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There are many circumstances that may compel a home owner to default on their mortgage payment; loss of income, illness, emergency expenses, etc. are all valid reasons for not making a timely payment. But no matter how good your excuse is, defaulting on a property loan is a major financial offense. Here we discuss the importance of securing the right type of loan to minimise the risk of defaulting, as well as the consequences that late payments can have on your financial health.
The Repercussions of Late Payments
The immediate consequence of late payment is that all of your finances are thrown off-balance trying to get back on track. In order to recoup the missed payment and avoid missing the next payment, you’ll likely have to use money meant for other bills which means that those payments also fall behind.
Defaulting will also cost you. You may have to pay fees for arrears management and insufficient payment with your financial institution, and your overdue payment may also be charged at a higher interest rate than your loan. If your lender decides to take legal action, you will also be responsible for legal and administrative fees.
Your credit rating will also take a hit. A property loan is a significant commitment, and therefore one of the most important tests of financial reliability. Missing one payment can reduce your credit rating, but missing two or three can see your score plummet. A comment that indicates mortgage default also makes you a less attractive candidate for future loans and credit card applications.
Your lender will also take action. When a payment is missed you’ll receive a notice, which then gives you 30 days to make repayment. If payment is not received, the lender will give you a fixed period for the payment to be made before they can take steps to repossess your home. If payment is still not received, a Sherriff will change the locks, and you can then be served with an eviction notice. Before they can kick you out of your own home, there are steps that the lender needs to take to make the eviction legal. This gives you time to seek out legal advice, make payments, and develop an effective strategy.
How to Avoid Defaults
Now that we’ve discussed the consequences of missing a mortgage payment, it’s important to note that choosing the right kind of mortgage can mean that you never miss a payment.
Some types of loans have built in protection against payment defaults. Limited Recourse Borrowing arrangements for SMSF property loans, for example, require cash reserves as part of the approval process to cover its repayments, but this will ensure that payments can be covered in any eventuality. On the opposite side of the spectrum, some products may cause borrowers to struggle if they lack foresight. Honeymoon loans have an introductory period of lower rates, but then get reverted back to standard variable rate, meaning an increase in repayments that can catch property owners unaware.
Each type of mortgage has a unique structure that can either hinder or help in making regular contributions towards your loan. When securing your property loan, it’s important to be educated on how seemingly attractive rates can affect your payments down the road, or how perceived impediments can actually work in your favour.
Lenders understand that homeowners experience financial hardships, but they won’t be aware of your situation until you communicate with them. You may be tempted to burrow your head in the sand, but creating and following through on a repayment plan will lessen your punishment for the default.