Steps you can take to avoid foreclosure: debt consolidation, refinancing and more

Rapid Finance on 9 February 2016

When you get behind on your loan repayments, it can be tempting to evade and ignore those calls and letters from the bank. But hiding from your debt will only make problems worse, and the tactics used by debt collectors will become increasingly persistent.

Your treasured belongings and even your home are at risk when things get really bad. Foreclosure is one of the worst outcomes of missing your home loan repayments and poorly managing your finances. So how do you avoid foreclosure on your home? Here are some tips to getting back on top!

What is foreclosure?

Foreclosure is the repossession of property by a lender – that is, your bank takes possession of your home. This can happen because the property is held as security for a home loan. If you fail to keep up with loan repayments, the lender has a right to foreclose on the mortgage, sell the property and recover the amount still owing.

It's important to note that the lender has no incentive to sell the property at the maximum sale price; the only concern the lender has is to recover the outstanding loan amount. In some cases, you may be better off selling the property and paying off the amount still owing on the loan (see 'sell your home' below).

Missing a mortgage repayment

Missing a mortgage repayment is not the end of the world. Although serious, the lender must take steps to contact you before they can take legal action to foreclose on your home. For example, the lender must send you a Default Notice and you will have 30 days to rectify the situation by paying the overdue repayment, plus any other regular repayments.

Formal legal proceedings

If you do not act on the Default Notice and do not pay the late repayments, the lender can commence formal legal proceedings. The lender can serve you a Statement of Claim, which will initiate a court case against you. If you do nothing, or file a defence and lose, then the lender can apply for an order to take possession of your home. At that point a sheriff will notify you of when they will come to change locks and you will be evicted.

How can you avoid foreclosure?

Eviction is serious and the thought of losing your home is terrifying. But there are steps you can take to avoid foreclosure. The key is to act as early as possible.

Talk with your lender

If you’re having trouble managing your mortgage, the first thing to do is to contact your lender. Many lenders have special customer service teams that deal with financial hardship (see below for more information about 'hardship variations').

Legal action is expensive, so the lender will always prefer to work out an alternative solution with you. But remember to contact your lender as early as possible to avoid being sent a Default Notice.

Get financial help

financial counselling

Your finances might be a mess and you’re feeling lost in a flurry of bank statements and notices. You may have forgotten your repayment date, or have been caught short because of other debt repayments. Financial advice would always be a recommended step for those wanting help to manage and plan their personal finances.

From professional financial advisors, to free financial counselling, financial support can always be at hand. Counselling can help you set up a budget and offer advice on keeping on top of repayments. If you’re facing the risk of foreclosure, then you should definitely and urgently seek out legal advice, too.

Consolidate debt or refinance your home loan

Changing your loan is another possible solution. Talking with an expert to refinance your home loan could be a way to help you manage your debt. For example, you could change the terms of your home loan so that repayments are lower and easier to handle.

Another finance option is debt consolidation. Reducing or consolidating all your debts is a good way to simplify your personal finances. When matched to your financial situation, debt consolidation could help you meet all your loan repayments and ultimately avoid home foreclosure.

At the best of times it can be difficult to keep up with your expenses: what is due, and when. If you have repayments directly debited from an account, then it’s surprisingly easy to get caught out.

Debt consolidation is a potential solution. The idea is that all your debts – from your home loan to your credit card – is rolled into one loan that is backed by equity in the property. This way you can better manage your finances, reduce repayments or secure a lower rate on expensive debt.

Find out more about debt consolidation here

What to do when things get serious

If your financial troubles have progressed beyond a missed repayment, then you will be feeling the pressure from the bank or even debt collectors. It is still important to keep an open line of communication with your lender to try and find the best outcome and avoid foreclosure.

Apply for a hardship variation

Often we fail to meet repayments due to situations out of our control, such as illness, unemployment or changed financial circumstances. In these cases, you can talk to your bank and apply for a hardship variation.

A hardship variation is an agreement between you and your lender that changes the terms of your home loan so that it is easier to manage your payments in these periods of hardship. You can extend your loan payment period, or even temporarily postpone your repayments altogether.

External dispute resolution (EDR) schemes are free services that aim to achieve a fair outcome for consumers. If you think that your lender is acting unfairly towards you, then you can make a complaint via an EDR scheme, such as the Financial Ombudsman Service.

Before you can contact an EDR scheme, you will need to first direct your complaint to the lender. Your lender will advise you of their complaints handling procedure and the time frame they have in which to respond to your complaint, usually 30-45 days.

If your lender’s internal complaints process fails to achieve a satisfactory result, you can turn to an EDR scheme for assistance. The lender cannot start or continue legal action while you matter is being considered.

selling home foreclosure

Sell your home

As a last resort, you can sell your home. Although this is never an ideal situation, you may be better off selling your home on your terms, rather than surrendering the property to debt collectors. Since you are in control of this sale, you can do your best to get a good price. It’s even possible that you might end up with some money left over, which could be used to pay down other debt.

Note that the content of this article does not constitute financial advice. Remember to seek professional legal and financial advice before making a decision such as selling a property.

About Rapid Finance

At Rapid Finance, we are experts in finding finance, including refinancing and other ways to consolidate existing debt. We investigate your financial circumstances to determine the best way to achieve your loan requirements and objectives – whether it be improving your cash flow or saving on fees and interest.

Want to simplify your finances? Talk to a Rapid Finance expert today on 1300 467 274.