Can't pay your loan, should you sell?

If you’re struggling to meet repayments and tempted to sell at a loss, read on as Joe Sirianni looks at your options

What signs do you watch out for so that you know it’s time to sell?

If circumstances mean you can’t make your full mortgage repayment over the course of more than a couple of months, and the arrears start to mount up, this is a problem.

Alternatively, if you’re having to make major sacrifices or are struggling in other areas of your essential household spending (buying groceries, paying utilities, paying school fees, etc.) so you can make your mortgage repayments, this should be ringing alarm bells.

How much time do you need to give yourself? How soon do you make the decision?

If the reason/s for not being able to make your mortgage repayments are short-term (perhaps due to an illness which meant you couldn’t work for a while, or because of large, unexpected expenses) and you’ve otherwise been able to manage them comfortably up to this point, you’re probably going to be able to catch up.

However, if the reasons for not having the available funds are more long-term (unemployment, or an inability to work for a long time or perhaps ever again), you need to take action sooner rather than later.

For example, if your monthly home loan repayment is $3,000 and you miss two months, you’re already $6,000 behind and actually need $9,000 to cover the arrears and the existing month.

If you’ve struggled to find the $3,000 on a monthly basis, chances are you’re not going to have $9,000.

There’s a saying that your first loss is your best loss. Many people look at their situation and don’t like what they see, and think they can find a way out of it. However, unless there is a significant change, chances are the situation is only going to get worse over time.

What are the consequences of not acting sooner?

If you take too long to deal with the situation, you may end up losing control of the process, and this may cost you even more financially and emotionally. If you’re not on the front foot in terms of working with your mortgage broker and lender to either work out alternative arrangements or sell the property, the pressure is only going to build.

If you delay taking action, chances are you will fall further behind with your mortgage repayments. The arrears will increase, and whatever equity you have in the property will be reduced when you do ultimately sell.

If you sell the property yourself but are now quite a few months in arrears, you may well end up accepting a price that is below what you would like, or what the property is really worth, just to be able to resolve the situation.

If the house is sold because the lender has foreclosed on you, this may well see you receive a considerably reduced price for the property.

Chances are the property won’t be presented in the best condition, and potential buyers will smell a bargain and try to buy the property for a low price.

Remember, if there is any shortfall between the property sale price and the debt owing, the bank will chase you for the difference. A loan default will also go on your credit history and will negatively impact on your ability to secure a home loan, or any type of finance, in the future.

What options do you have other than selling?

Contrary to what some may believe, lenders are generally flexible and understanding if you are having difficulty meeting your mortgage repayments, and will be keen to work with you to find a solution that works for everyone. Banks are in the business of lending money, not selling houses, and the last thing they want to do is take possession of your property.

You should talk with your mortgage broker as a priority, and they will work with you and your lender.

Options might include moving from principal and interest payments to interest only to reduce the monthly repayment required, or pausing repayments while you sell the property.

It’s important that you communicate with your lender as early as possible to let them know what is going on.

The most obvious approach is to ensure that you can afford your home loan repayments, both at current interest rates and at least a couple of percentage points higher.

A change in circumstances can impact on your ability to manage your mortgage, but there are measures you can put in place to help absorb the impact of such circumstances.

This includes having personal insurances in place, such as income protection, trauma insurance, and total and permanent disability (TPD) insurance in case you should suffer from a major illness or injury.

Having a healthy level of savings or a ‘buffer’ in the form of money in an offset account or redraw will also help you ride out any changes in circumstances.

Joe Sirianni is executive director, Smartline Personal Mortgage Adviser.

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