For the many Australian home owners dealing with the financial fall-out of the covid crisis, the risk of foreclosure is very real.
Foreclosure is what happens when a home owner stops making mortgage payments to their lender, forcing the sale of the property so the lender can recover its money. While foreclosure is a US term, in Australia the same process is called ‘mortgagee in possession’.
Whatever you call it, it’s serious business when a home owner faces having their property sold from under them. While in some cases it can’t be avoided, there are some steps you can take to try to avoid foreclosure.
Billie Christofi, finance expert and founder of Melbourne-based investment and financial services company Reventon, explains.
1. Speak to your lender early if you’re having problems
Getting on the front foot is vital if you’re facing foreclosure, Christofi says. So don’t wait until you miss a mortgage payment before speaking to your bank or lender. Look to go on a payment plan or defer payments to assist with cashflow, she says.
2. Ask for a repayment holiday, but understand what it means
A repayment holiday gives you the chance to freeze your mortgage payments for up to six months, without any impact on your credit score, but you still have to pay the full amount owed back.
“Make sure you use it to get on top of your finances, as your debt will compound if you don’t have a plan in place. This is a pause on your finances, not an exemption from your responsibilities,” Christofi says.
3. Consider switching to an interest-only home loan
If you’re on a “principal and interest” loan, switching to an interest-only loan for a set period will mean you’ll pay less towards your mortgage.
Interest-only will reduce the amount you’re required to pay and you’ll have more freedom to pay whatever extra you have available off the principal too, Christofi explains.
4. Look at extending the length of your home loan
Extending the years on your loan will reduce your payments. But keep in mind this will also extend the overall amount of interest you pay.
“Once you get on top of your financial situation, look at potentially changing your loan term back or paying extra towards the principal,” Christofi says.
5. Fix the terms of your home loan
Many lenders, including the big four, are currently offering very low-interest rates on fixed-term loans – sometimes more than a full percentage point lower than the standard variable rate.
Christofi says fixing the loan term will make your payments regular and consistent, making it easier to budget.
6. Check your insurance, for several reasons
If you have mortgage protection insurance, check the terms of your policy to see whether it covers your current situation and can help you pay your mortgage.
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7. Consider a personal loan
Christofi says a personal loan, with a low interest rate, might be of help if you’re really struggling. It can be a better approach than defaulting on a mortgage, something that affect your credit score in the longer term.
8. Downsize to a home you can afford
While it’s a drastic measure, selling up and buying a new home to reduce your mortgage and repayments is an option, depending how far along the process is. Whether you qualify for a loan on a new home will depend on your income and expenses.
9. Ask for help
Don’t be afraid to ask friends and family for help if you need it, Christofi says. Even if they can’t afford a loan to ease the pressure, they may be able to assist by using the equity they have in their own home.
10. Assess all your unnecessary spending
If you’re struggling to make commitments, look closely at all your outgoings, as there may be a way to rein spending in. This can help ease the pressure a little.
Ensure you speak to a financial expert for advice on your particular situation to ensure you make the best decision for your circumstances.
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