A recent survey on Australian Mortgage Stress has revealed a fifth of first home owners risk defaulting on their mortgage in the next few months – are you one of them? We look at who might be vulnerable to mortgage stress, why you want to avoid defaulting on your home loan, and what you can do to prevent things reaching that stage.

By Graham Doessel, Founder and CEO  of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

An ‘Australian Mortgage Stress Analysis’ survey released last week shows almost 20% of the 26,000 Australian households surveyed were under mortgage stress.

The results from Digital Finance Analytics (DFA) showed 16% of those homeowners surveyed currently fall into the ‘severe mortgage stress’ category.

Those in Tasmania are leading the crisis with 17.2 per cent falling behind in repayments, being driven to refinance or pressured by banks to sell. This was closely followed by Northern Territory (17 per cent), New South Wales and South Australia (both 16. 4 per cent), Victoria and Queensland (both 16 per cent), ACT (15.2 per cent), and Western Australia (14.4).

Digital Finance Analytics says rising household costs and budget blow outs can land first-home buyers in hot water.

The survey showed the number of suburban homes in the severe mortgage stress category will rise by 4000 from 43,600 by June 30 next year.

How could I be affected by defaulting on my home loan?

Obviously, if you default on your mortgage for a certain period of time, you risk the bank taking the home. But even if you default once, but then begin to make up the repayments you are still putting your future at risk.

If you fail to make repayments on our loan past 60 days, the bank will make a notation on your credit file – a ‘default’ credit listing. Once you have a default against your name – it will stay there for 5 years. The intention of adding default credit listings to credit history is to warn future credit providers you would potentially have trouble keeping up with repayments. Likewise, as part of ‘responsible lending’ it would mean the credit provider would be acting irresponsibly to lend you money – so most don’t.

A default on your credit file means you have very little access to mainstream credit for the five year term. If you really need to borrow money – you may be able to get a non-conforming loan – but that’s going to be at a much much higher interest rate. You may also find it difficult to access all secondary forms of credit – such as mobile phone plans, credit cards and store credit. This is how people end up going for alternative loans and paying massive amounts of interest. If you fall into this cycle (and sometimes there can be no choice) you can often end up getting into more and more debt without the funds to climb out of it.

This credit lockdown is the very reason why people with legitimate credit rating errors seek help through a credit repairer, and fight so hard to have those credit listings which shouldn’t be there removed from their credit file. Our society works on credit, so it is often very difficult to live with defaults or other adverse listings on your credit file.

So to avoid this ‘debt cycle’ through living with defaults on your credit file, what you want to do is avoid defaulting on your home loan (or indeed any other forms of credit) at all costs.

What can I do if I am experiencing mortgage stress?

Yesterday Sydney Morning Herald’s Money section featured some great advice for people in the situation of mortgage stress in their story Tell them to cut you a break. The article gives you some great practical tips on what to do to reduce the size of your mortgage payments, which should hopefully help to reduce the strain on your household and allow you to get back on track without resorting to missed payments.

The article was all about speaking up, and asking the banks for what you need. Recently there have been some big moves to increase competition in the mortgage market place, through for instance banning exit fees. This may mean your bank is more willing to reduce your interest rate:

If your loan is with a big bank and you’re paying the advertised interest rate, you’re being ripped off. It used to be that customers who knew to ask could secure 70 basis points off that rate, but in recent competitive times, that discount has leapt to as much as 100 basis points.

You won’t be able to get any reduction from one of the new breed of online lenders; it’s their cut-price rates that are forcing discounting elsewhere. But banks, and even some building societies and credit unions, will have wiggle room. The beauty of this information is that you could use it to make an instant saving with your lender, sparing you from having to remortgage.

Be warned, though: getting the full 1 per cent might require a genuine threat to leave. And even then, you may have to play the ”I’m a long-term, loyal customer” card, the SMH article says.

