Around 1% of mortgages in Australia are in 90+ day arrears, according to official figures from the Reserve Bank of Australia (RBA).

This means around 1% of Australia’s outstanding home loans are overdue on their repayments by 90 days or more. The figure is relatively low compared to other countries (arrears in the US hit 10% amid the global financial crisis). It’s also lower than pre-pandemic levels which is quite remarkable given Australia’s run of interest rate rises during 2022 and 2023.

While the RBA looks at loans 90+ days in arrears in its assessments of Australia’s economic health, a loan is technically in arrears the moment a repayment is overdue.

If you’re in this situation, refinancing could be a viable option to help you to get back on track with your loan repayments, but the key word here is could.

Refinancing is the process of switching a mortgage to a different loan to get a lower interest rate, more flexible loan terms, or to consolidate debt. However, when your home loan is in arrears, this can be a tricky business and might not always be possible.

Nonetheless, let’s explore how to do it in this article and the pros and cons of doing so.

How does a home loan fall into arrears?

If you have missed, late, or overdue repayments on your home loan then it’s considered to be in arrears. This can be a result of many factors including illness, job loss, relationship breakdown, or other unexpected situations which lead to a borrower not being able to meet their monthly mortgage repayments. It could also be as a result of interest rate rises putting increasing pressure on your financial reserves.

Whatever the cause, falling into arrears is a serious situation which can eventually lead to your lender repossessing your home and selling it to recover their money. Such an outcome can also prevent you from obtaining a loan in the future. Unfortunately, falling into arrears and potential repossession will leave a big black mark on your credit score.

There are ways to get yourself out of being in arrears. Refinancing is one of them but it’s important you do everything possible to avoid getting to this stage.

What to do before you consider refinancing

If you’re struggling to meet your home loan repayments, it’s wise to contact your lender before you default on a repayment. Sydney-based community legal group Financial Rights Legal Centre says banks and non-bank lenders routinely consider what are called ‘hardship variation’ requests.

A hardship variation is generally a temporary arrangement with your lender, usually covering a few months until normal payments resume. Lenders may consider:

  • postponing or reducing payments for a few months

  • reducing or freezing the interest rate for a few months

  • extending the term of the loan so missed payments are added to the end of the loan

  • waiving default or other penalty fees

Lenders are legally required to work with people in financial hardship and have specialised financial hardship teams to explore options for people struggling with their mortgages. The Australian Banking Association has put together a Financial Assistance Hub with the contact details of banks' hardship services. It’s also strongly advised to keep a record of correspondence with your lender and work with them to come to a solution that may get you through a difficult patch. However, if your situation isn’t likely to be temporary, you will need a longer-term solution.

How to refinance a home loan in arrears

Although refinancing a home loan in arrears is a valid option, it probably won’t be an easy one and it’s highly discretionary, with lenders judging circumstances on a case-by-case basis. Borrowers in arrears are considered ‘bad credit’ and, as a result, some lenders won’t be interested in taking you on as a customer.

This doesn’t mean you’re out of options though. Here are some general tips on how to approach refinancing a home loan in arrears:

Talk to your current lender

It’s best to start with your current lender to see what options they have, even prior to deciding to refinance. If you have applied for a hardship variation on your loan and still feel you won’t be able to make future repayments, ask your lender what else they can offer given your circumstances. Despite what you might hear, lenders aren’t always faceless corporations hellbent on profits. An open line of communication is the best way to foster a relationship and build some level of trust. You’ll likely get far better results with this approach rather than asking to refinance when your repayments are late without any prior communication.

Your current lender may also be more understanding than a new one and, as such, may be more open to you refinancing your loan. A paying customer is more valuable to a lender than one who can’t meet their repayments, so it’s usually in the lender’s interest to work out an arrangement with you.

Get your credit in check

It’s vital to take stock of your credit situation. Lenders will be looking at just that when they’re assessing you. If you’re looking to refinance a home loan in arrears, it’s advisable to ensure you have no other outstanding credit. Do all you can to minimise credit card use, pay your bills on time, and have some idea what your credit score is. It also pays to know how to improve your credit score so you are aware of what factors can impact your future rating.

See a mortgage broker

Mortgage brokers wrote more than two-thirds of all new residential home loans during 2023.

Refinancing a home loan in arrears is more complex than arranging a standard home loan so it may pay to have professional guidance through the process rather than going it alone. A good mortgage broker could be well worth the investment to help you discover options most suitable to your circumstances. Brokers are also legally required to act in your best interests.

Consider a specialist lender

Many major lenders will typically not consider refinancing your home loan if it is in arrears, no matter what situation you’re in. This generally leaves you with far fewer options.

However, there are specialist lenders in Australia who offer home loans specifically for people with bad credit histories. These lenders may be more understanding of situations that may have been out of your control that led to your home loan falling into arrears. They also take into account more factors when deciding whether to lend to you.

Bear in mind though that because you’ll be perceived as a riskier borrower, any lender that’s willing to give you a loan might only do so by charging higher interest than standard market rates and more costly fees.

