Since May 2022, the Reserve Bank of Australia has increased the cash rate four times. All major banks and lenders have responded to and passed on the rate hike. Most experts expect interest rates will be further increased in the upcoming months.
If you are on a variable rate loan, your monthly repayments are likely to be significantly more expensive in the next two years.
With high inflation and costs of living, it is probably time for you to be prepared and know more about your home loan and home loan default.
What is a home loan default?
There are various events that may trigger a loan default. The most common one is failing to make payments on time. Some lenders may grant a grace period of one to two weeks. Technically, once you are one day late, however, you are in default and have breached the loan agreement. The payment terms are specified in your loan contract.
If you are in default, there are certain procedures the lender must follow.
The lender must first issue a default notice giving you at least 30 days to rectify the default and attach an information sheet letting you know your rights. The problem you have if this occurs is that once you miss one payment, it means the whole loan is in default and the default notice will demand the whole of the loan, all interest due and all bank fees due to be paid in full in 30 days.
You should always contact the lender and try to reach repayment arrangements with them as soon as you receive a default notice. However, the lender is under no obligation to make any change or variation to your loan contract.
If, by the end of the period specified in the default notice, you fail to reach agreements with the lender or rectify the default, the lender can commence legal proceedings against you.
The lender will typically have the power to:
- Charge interest at the default rate (usually 2 – 4% greater than the rate otherwise applicable);
- Charge any fees and expenses incurred in recovering the debt;
- Demand payment of the whole of the loan under the acceleration clause; and
- Take possession of your property.
Most loan contracts will have an acceleration clause which allows the lender to demand immediate payment of all outstanding amounts due under the loan. Some loan contracts may have additional requirements to trigger an acceleration clause, but in general the clause can operate if the loan is in default.
Mortgagee in possession
Contrary to many people’s beliefs, the lender can take possession of your property without starting court proceedings. In practice, most of the time, the lender will get a court order for the sheriff to evict you from the property if you live there.
If the property is tenanted, the lender can take possession by giving notice to the tenant and will then be entitled to rents and profits accruing.
In addition to the above, a default can significantly impact your ability to get credit in the future. The lender can list a default of $150 or more against your credit report. If the lender obtains a judgment against you, the judgment will be listed and remain on your file for five years.
It is important that you are familiar with the terms of your loan contract. If you are about to enter into a loan contract, if you want to know more about your rights and responsibilities under a loan and mortgage, or if you are experiencing any issues with your lender, please don’t hesitate to contact Lynn & Brown Lawyers and get in touch with one of our experienced commercial lawyers.
About the authors: This article has been co-authored by Tina Xiao and Steven Brown. Tina was admitted in June 2018 in NSW and specialises in commercial law area. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.