Choose the Right Loan

It is the responsibility of mortgage brokers to gather a host of loan opportunities that suit your financial status and work along with numerous lenders. They will help secure a loan with repayment schedules and interest rates that are competitive. Thus minimising the risk of financial stress.

2. Assistance with Refinancing

Time is unpredictable and there are situations when your financial status can change. Your current loan might become affordable because of this. As such, you may even consider refinancing. But where do you even start? This is where a broker comes in. Hiring one will make things easier. Get cost-effective solutions instead of looking for options by yourself.

3. Lender Negotiation

A broker can act as the mediator between you and your lender. They can talk to them for you to get lower interest rates. They can also ask for alternative loan terms or a temporary halt in repayment. As such, keeping you out of default.

4. Advice

Overall finance management is troublesome when you dip your hand in multiple debts. But a broker can present multiple solutions. One of them is debt consolidation where you essentially combine all your debts into one loan that you can afford. This can make your repayments simpler and cheaper resulting in less risk to missing payments on your home loan.

Are There Ways to Manage Mortgage Defaults?

It’s normal to panic when you’re on the verge of defaulting. But take a deep breath. There are steps you can take to minimise your casualties.

1. Talk to Your Lender

Think you might not make payments on time? You should contact your lender right away. Many lenders are open to considering new terms. Negotiate an extension of your repayment period. Or you could also ask them to temporarily reduce your payments. You just have to be proactive about it.

2. Refinancing Might be Better

Have your current loan repayments become unmanageable? Then refinancing may be up your alley. You can work with a broker to get a loan with a better interest rate. Or why not extend your term instead? This reduces your monthly payment amount and helps you avoid default.

3. Sell Your Property

Nobody likes getting their property foreclosed. And sometimes selling your property is the best you can do. If you sell before you default, you can use the money to pay off your loan. This also preserves your credit score.

AFMS Group: Your Mortgage Experts in Sydney

We know it’s not all sunshine and rainbows when it comes to paying off loans on schedule. But worry not. Our mortgage brokers in Sydney are in your corner to assist. Got trouble making on-time loan payments? Let’s think of a better strategy. Thinking about refinancing instead? We can set you up with better loans. Let us keep you on track to paying off your mortgage and figuring out your loan situation. Contact us today.