Borrow at an LVR of under 80%

If you’re already in financial hardship, the last thing you want is to be incurring more costs. Refinancing to a home loan with a loan-to-value ratio (LVR) of more than 80% often means you’ll be subject to lenders mortgage insurance (LMI). This can run into the thousands, potentially wiping out any benefits of your refinancing efforts.

Of course, if your finances were stretched enough to fall into arrears then borrowing under 80% LVR may not be possible, but it’s always useful to be aware of the threshold when considering the terms of any loan products.

Benefits of refinancing a home loan in arrears

Refinancing is by no means the definitive answer to recovering from a home loan in arrears, but it could be an effective option in some circumstances. Here are some of the benefits of refinancing a home loan in arrears:

  • Consolidate debt - if you have several debts with a lender, they may allow you to roll them into one lump sum upon refinancing. This can help with future budgeting efforts and make your repayments easier to keep track of, although this method is not a magic pill.

  • Negotiate new terms with your lender - refinancing opens up an opportunity to reorganise the terms of your loan, albeit on the lender's terms. If you feel you may be able to repay your loan more easily via fortnightly repayments or wish to make extra repayments, refinancing can be a way to do so.

Risks of refinancing a home loan in arrears

Refinancing a home loan in arrears is not without its drawbacks. Here are some you might run into:

  • Slip further into debt - some borrowers believe refinancing will be the solution to their problems and refinance to a loan they still can’t afford. Falling into arrears a second time or soon after refinancing may rule out another refinance attempt and create further debt or even repossession of the home.

  • Higher interest rates - if you’re in arrears, it’s highly unlikely you’ll get a more competitive interest rate. Once you refinance, your repayments may not be that much lower than they were previously, again opening up the opportunity for a debt spiral.

  • LMI and other fees - refinancing typically comes with more fees such as application fees, valuation fees, and settlement fees, just to name a few. Some specialist lenders are also known to charge a risk fee. As well as this, borrowing at an LVR over 80% means you could be subject to the often-costly LMI.

  • Longer loan duration - if you’re looking to reduce your loan repayments immediately, lengthening your loan can be a quickfire way to do so. However, doing this will likely see you pay tens of thousands of dollars more in interest over the life of your loan. This method could provide short-term relief in exchange for more long-term costs. The antidote, of course, is to make extra repayments when you’re in a position to.

What happens if your home loan remains in arrears?

The worst-case scenario of your home loan being in arrears is your property being repossessed. However, there are several steps that need to take place before this can happen.

  1. The lender contacts you after you miss a repayment, either in the form of an email, phone call, or letter.

  2. The lender sends you a default notice, which gives you at least 30 days to catch up on your missed mortgage repayments. At this point, you have some options. You can make your repayment, ask your lender to delay your repayments, apply for a hardship variation, or consider selling your property.

  3. When your default notice period expires, your lender may take you to court so they can repossess your home and sell it to cover the cost of your loan. At this stage, you should seek legal advice. There are a number of institutions across Australia that provide free legal advice and financial counselling.

  4. If you have failed to take any action, the lender will apply for a court order to gain possession of your home. Seek urgent legal advice if this happens.

  5. Once the lender has obtained a court order, they will send you a letter directing you to vacate your property. A sheriff, also known as a bailiff, will come and change the locks on your property if necessary. Again, legal advice is urgently needed.

  6. The lender evicts you from your home and sells it to recover the loan amount.

Case Study

Here’s an over-simplified example to illustrate how refinancing a home loan in arrears can work.

James and Cassidy are a couple in their late thirties with a property in Sydney. They borrowed $450,000 at 4.5% and pay a monthly repayment of $2,502 over 25 years.

Ten years into the loan, James falls ill and is unable to work for a year, causing their loan to fall into arrears. At this stage, they still have $325,688 left to pay on their loan over 15 years.

Interest rates have risen since they took out their loan, so they go to their current lender and manage to negotiate a refinance, where they will pay the remaining balance out over 25 years instead of 15. Of course, this will extend the life of their loan by 10 years. Their new interest rate is 5%, higher than their previous rate but pretty good for someone in arrears looking to refinance.

As a result, their monthly repayment drops to a more manageable $1,904 per month, which allows them to keep their heads above water until James can get back to full-time work.

Extending their loan by 10 years means James and Cassidy will end up paying $122,713 more in interest than they would have if they stuck with their old loan, but they consider this an acceptable price to pay to keep their home.

Savings.com.au’s two cents

Although refinancing may seem like an easy way to get your home loan out of arrears, it can be fraught with danger. If you can avoid going into arrears, do so at all costs as it often has a damning effect on your credit score and, in some cases, you may not be able to refinance.

Refinancing can also be littered with extra expenses due to higher interest rates and fees than a standard home loan lender might charge. This is to compensate for the perceived risk in extending you a loan.

If you think you might be in danger of missing home loan repayments, immediately contact your bank and open a line of communication.

If you’re thinking of refinancing your home loan in arrears, consider seeing a mortgage broker. Their experience with lenders and how the industry works could prove invaluable in your time of hardship. Also take advantage of free financial counselling and legal advice services to offer guidance and support. If it comes down it, you might just have to bite the bullet and downsize to a less expensive home. That is certainly not the worst outcome.

First published on December 2019

Article originally published by Alex Brewster in November 2019



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