If this doesn’t work – the article advises threatening to leave (but beware exit fees if your loan was taken out prior to Jul 1, 2011).

A report by the Australian Securities and Investments Commission found that more than 50 per cent of people who complained about an early-termination fee saw it reduced or waived. However, the survey of 20 lenders found fees were still levied in 75,000 cases between July 1, 2010, and February 15 last year.

So it’s the knowledge of the deals banks are doing that will save you.

If you are in severe financial strife which won’t be helped with a slightly reduced interest rate – then it’s time to tell put up your hand and tell your bank.

”No way – keep it quiet for as long as possible,” I hear you say, and I understand that rationale. But you also have to realise that your lender doesn’t want you to default. They’ll lose all that lovely interest you’ve signed up to pay, and if the situation becomes so drastic that they sell your house from under you, the price they’ll fetch will be paltry.

The lenders will help you – with revised repayment schedules, spreading them over a fresh 25 or 30 years, and even with interest-rate discounts – because it’s in their interests to do so. What’s more, they made a commitment to the government during the GFC to go easy on borrowers in distress. And today, they’re under more political and public scrutiny than ever,” the same article said.

How do I apply for a revised repayment schedule with my bank to avoid a default?

Firstly, you need to make it clear to your bank that you fear if you aren’t able to restructure your home loan repayments that you will fall into arrears. If you have a situation of temporary difficulty, such as unemployment, illness, injury or other reasonable issue which would mean making repayments will be difficult, this is essential to do. You will be requesting a financial hardship variation to your repayments. This may mean your repayments are reduced accordingly and the lender may take action to stop a potential default on your credit file.

Tips for Applying for financial hardship

– Work out what you can afford to pay prior to requesting a hardship variation. This would involve taking the bull by the horns and doing up a serious budget on what’s coming in and what your repayments are on all of your credit accounts. Could burying your head in the sand be the main reason why you find yourself in this situation in the first place? If so, it would be a great idea to seek professional help in managing your budget for your entire future. The best place to start looking for some help would be ASIC’s MoneySmart Website. If you feel like you’ll struggle across a number of credit areas in the short term – consider requesting a reduced payment for other credit accounts as well.

– Put your request in writing and keep a copy as a record.

– You may need to use the actual words “financial hardship variation” for your lender to officially recognise the request, and to avoid confusion as to what you’re asking for.

– Check your loan agreement as to the terms you entered into around financial hardship. Those agreements post-1 July 2010 have a clause which requires the lender to respond to you within 21 days.

– Creditors are legally required to consider a person’s request for variation on payment arrangements, but are not obliged to agree to any hardship variation proposal put forward. If a lender either refuses or fails to respond to your hardship request, you can lodge a complaint with their independent dispute resolution scheme, such as the Ombudsman they are a member of.

– Research how to apply for financial hardship. You can do this through ASIC’s MoneySmart Website, or through sites like Money Help, a website run by the Victorian State Government.

A rethink about money

If you have been accepted for a hardship variation – and you don’t end up with a default on your credit file, consider that you have dodged a bullet. But are you sure you won’t get into any kind of credit stress in the future? This whole episode will be worth it if you are able to learn from what’s happened. My advice on avoiding future defaults? Overhaul your finances and put in place some real changes in how you think about credit – taking a fresh look at ‘things’ ‘wants’ and ‘needs’– and making credit work for you next time instead of the other way around.  Unfortunately this doesn’t guarantee that mistakes won’t happen with your credit file, but it will guarantee that a negative credit listing won’t make its way to your credit file through any fault of your own.

For help with disputing credit listings which you consider unfair – including where instances of financial hardship have not been recognised – contact a Credit Repair Advisor on 1300 667 218 or visit the main site www.mycra.com.au for more details on your possible suitability for credit repair.

Image: digitalart/ www.FreeDigitalPhotos.net

Survey statistics courtesy of Herald Sun Article: First time buyers at risk of home loss