If you’re a homeowner in Australia and you’re having trouble making your payments, you may be wondering what “Mortgagee in possession” means – and how to avoid this situation.
Basically, mortgagee in possession refers to a situation where you default on (stop paying) your mortgage.
In this situation, the mortgagee (lender) who gave you the money has the right to the possession of your property.
Once you stop paying, it’s no longer yours – and you must move out.
In this article, we’ll explain this situation in more detail, and discuss everything you need to know about mortgagee in possession – and how you can avoid it, even if you are having trouble keeping up with your mortgage.
Who Is The Mortgagee? What Does This Mean?
If you, like most Australians, borrowed money from a bank (took out a mortgage) to buy your home, you are the mortgagor.
What this means is that you have taken a loan out to purchase a particular property, and that you have put that property up as collateral, in case you don’t repay the loan.
This means that the bank or lender is the mortgagee. The mortgagee is the institution which has lent you the funds for the purchase of a home or property.
When you pay your mortgage each month, you’re paying the mortgagee. And if you stop paying the mortgagee, the ownership of your property will legally become theirs.
Until you have completely paid off your mortgage, the mortgagee has the right to take possession of your home if you cease paying your mortgage, and sell it to recover their losses.
What Does It Mean To Be A Mortgagee In Possession?
A mortgagee in possession is a lender who has exercised its right to take control of a property due to nonpayment of the mortgage.
The mortgagee (lender) owns the home, and can sell it or take any other action they wish to recoup the money lost by the mortgagor (borrower) who failed to repay the mortgage.
This circumstance is more common than you may think.
There are many different reasons that a mortgagor may default on their loan – and cause the mortgagee to take possession of a piece of property. Some of the most common reasons include:
- Sudden change of employment – If a borrower loses a high-paying job and goes through an extended period of unemployment, they may find themselves to be unable to repay their mortgage, unless they have a large savings account. This is, unfortunately, quite common, especially in situations where only a single individual is bringing home the majority of household income.
- Variable rate loans – Variable rate loans are one of the most common types of home loans in Australia, and often have a low introductory rate. However, this can rise over time, particularly if the Reserve Bank raises interest rates. Rising interest rates can dramatically increase the cost of monthly mortgage payments – making it difficult or impossible for a borrower to repay them.
- Excessive debt – Having to repay debt from other sources, such as student loans, financed vehicles, credit cards, medical bills or other such debts can restrict cash flow to the extent that a borrower can no longer afford to pay down their mortgage.
- Medical expenses or disability – Sudden medical expenses or a long-term or permanent disability may have a serious impact on the finances of a borrower, resulting in an inability to continue paying the mortgage.
- Divorce – It can be messy when families separate, and communication issues combined with financial issues during a divorce can result in a failure to pay mortgage payments, even if sufficient funds are available.
- Death in the family – The sudden and unexpected death of a person who was responsible for paying the mortgage, or whose income was crucial for repaying it can result in default, and the situation of mortgagee in possession.
For all of these reasons, it’s not uncommon for people with mortgages in Australia to fail to pay – resulting in the loss of their homes, and mortgagee in possession.
What Do Mortgagees Have To Do Before Repossession?
There are a few steps that must be taken before a mortgagee can take possession of a home, and it may take several months before the mortgagee is able to take the home back from the buyer, and sell it.
First, if the buyer fails to maintain mortgage repayments based on their mortgage contract, the lender will issue a formal notice to the borrower – notifying them about the fact that they have defaulted on their loan, and providing them with a specified date by which they must pay the loan and any additional fees.
In most cases, lenders will issue multiple notices about the default.
Usually, the borrower will have between 30-180 days from the initial date of default to begin paying their mortgage again, and exit default. If the borrower does so, the issue is resolved – and they may continue paying normally.
However, if the borrower does not pay, the next step is taken by the mortgagee. Most lenders have an “acceleration clause” in the mortgage, which kicks in if the borrower does not pay. Essentially, this clause makes the entire loan due and payable – in a lump sum.
Then, the mortgagee can apply to a local court seeking orders which will force the borrower to vacate the property, so that the mortgagee can take possession of the property and arrange for its sale, as set out in the mortgage contract.
Then, the borrower will be informed about the date by which they must leave the property, and the mortgagee will take possession.
If the borrower refuses to vacate the property, local law enforcement will work with the mortgagee to remove the occupants and secure the property.
What Happens After Mortgagee Repossession?
After the property has been repossessed by the mortgagee, they will take action to arrange its sale.
The sale can be made at auction, or the home can be sold privately on the real estate market.
Then, once the home has been sold, the proceeds from the sale will be applied against the costs of:
- The outstanding loan amount
- Expenses incurred when maintaining/repairing the property to prepare for sale
- Legal costs related to the loan default
If the value of the home is not enough to cover all of these costs, the borrower will be required to pay the lender the remaining amount.
There is a requirement for mortgagees in possession to act in good faith, and attempt to get the best possible price available for the home, based on the current economic climate.
How Do I Avoid A Mortgagee Taking Possession Of My Home?
If you are struggling to pay your own mortgage, and you are wondering how you can avoid defaulting and having your mortgagee take possession of your home, you do have a few options.
Here are a few suggestions for how you can avoid having a mortgagee take possession of your home.
- Contact your lender as soon as your circumstances change – If you are having trouble paying your loan, do not wait until you miss a payment. Contact your lender right away and tell them about the situation.
Contrary to what you may think, your lender does not want your property. It’s easier and more profitable for them to simply take your money as you repay your mortgage.
This means they may be willing to work out a solution. You may be able to fill out a hardship application, negotiate payment holidays, or get a variation of your mortgage to change its interest rate or change the loan terms to make it easier for you to repay. This should always be your first step.
- Consider refinancing your loan – If your lender is not willing to work with you, you may be able to get more favourable loan terms if you refinance. When you refinance, another lender will purchase the loan from your current lender – and you may be able to get better terms like a lower interest rate, longer repayment terms, and lower monthly payments.
- Get help with debt consolidation – If you are having trouble paying your loan due to other debts, it may be time to try consolidating your debt. If you’re not sure how to do this on your own, Debt Negotiators can help, and provide you with a plan to help get you out of debt, and get your finances back on track.
- Sell the home and downsize – This is an option if you think you may have trouble paying the mortgage in the near future. If you can sell the home yourself before you default on the loan, you can use the proceeds to pay off the rest of the loan, and avoid mortgagee possession entirely.
Know What Mortgagee In Possession Is – And How To Avoid It!
As a homeowner, you want to avoid a situation where you default on your loan, and the mortgagee takes possession.
We hope that the information and tips in this guide have helped you learn more about this situation, and the steps you can take to maintain possession of your home, even if you are having financial difficulties.