Mortgage stress: what to do when the repayments stop working

What counts as mortgage stress

There is a commonly quoted rule that mortgage stress starts when repayments pass 30 per cent of gross household income. It is a useful shorthand and it is not a test anybody applies to you.

The more honest version is behavioural. If the mortgage is being paid out of savings, or out of a credit card, or by not paying something else, the loan is already costing more than the household produces.

• Repayments coming from savings rather than income, month after month
• Using a credit card or buy now pay later to cover ordinary living costs
• Paying the mortgage late, or paying it by letting another bill slip
• No buffer left, so one unexpected expense becomes a missed payment
• Dreading a fixed rate ending because you already know the new number does not work

None of those needs to become a missed payment before you can act. The right to ask for a variation covers being unable to meet your obligations in the future, not only being behind now.

Your right to ask, and what the lender must do

Under section 72 of the National Credit Code you may give your credit provider notice that you are unable, or will be unable, to meet your obligations. That is a hardship notice, and it can be given verbally or in writing.

Once you give it, the lender must consider varying the contract and tell you its decision within set timeframes. The clock is not open-ended and it is not at the lender's discretion.

1. 1

   You give the notice

   Verbally or in writing. You do not need a form, a template or a particular phrase, and you do not need to be in arrears yet.

2. 2

   The lender has 21 days

   If it has enough information to decide, it must notify you of the decision within 21 days, counted from the day after the notice is received.

3. 3

   Or it asks for more information

   If it does not have enough to decide, it may request further information within that same 21 days.

4. 4

   Then 21 days from your answer

   Once you provide what was asked for, the lender has 21 days from receiving it to respond to the notice.

5. 5

   If you are not happy with the answer

   Complain to the lender first, and then to the Australian Financial Complaints Authority, which is free to consumers.

What you can actually ask for

A variation is not one thing. ASIC lists payment deferrals, reduced payment arrangements, interest-only periods, term extensions, capitalisation of arrears and interest rate reductions among the possibilities.

Ask for the one that matches the problem. A deferral suits a temporary gap with a known end, such as a period off work with a return date. It is the wrong tool for a repayment that has permanently outgrown the income.

What the evidence says about asking

It is worth knowing what you are walking into, because the process is not always as straightforward as the right suggests.

ASIC reviewed ten large home lenders and found more than one in three Australians, 35 per cent, dropped out of the hardship application process at least once. The report was titled Hardship, hard to get help, which tells you most of it.

The regulator described lenders failing to identify customers in financial stress, using cookie-cutter approaches to hardship requests, and running onerous assessment and approval processes. In the worst cases, ASIC said, lenders ignored hardship notices entirely.

• Put the notice in writing even though verbal is allowed, so there is a record and a date
• Note the date you gave it, because the 21 days runs from the day after
• Say plainly what you are asking for and what would make the loan workable
• Keep every reference number and the name of whoever you spoke to
• If you are asked for information, send it in one go and note the date you sent it
• If the process stalls or nobody comes back, escalate rather than starting again

Where refinancing helps, and where it does not

Refinancing to a lower rate or a better structure is a genuine answer to mortgage stress, and it is the one we are actually here for. It is also the option with a closing window.

The window matters because refinancing is a new loan application, assessed on your current position. Arrears on your credit report, a recent hardship arrangement or a drop in income all narrow the field of lenders willing to look at you.

Which is the uncomfortable point. The easiest time to refinance out of trouble is before the trouble is visible on your file, and the hardest is after several missed payments.

• Ask your own lender for a rate review first, because it costs nothing and sometimes works
• Compare what else is available before your position deteriorates further
• Understand that a longer term lowers the repayment and raises the total interest
• Know that consolidating other debts into the mortgage stretches short debt over decades
• Remember a hardship arrangement on the file affects how a new lender reads the application

Our refinancing guide at Refinancing a home loan covers the mechanics, and Debt consolidation covers the trade-off in rolling other debts into a home loan, which is the option most often reached for and least often costed properly.

Free help that is not trying to sell you anything

Some of the most useful help available here is free, independent, and has no product attached to it. It is worth saying so even though it is not us.

• Financial counsellors, who are free and independent, through the National Debt Helpline on 1800 007 007
• The Australian Financial Complaints Authority, free to consumers, if your lender will not deal with you properly
• Moneysmart, run by ASIC, for budgeting tools and plain explanations with nothing being sold
• Your lender's own hardship team, which is the first call rather than the last

A financial counsellor can negotiate with creditors on your behalf and will look at the whole picture rather than the mortgage alone. If the mortgage is one of several debts, that is frequently the better first call.

The one thing that makes all of this worse

Going quiet. Every option above works better the earlier it is used, and each of them narrows as arrears accumulate.

There is a specific protection worth knowing here too. A credit provider is not allowed to list a default on your credit report while it is deciding a hardship request, or until 14 days after telling you it has refused one.

So asking is protective in itself, not just procedurally but on your credit file. Our guide at Credit scores and home loans sets out what a default does and how long it stays.