What to do if you can't afford to pay your mortgage

Managing mortgage repayments isn’t easy, especially amid the ongoing cost of living challenges.

Throw in the ever-changing interest rates, and you might wonder how you’ll ever afford your next mortgage repayment.

It’s crucial you don’t bury your head in the sand. The last thing you want to do is to skip repayments. If you’re struggling financially, there are options available to you that you might not have considered, which don’t involve selling your home.

What is a mortgage default?

If you’ve fallen behind in payments, you will be in arrears. Most lenders will give you a week or two to catch up on the missed payment.

But if the payment isn’t made, you’ve defaulted on your mortgage payment.

You may incur fees for missing a mortgage payment, and a default can also appear on your credit report, which can negatively impact your credit rating. This could mean you struggle to find another lender willing to take on your mortgage debt because you’re deemed a potentially risky customer.

This means your lender may send you a default notice, giving you 30 days to pay what is outstanding and any current payments owed.

If you still don’t make the payment, the lender may repossess the property and sell it to recover the debt.

Bear in mind that making the tough decision to sell your home before your lender does is likely to be more financially beneficial.

Check your budget

This is the time to get serious about your budgeting. Know what your living expenses are, and look at where you can make some cuts. Cancel the subscriptions, gym membership and weekends away, and get some funds stashed away to cover your mortgage.

It’s also worth calling your utility providers, such as electricity and gas, and see if you can negotiate a more competitive deal. Also, shop around and see if you can get a better deal with a competing provider.

Up your income

This could include asking for a raise at work, picking up extra hours where you can, taking on an extra job for a while, renting out a spare room if you have one, offering gardening services at the weekend or selling unwanted items.

You may even need to consider relocating somewhere cheaper and renting out your home for a period of time so that you can get on top of your repayments if you have to.

Negotiate your interest rate

Do some research on your interest rate and what else is on offer in the market. Getting a lower interest rate is a possibility.

Start by finding out what variable rate your current lender offers new customers. These are usually competitive rates, and if it’s lower than your current rate, ask your lender for this rate.

It sounds simple, but they won’t want to lose you as a customer, so brush up on your negotiation skills and go for it.

Contact your lender

As difficult as it might be, start by contacting your lender and have a frank conversation. This won’t impact your credit score, so it’s worth reaching out early.

Lenders have hardship clauses built into the loan, which could give you some breathing space to determine the best way to get on top of the situation.

Depending on the size of your mortgage and how much difficulty you are having, they may be able to waive fees, offer discount rates, or restructure your repayments, such as paying interest only for a while.

Another option is to consider changing the frequency of your repayments, which could reduce your payment amount. Or, if your mortgage has an offset account, it may be possible to use these extra funds for repayments. Bear in mind that this could increase the term of your loan and, therefore, how much interest you pay on the loan.

Review hardship options

Mortgage stress kicks in when borrowers spend more than 30 per cent of their household income on their mortgage. If you’re in this category, you’re officially struggling.

All lenders have a financial hardship team on standby to help borrowers experiencing financial difficulties and mortgage stress. They will assess your situation and help you create a plan of action to get back on track.

The Australian Securities and Investments Commission is watching closely, reminding lenders that they must appropriately support customers experiencing financial hardship.

This includes having the appropriate arrangements to respond to requests for assistance from customers experiencing financial hardship.

But if you’re already defaulting on your loan, it will be more difficult for them to help you, but it’s worth reaching out. The trick is to get on the front foot and contact your lender before you’re unable to make the next repayment.

The Financial Rights Legal Centre has a template to help you write the letter requesting hardship variation on a loan.

Switch to a cheaper home loan

You may be able to save with your current lender, but it doesn’t hurt to shop around, either.

Check out some of the many comparison sites to see where your current interest rate sits in the broader market, which will help you understand how much wriggle room you might have with your current or a new lender.

Remember that refinancing will attract fees, so understand the costs involved and calculate whether the move is worthwhile.

Sell your home

While it sounds dire, if you’re in over your head, you’re probably experiencing a fair bit of emotional stress, so ending the financial pain could be a relief.

As long as you don’t have negative equity in your property, selling your home will allow you to repay your mortgage, relocate to something more affordable, and move on emotionally.

You may even want to rent or stay with family until you figure out your next move.

Remember, the key here is to act early before you go into mortgage default.