On The Edge

Sydney Morning Herald

Wednesday July 28, 2004

Barbara Drury

There's turbulence on the property front. Barbara Drury looks at what to do if you can't meet your mortgage repayments.

Property values have fallen by more than 15 per cent in some parts of Sydney and Melbourne, at a time when interest rates are poised to rise. That's a lethal combination for anyone who stretched their financial resources to the limit to buy property near the peak of the market.

Financial institutions have exacerbated the problem by lending 95 per cent or more on some investment properties. Some speculators who bought off the plan hoping for a quick profit have already been forced to sell for less than they paid.

Investors with other financial assets may be able to write the loss off to experience, but an owner-occupier who is unable to meet loan repayments because of rising interest rates, illness or unemployment is in a much worse position.

Fortunately, unemployment is at record lows, the economy is strong and house prices have subsided, not collapsed.

However, Paul Leroy, a registered trustee in bankruptcy at Hall Chadwick, warns that despite current economic prosperity, consumers need to be cautious.

"Personal debt levels are at a record high," he says. "This is manageable

when the economy is strong. If, however, people aren't careful, any downturn in the economy could have disastrous consequences on their finances.

"The current downturn in the housing sector further complicates the situation for families making loan repayments. If the economy were to suffer in the future, people would not only be faced with higher interest rates but also the realisation that their equity value has fallen.

"People must become more aware of the measures [they can take] that can stop them from becoming bankrupt."

Despite the warnings, there is no indication that loan defaults are on the rise - quite the opposite. Bankruptcies fell 9.5 per cent in the year to June 30 and they have been on the decline for three years, although Leroy says the growing number of young bankrupts is a concern - 22 per cent of bankrupts are under 24.

Geoff Austin, the head of mortgage lending at the Commonwealth Bank, reports that mortgage defaults across the industry are around the 20-year average of 0.12 per cent a year, and arrears are at low levels. Even so, last year the Australian Prudential Regulatory Authority was concerned enough about the state of the housing market to have banks stress-test their ability to withstand a hypothetical 30 per cent fall in house prices and an increase in mortgage defaults of 3.5 per cent.

The authority found that the banks would weather the storm, but individual consumers may not be so lucky.

David Bell, the chief executive of the Australian Bankers Association, points out that a bank could move on a customer only if there was a breach of the mortgage contract. "Even then, typically a bank would be reluctant to force a sale unless it saw no other option." (See box at right.)

Banks don't regularly value properties and won't know about any loss of value until the borrower defaults and/or the property is sold. Unlike margin loans for shares, banks don't make margin calls forcing borrowers to top up their equity when property values fall.

Lenders are also covered by mortgage lenders' insurance, which is standard when the loan is for 80 per cent or more of the value of the property.

Austin says most homebuyers put equity into their property and, provided they are long-term investors and keep up their repayments, they can ride out temporary fluctuations in home prices.

Katherine Lane, a solicitor with the Consumer Credit Legal Centre, says banks generally allow a lot of latitude before they force the sale of property. Non-bank lenders may be a bit quicker on the draw.

"I had one client who was sold up before the default notice expired," says Lane.

Austin says the Commonwealth Bank allows at least 30 days after sending out a default notice for the borrower to make alternative arrangements and points out that consumers facing financial hardship are protected by consumer credit legislation. "We can't just seize property - there is a process we go through," he says.

For example, borrowers sometimes use a second property as security, sell other assets, consolidate debts or reduce their mortgage repayments and extend the term of the loan. If selling up is necessary, then selling under the supervision of the bank is a softer option than waiting for the bank to repossess the property and sell it.

Leroy believes it is in the borrower's interest to talk to the bank while they still have options and the time to seek advice from a financial counsellor or a registered bankruptcy trustee. He says a staggering 47 per cent of bankrupts fail to seek advice when they are going into bankruptcy.

Bankruptcy is the option of last resort. Before going all the way you may be able to come to an agreement with creditors under Part IX or Part X of the Bankruptcy Act, and repay a portion of your debt in satisfaction of the whole amount. Consumers are advised to take a leaf from the banks' book and stress-test their finances from time to time to check their ability to service their debts. If you are overstretched, seek advice to avert a financial crisis.

Contact the insolvency helpline (1800 222 868 or www.insolvencyhelp.com.au) for information and links to consumer and legal advisers in your state.

DEAL WITH DEBT

If you find you can't meet mortgage repayments the worst thing you can do is bury your head in the sand. Consider your options and take action before your mortgage lender does.

* Negotiate a one-off variation in payments with your lender.

* Negotiate a permanent change in payments by reducing payments and extending the period of the loan.

* Make a hardship variation. If your loan was for less than $125,000 and you are unable to pay because of temporary illness, unemployment or other reasonable cause, you can apply to reduce your payments (and extend the loan) or postpone them under the Uniform Consumer Credit Code, even if the lender is reluctant.

* Refinance the loan if you can get a better deal elsewhere.

* Sell your property or other assets to repay the loan.

* Bankruptcy. This is a last resort with long-term consequences for your ability to borrow in future.

A financial counsellor may be able to help you negotiate with the lender or arrange a hardship variation.

Source: Consumer Credit Legal Service

© 2004 Sydney Morning Herald

Back to News Index | Back to Home