How can homeowners avoid a mortgagee sale?

Homeowners struggling to make their mortgage repayments are often guilty of ignoring the problem, but this won’t make it go away, a financial adviser says.   

Jeff Royle (pictured above left), financial adviser at iLender, said that borrowers falling on hard financial times and facing the risk of a mortgagee sale were prone to burying their head in the sand, adopting the attitude “it won’t happen to me”.

“By and large, we have some warning that financially, things are not great, so it’s about taking action,” Royle said. “Communicating with your lender (and/or adviser) is the most important thing.”

Royle, who specialises in helping borrowers access lending through non-banks and stepped in to help borrowers avoid a mortgagee sale prior to Christmas, said that a mortgagee sale was only considered by lenders as a last resort.

Proactively working with lenders on borrowers’ behalf, Royle said that many borrowers were unaware that the process for a mortgagee sale is highly regulated, requiring lenders to follow a process.

Educating people is part of a mortgage adviser’s duty, and this includes advising them to act early if they become unable to pay their mortgage, he said.

Royle said that advisers helped to keep the decision-making process within the borrower’s hands, negotiating with the lender to buy time, and may involve restructuring or refinancing the mortgage.

Despite the value of early discussion, Royle said that some borrowers were driven to take action only when their financial situation became too difficult to manage.

“Once the realisation hits that this is real, it comes to the point where people can’t ignore it and need to sort it out,” he said.

Mortgage arrears low, but expected to rise

Centrix managing director Keith McLaughlin (pictured above right) said that arrears usually stemmed from circumstances beyond a borrower’s control: illness or bereavement, relationship break-up, loss of job, interest rate rises and/or an increase to the cost of living.  

According to Centrix data, mortgage arrears have plateaued over the last four to six months. In October, 1.42% of mortgage loans were in arrears by 30 days or more.

McLaughlin attributed the current low percentage of defaults to communication between lenders and borrowers and responsible lending practices.

“Communication is the way to fix these things … hiding from it is not going to resolve it,” he said.

While households appeared to have their budgets under control, McLaughlin noted that arrears tend to be seasonal. Arrears typically spike over February and March as Christmas spending and costs of returning to school are absorbed, and businesses restructure for the year ahead, he said.

 Are certain mortgage borrowers more exposed?

Higher mortgage interest rates, coupled with the cost of living, have put pressure on household budgets.

Over the year to October 2021, property value growth peaked at 28.8% but has since slowed, representing a loss of equity for some homeowners who purchased over this period.  CoreLogic December figures showing the national median property value was $803, 624, down 3.9% compared to the same time last year. 

According to Royle, small business owners were among those who had found higher interest rates a challenge, particularly those who encountered a loss of income or downgrading of income at the same time.

He cited the slowdown in construction and falls in residential dwelling consents as impacting the incomes of tradespeople, particularly those working for building companies that subsequently went into liquidation. 

Borrowers entering into short-term arrangements for bridging finance with a plan to move their borrowing to a main lender only to have their plans go awry were another impacted group, particularly in cases where an existing lender was unwilling to extend their loan term, he said.

What can borrowers learn?

Royle said that borrowers wanting to resolve their financial situation must be willing to confront the issues and provide necessary documents such as payslips or financial statements in a timely manner.

He cited an example where a borrower working in the construction industry owed $3.4 million on a property valued at $10 million.

Royle said that the borrower’s financial difficulties arose following a downturn in the economy, which resulted in a falling order book and bad debts.

Their professionalism and cooperation with the process meant that a solution to their situation was found, which ultimately meant they remained in control.

While in most cases, an unexpected change in circumstances is the cause of mortgage arrears, Royle said he’d seen situations where borrowers were driven by emotion and did not contemplate the financial impact. 

He gave an example where a mortgage borrower had an $80,000 loan on a property valued at around $750,000. When asked why their mortgage was in arrears, the borrower’s response was that the person they dealt with about their loan had annoyed them, so they chose not to pay it.

“We stopped the mortgagee, but with legal fees, interest and other charges, the debt has now grown to around $110,000,” Royle said.

“This reaction cost the borrower $30,000 – that’s an expensive lesson.”

The borrower concerned now paid an interest rate of 11% over a 12-month fixed term, which Royle said was designed to clear the debt and rebuild credit.

In response to questions from NZ Adviser, an ANZ spokesman said that mortgagee sales were rare and only progressed as a “last resort”, and if all other options were exhausted.

For mortgage customers experiencing financial pressure, the bank recommended that customers talk to them as “early as possible.”  Customers could set up a time to complete a “Home Loan Check In” and those experiencing hardship or falling behind on their mortgage repayments could access the bank’s customer financial wellbeing team.

Support may vary based on the customer’s individual situation and options explored could include “debt consolidation, restructuring lending, taking a loan repayment break, extending the term of a loan or a period of interest only”, the ANZ spokesman said.

Discussing options to restructure, Royle said lenders were reluctant to take on another’s challenges, unless there was clear evidence that their lending rules and/or approach were beneficial to the customer.

While “prolonging the agony” was not a solution, Royle said that in many cases, restructuring the mortgage enabled borrowers to “buy time” to reach a solution. This may be selling a property upon completion of a renovation or end of a tenancy or even waiting on an inheritance to clear the debt.

As an adviser, Royle said it was easy to dig a lender into a situation, but the question was also how he would dig them out, a process he refers to as the “exit strategy”.

As part of the process, borrowers may need an adviser’s help to manage their finances wisely and adapt to a new level of spending.  For example, someone who was earning $250,000 and could afford “all of the toys” and now earns less (or nothing), needs to realise that “the mortgage comes first.”

“Toys can be replaced…the last thing you want is for your house to go,” Royle said.

“It’s very much being aware of the change – what’s going on, what can we do about it and plan for the future.”

What steps have you taken to help borrowers avoid a mortgagee sale, or as a borrower, what changes have you made to ensure that your mortgage is paid?  Share your thoughts in the comments section below.