Struggling with mortgage repayments? Make a plan

The rising cost of living, higher interest rates and the financial stretch to buy a home in the first place are believed to be behind a surprise spike in mortgage arrears in the last quarter of 2010. With the mortgage stress expected to have continued in the past three months, borrowers are being advised to seek help quickly if they start to fall behind on their repayments.

The ratings agency Fitch found in a quarterly survey that mortgage payments more than 90 days late were 12.5 per cent higher in the final three months of 2010 than they were in the preceding quarter.

The agency described the result as unexpected, saying mortgage stress usually reared its head after Christmas, not before. It said mortgage performance was likely to have worsened in the first three months of this year because of the usual holiday hangover, the rate rise in November and the Queensland floods and cyclone that followed.

It did note, however, that the mortgage arrears rate in Australia remains relatively low compared with that in other developed countries.

The percentage of households more than 90 days behind on repayments – which means they’re in serious danger of their lender foreclosing – is just 0.54 per cent, it says.

RBA statistics released late last month show non-performing home loans in Australia to be less than 1 per cent of total loans, compared with more than 2 per cent in Britain and about 8 per cent in the US.

HOUSEHOLDS SQUEEZED

Leading home lender Commonwealth Bank of Australia is believed to have seen the same blip in arrears late last year but is thought not to be overly concerned. However, one industry observer, who has asked not to be named, says research also shows an increase in arrears and believes this is because of a ”systemic” issue with housing affordability, not just a Christmas squeeze.

Rate rises have happened much quicker than people expected, the costs of living are rising faster than wages and the number of people who simply cannot afford the homes they have bought is ”the real story”, the source says. The insider estimates that one in three first-home buyers – many of whom entered the market thanks to juiced-up government incentives – is finding it difficult to make payments.

A spokeswoman for Mortgage Choice, Kristy Sheppard, says the broker network records below-average customer arrears but finds that the people having difficulties fall into two broad categories: those whose personal circumstances have changed, perhaps because of job loss; and those who have gone into additional debt after taking out a mortgage.

RESTRUCTURE DEBT

The Mortgage Choice 2011 First Home Owner Survey found that 19 per cent of respondents had taken on ”significant” extra debt since buying a property in the past two years.

Half of these people had spent more than $20,000 since becoming a home owner and 8 per cent had spent more than $100,000.

”If a customer is experiencing financial difficulties due to a change in their personal financial circumstances, then their broker will review their loan and repayment strategy immediately,” Sheppard says. ”It may be that cutting back spending in other areas of their life could help put them back on track or it could be that the broker needs to talk to their lender about restructuring the home loan in some way.”

A review by the broker might find that switching to a loan with fewer fees or a lower interest rate, or that restructuring the existing loan – for instance, by moving to interest-only payments – might help the client over the hump.

”If the mortgage stress is the result of extra debt … then a different strategy may be taken,” Sheppard says.

Consolidating credit-card debt, store-card debt, ”interest-free” purchases and/or personal loans into a home loan at a lower interest rate is one option to reduce the total commitment.

”However, doing so will stretch these debts over a longer term, increasing the interest owed – debt consolidation isn’t to be taken lightly,” Sheppard says.

Brokers may have to refer such clients to a financial adviser.

HARDSHIP PROVISION

Under codes of practice covering the home-loan sector, customers can invoke ”hardship” provisions that say lenders will ”work with” customers to overcome financial difficulties. The National Consumer Credit Protection Act also contains hardship provisions.

The, Banking Ombudsman, Philip Field, says people going through a rough patch should consider how long the difficulty may last.

They should prepare a budget so they can work out what they can realistically afford to pay their lender and by when. ”There’s no point proposing something that’s just going to fall over next week,” Field says.

They might want to do this with the help of a financial counsellor.

”Next, go and have a conversation with those people – the bank, the utilities,” he says. ”Get on the front foot and raise it with them first.

”The earlier you let the lender know, the more options they have available to them. I would hope and I would be surprised if this didn’t happen, that if you spoke to them early and had a realistic proposal based on a budget, you’d get a much fairer hearing than if you had kept your head in the sand.”

OMBUDSMAN’S ROLE

People who feel that their lender could have been more helpful can take a dispute to the Financial Ombudsman Service (fos.org.au).

”What we do with a lot of them is we set up a telephone conference with the lender, customer and us and we try in the space of an hour or two to come to a resolution about how the debt might be repaid,” Field says.

”What an appropriate arrangement might be if things are really looking bad may be giving people time to sell, themselves, rather than having to go through a mortgagee auction.”

The FOS handled a few hundred such disputes last year and about 70 per cent were resolved, usually with some type of repayment variation.

”Again, it’s about being realistic and having these discussions,” Field says. ”Sometimes customers have an unrealistic expectation and sometimes lenders have an unrealistic expectation of what might be appropriate – some customers might want the whole debt written off; some lenders want their money yesterday.

”It’s a case of trying to find the right balance. If you give people time, are they going to be able to get back on track, or is it hopeless and therefore we have to look at other options?”

Field says if selling the home is inevitable, as a general rule it’s better to sell earlier than to delay.

”The longer it goes with you not making payments, or only minimal payments, all you’re doing is eroding your own equity,” he says.

In other words, it may be best to take the proceeds and use them to find a rental property, or to downsize.

Key points

❏ There has been an unusually timed spike in mortgage arrears.

❏ People who are having trouble making repayments should check their budget.

❏ They should talk to their lender to work out a repayment plan.

❏ Lenders have an obligation to work with people in financial hardship.

❏ If help isn’t forthcoming, the Financial Ombudsman Service can mediate a dispute.