When Life Gets Tough - Advice for Home Owners in Distress

May 3rd 2019 by Andrea Kirkby

Selling Your Home Financing Your Home

Cover: article > When life gets tough

Owning your own home is most people's dream, but in some circumstances it can rapidly become a nightmare. If you lose your job, or other circumstances make it difficult to meet your monthly payments, you could lose your home. You certainly won't be getting a good night's sleep.

But there's quite a lot you can do. If the financial problem is temporary, you may be well advised to talk to your lender. For instance, if you lost your job, but you have found another one or think you can do so in the short term, explain the situation and talk about what you're doing to address the situation and how you might be able to catch up. It's a good idea if you have also identified ways that your lender could help you get back on track; a hardship variation could reduce your payment for two or three months while you sort out your problems.

Can the Financial Problem be Tackled?

There are some other ways to tackle financial problems. For instance, some lenders may allow you to switch to an interest-only loan, or to extend the period of the loan. If you have made overpayments earlier, you may be able to take money out of your redraw facility.  Exceptionally, you might be able to rent the house out and find cheaper accommodation for yourself, so that your tenant is paying the mortgage. Be careful with that approach, though; not all lenders are happy with it, and you may end up paying higher interest rates on your debt.

It can be worth talking to a financial counsellor. You might even be able to access your super fund—that's costly and a last resort, but if it will save your home, it could be worth it. However, you should definitely avoid going further into debt by paying your mortgage on credit cards (which are expensive, making matters worse).

Try to keep meeting your payments even if it's hard. Sell the car, rent out a spare room, sell your kidneys or the kids (okay, we're joking about the last two). If you keep up your payments, you're fine, whereas missing payments allows your lender to start proceedings for default. You really don't want that to happen.

There's a bit more detail on how to manage money problems here.

If You Have to Sell, Don't Delay

If your financial problems can't be solved, you'll lose the house one way or another. You can keep putting it off, and eventually your lender will foreclose. That wrecks your credit record, and can wreck the house, too. Or you can decide to sell now, keep control of the process and of your credit record, and probably end up with a better price. You may even be able to downsize, if you have equity in your existing property and are able to keep the payments up (or reach an agreement with your lender) until you have sold it. The biggest mistake is to delay.

Make sure you understand your home's value correctly. Some home owners rely on an exaggerated estimate of what their homes are worth. In some cases they even refuse offers which would solve their financial problem, just in order to hold out for more. Foreclosed properties often sell 20% cheaper than normal transactions, so even if you accepted an offer 10% lower than market prices, you'd still be in the money.

If your house is worth less than your mortgage, you have a problem. But it's possible to solve the problem if you can use savings to cover the shortfall, or sell other assets. When markets are falling, it's often preferable to sell 'short' rather than wait, and see your negative equity increase. However, you'll need to talk with your lender about making a 'short sale'. They might let you pay the shortfall off over a few years. That at least reduces the total amount you're on the hook for.

Find a Cash Buyer

If you need to sell, look for a cash buyer even if the price isn't everything you'd hoped for. The more security you can get, and the faster the deal can be done, the better—you could lose precious time with a buyer who can't find finance. If you have a property that could appeal to investors, your marketing plan should target them rather than trying to sell to owner occupiers, who probably have a property to sell and can't move so quickly. You could also talk to Sellable. We can solve your immediate problem by contracting to buy your property at a base price immediately, and if we resell for more, we'll share the profits with you.

If your problems are really intractable–for instance, your business has gone bust, you have no income, you have no equity in your house, and there's no way you can get a job that will pay the mortgage–bankruptcy might be the right option for you. It's not an easy step to take and you'll want plenty of good advice if you're considering this route, so talk it over with a financial counsellor. More information on this can be found here.

Avoid Full-on Distress and Foreclosure

If the bank has to foreclose, it's bad news for you. You'll have to pay all the costs of repossession as well as the sale costs. Mortgagee possession sale properties also sell at a discount, so the bank will get less money than you might have secured earlier. And if the house has been empty for a while, it may look terrible or even have been squatted, further reducing its value. Don't forget that while Americans can just walk away after they've handed the keys back to the bank, here in Oz the banks have full recourse–that is, responsibility for the loan stays with you for ever, till you pay it off.

So don't put off taking action. There are numerous different ways of getting out of the situation and they're all better than a foreclosure sale. Once you know there's a problem, it's better to bite the bullet and move on. You can keep your credit record intact, the house will probably fetch more, and you can draw a line under the bad experience.

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