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What happens if you default on a home loan?

couple anxious about getting a default on their home loan

When you default on a loan, the bank will see you as a financial
liability and this could have negative effects on any future loan or credit applications.

When you take out a home loan (also known as a mortgage), you are committing to a big financial responsibility spread over many years. While at the time you may have been financially secure enough to buy a home, it is impossible to predict the future.

Even if you are prepared for emergency situations like loss of employment or sudden illness, emergency funds don’t last forever—especially when you are expected to make monthly payments of a couple thousand dollars. This may lead to defaulting on mortgage repayments.

What’s a mortgage default?

A mortgage default happens when you don’t pay your home loan on schedule. The loan becomes ‘on default’ one day after the payment is due. Typically, the lender won’t follow up about the missed payment until a couple days or weeks later. 

When you miss a mortgage repayment you are usually hit with a late fee which, depending on your lender, ranges from $9 to around $195. However, the late fee should be the least of your concerns when it comes to defaulting. When you default you run the risk of extending your mortgage due to the interest adding up.

What are the consequences of defaulting on your home loan?

Aside from being hit by late penalty fees and your overall interest on your loan increasing, by defaulting on your home loan you run hurting your credit rating.

If you miss several home loan repayments, you are at risk of losing your home. The lender may be forced to sell your house to protect themselves and recover any debt.

How do I avoid defaulting on my mortgage?

It is always good to prepare yourself for the worst. When looking at home loans, consider looking for a lender that offers repayment holiday features or something similar, just in case you run into some unforeseeable problems in the future.

Another thing to consider is to have an emergency fund that you can use towards your home loan in case of income loss. Plan for a fund that could cover your mortgage repayments for three to six months, that way you don’t run the risk of losing your home while looking for employment.

What can I do if I default my loan?

If you think you might default on a loan, typically it is best to contact your lender and let them know of the situation you are in. Your lender may give you advice on how to move forward with your financial situation. Depending on the lender, they may extend the term of the loan and reduce or delay repayments. It is important that you speak to your lender’s hardship team and apply for a hardship variation—which may help you make your loans more manageable by changing the terms of your mortgage.

If you’ve missed several repayments and your lender has sent a formal statement of claims or summon, then it is best to seek legal advice. Through Money Smart, you can find free legal advice in your state or territory.

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Maria Gil
Maria Gil
Money writer

Maria Gil writes across all of our personal finance areas here at Mozo. Her goal is to help you think smarter about money and have more in your pocket. Maria earned a journalism degree in Florida in the United States, where she has contributed to major news outlets such as The Miami Herald. She also completed a masters of digital communications at the University of Sydney. When Maria isn’t busy with all things finance, you can find her tucked away reading fantasy books. She is also ASIC RG146 (Tier 2) certified for general advice.

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