With government and bank support slated to diminish gradually and eventually end all together early next year, many Australian’s may find themselves at risk of defaulting on their mortgage.
Before banks extended mortgage deferrals, I wrote an article explaining why more action was necessary, as the Australian economy headed for a doomsday equivalent event that would have seen both JobKeeper/JobSeeker and mortgage deferrals end in the same month. With the prospect of having to make increased mortgage repayments with less government support, I was very wary of the prospect of widespread default. With so many Australian’s relying on government support and the banks deferral program things were looking particularly scary.
Thankfully, the banks extended deferrals, and the government has done the same with it’s programs, although both are tapering their programs and slowly weening Australians off of their support. While this will certainly save many from default, it won’t save everyone. Exactly how many? Only time will tell. Recently I looked at how defaults occur, long story short, you need a loan on an asset (e.g. your house or your business) that is valued at less than what you borrowed for it, and you need to be unable to meet repayments. With house prices having already dipped, and expected to drop lower.
“I think a reduction … in the order of 10 to 12 per cent is still a reasonable assumption,” said Matt Comyn, CEO of CBA.Said Matt Comyn, CEO of the Commonwealth Bank of Australia to Sydney Morning Herald
So, with financial supports tapering out, and housing prices potentially going down in the coming year, we may very well see borrowers defaulting.
One would hope that the banks and other lenders understand the unprecedented nature of this pandemic, and throw another life raft to Australians. But the fact remains that the banks are fully in their rights to declare a default after an account is sixty days overdue.
Once a default has been recorded on a credit file it remains there for five years, regardless of whether it’s paid or not. A default makes finding finance incredibly difficult. Credit files are a Banks first determinant for a successful application. The initial application process is fully automated, meaning a computer checks the credit file and a default often leads to an automatic decline.
The key to avoiding a default is communication. This may be difficult at first, but it is very important that you be transparent with the banks about the situation you are in so that they can help you find a solution.
The reason communication is so important is because the credit file is managed separately and is once again automated. An account that is overdue will automatically go onto a mail list where demand letters will be sent out, and should you fail to communicate with the lender you will automatically be listed as a default. Once a default is recorded, it is near impossible to have it removed. So, act proactively, knowing you may not be able to meet your payments act before you receive a demand letter.
When a borrower contacts a credit provider about an account they are having trouble with, they will typically end up talking with someone from the financial hardship department who will work with the borrower to help the borrower get back on track with their payments. While the borrower continues to communicate with the creditor, and they are working towards the resolution of the problem account, it is very unlikely a default will be listed.
Over the next few months if you find that your business is slowing down, or your employers have indicated to you that they may have to cut staff, please be proactive and call the credit provider early. This will protect you from being listed as an automatic default as you go through the process of finding a solution.
At Finance Mutual Australia, we pride ourselves on our expertise and our human touch. We understand this is a difficult time and are always willing to help you deal with you lender, or find you a new lender if need be. For professional help contact us today.