Understanding the Impacts of a Mortgage in Possession

“Mortgagee in possession” is a term that might not be familiar to everyone, but it’s something you may want to consider wrapping your head around if you have a home loan.

Australia’s economy, like many others, has faced its share of challenges in recent times. And with unpredictable market conditions, fluctuating interest rates, and the ongoing effects of global events, many homeowners are finding it increasingly challenging to keep up with their mortgage repayments.

If you’ve found yourself in this position and continue to not meet your repayment obligations, the lender will have the power to take possession of your property and sell it. 

So, here’s what you need to know. 

Home Loan Terminology: Who is the Mortgagee?

The mortgagee is typically a bank or other financial institution that lends money to a borrower for the purpose of buying property. 

The mortgagee sets the terms of the loan, including the interest rate and repayment schedule, and has the legal right to take possession of the property if the borrower defaults on the loan.

The mortgagor, on the other hand, is the borrower who receives the loan from the mortgagee to purchase property. The mortgagor is responsible for making regular repayments on the loan as per the agreed terms. 

The property purchased with the loan serves as collateral, which the mortgagee can claim in case of loan default.

What are the Consequences of Defaulting on My Mortgage Repayments?

As a homeowner, there are many circumstances that could potentially lead to you defaulting on your home loan. These can range from personal financial hardships such as job loss or unexpected medical expenses to broader economic factors like recessions or rising interest rates. 

When you take out a home loan, the lender, or mortgagee, inherently takes on the risk that these or other unforeseen circumstances might prevent you from meeting your home loan repayment obligations.

Because of this risk, mortgagees have certain measures in place to recover their funds in the event of a default. 

The most immediate impact is usually on your credit score, which can be significantly damaged, affecting your ability to secure loans or credit in the future. You may also incur additional fees and penalties from your lender.

If the default continues and you are unable to negotiate new terms or catch up on your home loan repayments, the mortgagee may initiate foreclosure proceedings. This is a legal process where the lender takes possession of the property in order to recover the outstanding debt.

In this situation, the mortgagee becomes a “Mortgagee in Possession” and has the right to sell the property. This is typically done through an auction or private sale. The proceeds from the sale are used to cover the outstanding loan amount, interest, and any associated legal costs. 

If the sale does not cover these costs, you may still be liable for the remaining debt.

Note: Laws regarding foreclosure and the rights of mortgagees in possession can vary, so it’s always advisable to seek legal advice if you’re facing potential foreclosure.

Steps Before Mortgagee Possession

Before a mortgagee can take possession of your property, they must follow a series of legal steps. These steps can vary depending on the jurisdiction, but generally, they include the following:

Default Notice

The first step a mortgagee usually takes when you default on your loan is to issue a default notice. This is a formal document that outlines the nature of the default (usually non-payment) and gives you a specified period to rectify the situation by making the outstanding payment. 

If you receive a default notice, it’s important to act quickly. You may want to seek financial advice, contact your lender to discuss your options, or consider refinancing your loan.

Demand Letter

If the default continues past the period specified in the default notice, the mortgagee may then issue a demand letter. Unlike the previous letter, this one is more serious and will demand repayment of the full loan amount, not just the missed payments.

Legal Proceedings (Statement of Claim)

If the demand letter does not result in repayment, the mortgagee may initiate legal proceedings to recover the debt. Typically, a statement of claim is filed in court, outlining the details of the loan, the default, and the amount claimed.

Judgement

If the court proceedings are successful, the mortgagee will receive a judgement. This is a court order that confirms the mortgagee’s claim to the debt and allows them to take further action to recover it.

Eviction

Once the judgement is granted, the mortgagee can issue an eviction notice. This notice informs you that you must vacate the property by a certain date. 

If you do not vacate the property by the date specified in the eviction notice, the mortgagee can take physical possession of the property, often with the assistance of law enforcement.

Mortgagee-in-Possession Sale to Cover Outstanding Loan

Once the mortgagee has taken possession, they can sell the property. The sale is known as a mortgagee-in-possession sale. 

As mentioned previously, the proceeds from the sale are used to cover the outstanding loan amount, interest, and any associated legal costs. 

Facing the Possibility of Home Loss: What Steps Can I Take to Avoid Mortgagee Possession?

If you’re worried about potentially losing your home or investment property due to financial hardship, it’s important to know that you have options and resources available to help you navigate this challenging situation.

• Contact Your Lender: The first step is to contact your lender as soon as possible. Most lenders have hardship teams that can assist you by potentially restructuring your loan, changing the terms, or offering a payment holiday.
• Financial Counselling: Consider seeking help from a financial counsellor. They can provide free, independent, and confidential advice to help you understand your options and rights.
• Legal Advice: If you’re facing legal proceedings from your lender, you should get legal advice. There are community legal centres and legal aid agencies that offer free legal advice across Australia.
• Government Assistance: Check if you’re eligible for any government assistance or grants. Some states, like Queensland, have Mortgage Relief Schemes you can apply for.  

Remember, the sooner you take action, the more options you will have. Ignoring the problem will only make it worse, so reach out to your lender, seek advice, and explore all available options as soon as you can.

Key Takeaways

• Familiarise yourself with home loan terms such as “mortgagee”, “mortgagor”, and “mortgagee in possession”.
• Understand the process a lender follows before they can take possession of your property, from issuing a default notice to a mortgagee-in-possession sale.
• Seek help if you’re struggling with repayments. This can include contacting your lender, seeking financial counselling, obtaining legal advice, and exploring government assistance.
• Take immediate action if you’re at risk of losing your home. The sooner you address the issue, the more options you’ll have.
• Stay informed about your rights and responsibilities regarding your home loan. Knowledge is a powerful tool when navigating financial hardship.

Here at The Mortgage Agency, our team of experienced brokers can provide you with the guidance and support you need to make informed decisions about your home loan. 

Don’t hesitate to reach out to us today for a free discovery session.