Mortgage arrears are rising – what to do if you’re falling behind in your interest payments

Despite the lowest home loan rates in decades, more Australians are falling behind in their mortgage repayments.

The head of the Reserve Bank's financial stability department, Jonathan Kearns, explained that…

"The share of banks' housing loans in arrears is now back around the level reached in 2010, the highest it has been for many years," he said.

"But arrears are still well below the level reached in the early 1990s recession."

But they are at the highest level since that recession, as the following graph shows:

Mr Kearns was keen to emphasise the positives in the data.

"With overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector."

The data indicate that arrears are lower in Australia than in many other advanced economies, so maybe a better way of looking at the arrears rate in Australia is to note that over 99 per cent of housing loans are on, or ahead of, schedule.

Making loans involves risk, and banks are used to managing this risk.

If the arrears rate was persistently very low, that would suggest that lenders were being too cautious in lending.

Getting behind with mortgage repayments can happen to anyone.

There are many reasons why borrowers fall into arrears, almost all of which involve a fall in income or rise in expenses – or both.

Some borrowers experience personal misfortune, such as ill health or a relationship breakdown, which is unrelated to economic conditions or the quality of their loan.

And even in good times, some people become unemployed.

So there will always be some borrowers who fall into arrears

If you are having problems paying your mortgage don’t bury your head in the sand.

Instead act quickly as there are a number of steps you can take to stop the situation escalating and having the bank take possession of your home.

1. Speak to your lender and advise them of your situation.

They will be keen to help – they don’t really want to take possession of your home.

Explain in writing why you missed a payment or why you will miss a future payment and how you plan to catch up.

And offer to make some payments, it will look better when you ask for assistance, recognising there are a number of things your lender may do to help you:

• Many borrowers have not reduced their regular mortgage repayments as interest rates fell over the last few years and in effect have been paying extra off their mortgage balance. The bank may allow you to use this “redraw facility” rather than making cash repayments.
• Your lender may allow a temporary suspension of your mortgage payments through a hardship variation. They will still charge you interest on your home loan, but this will be added to your balance owing.
• Rather than fully suspending your mortgage payments for a short period, your lender may allow you a temporary reduction in mortgage payments or change your loan from a principal and interest loan to an interest only loan which has lower monthly payments as you are no longer paying off the actual loan itself.
• Your lender may extend the term of your mortgage from say 20 years to 25 years. This means you spread the loan over a longer period, reducing your monthly repayments. But beware…over the long run you'll pay more interest, so once you’re financial again it would pay to reduce your debt by increasing your repayments.

2. Do a budget NOW!

Spending some time documenting your spending habits to see where can save money.

Carefully look where you are spending money on non-essentials such as, take away food, cigarettes, alcohol, gym membership and entertainment and look for ways to cut back

Try shopping around and cutting back on essentials such as energy bills, phone and internet connection etc.

3. Seek Help from a financial counsellor.

The National Debt Helpline is hotline where financial counsellors will provide free, confidential and independent advice.

They may:

• Suggest ways to improve your financial situation
• See if you are eligible for government assistance
• Negotiate repayment arrangements with your creditors
• Explain your options and their consequences, including debt recovery procedures, bankruptcy and other alternatives
• Help you apply for a hardship variation
• Help you organise your finances and do a budget
• Refer you to other services, for example, a gambling helpline, family support, personal counselling or community legal aid.

4. Seek Legal advice

If your financial situation is dire consider seeking legal advice.

While you may not be able to afford a private solicitor, consider the free Legal Aid services available in each State.

Here’s two things you should not do if you’re falling into mortgage arrears

1. Take out an additional loan to pay your debts.
   If your existing loan is already unsustainable don't get yourself deeper into debt by borrowing more or taking on expensive credit card debt.
2. Borrowing from family and friends .
   While this may seem like a simple quick solution, if you can’t manage your debts now, taking on more debt is rarely a good idea and can lead to social pressures when you end up owing money to people who are close to you

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.