With mortgage repayment holidays and Government stimulus payments set to wind back, mortgagors who had arranged payment deferrals and are now unable to restart repayments may find themselves facing a financial crisis.
An open line of communication with your lender is crucial to show you are willing to work with them, along with a strong understanding of your rights. Lenders won’t foreclose on a mortgagor as long as they are trying to work through the situation with them.
The lengthy process of a property repossession to recoup the funds – which, most of the time is for a lesser amount – is the last step a lender will want to take.
Knowing this will put you in a better position. Many lenders will want to cut a deal with you – such as reworking the terms of the loan, temporarily reducing the interest rate or repayments or, as a last resort, allow you to sell the property for them.
Here’s what you can do
There are several tactics you can use to negotiate a reduction in repayments or get out of their mortgage, with as little a fallout as possible.
I’ve outlined the options available to you if your repayment holiday has ended and you’re struggling to restart.
1. Propose a temporary repayment plan. A repayment plan will allow you to make smaller, regular payments until your temporary hardship period eases.
The catch is that, once you return to normal repayments, your lender will want to negotiate higher repayments to cover the period where you paid less.
The key is to go to your lender with a realistic repayment plan that you know you can stick to. For instance, if your household is on a single salary temporarily, demonstrate to your lender that once you find work, two salaries will be able to fix up all arrears within a short time.
2. Request a mortgage modification. If your income is reduced for an indefinite period, you could negotiate modifications to your loan with your lender. You could either extend the term of the loan to reduce the size of each repayment or switch to an interest-only loan.
A little-known secret is that occasionally banks are also known to temporarily reduce mortgage interest rates – particularly if the only other option is foreclosure.
3. Seek forbearance. This is applicable for mortgagors who cannot make loan repayments in the short term, but are expecting a lump sum payment that will cover repayments in arrears.
Forbearance is where the lender agrees to forego loan repayments for a while and will accept the lump sum down the track. It could be money coming from an insurance claim, redundancy package, or sale from another property.
4. Ask for a short sale. This prevents the bank from repossessing a property. This is where the lender allows you to put the property on the market yourself, then present all purchase offers to them. They choose the offer that they will accept as the final settlement of your outstanding debt.
The negotiation process for a short sale is very delicate and nuanced, but remember there are some powerful consumer protection laws on your side.
5. Co-operate with repossession. Having a lender repossess your property is always a last resort for them, and should be a last resort for you.
A lender would like to avoid going to court and get orders for repossession of your home and a judgement against you for the value of your loan. As a borrower, you will also want to avoid incurring all of their legal costs.
Rather than wait for court orders, you could proactively approach your lender and request that you be involved with the sale. Your assistance with the sale will go on record, and is likely to soften the blow to your credit rating.
6. Buy your property after repossession. If your circumstances change when the dust settles after repossession, you may be able to repurchase the property from your lender at the auction or after the sale. While these cases are complex, nothing is impossible.
7. Seek hardship relief. Lenders are obliged by law and their own Codes of Practice to help you in times of difficulty if you have reasonable cause to request financial hardship.
Keep in mind, most lenders also have hardship officers who can review your situation and determine what assistance they can offer you.
While the end of the mortgage repayment holiday will overwhelm and bring added uncertainty to many households, it is not the be all and end all.
Consider implementing a few of these tactics to better manage your mortgage repayments, reduce your loan or potentially eliminate it completely.
DG Institute CEO and founder Dominique Grubisa is a lawyer, debt management specialist and wealth management educator.
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