What Is Mortgagee In Possession (And How Do You Avoid It)?

If you have a home loan, you know it’s essential to make payments on time.

However, given the geopolitical environment and fluctuating interest rates, many Australian homeowners are finding it increasingly challenging to keep up with their mortgage repayments.

You might be hearing terms like ‘mortgagee in possession’ and wondering what that means. 

So: What does mortgagee in possession mean? A mortgagee in possession refers to a lender (mortgagee) who takes control of a mortgaged property because the borrower (mortgagor) has defaulted on their loan. Once in possession, the lender has the right to manage the property, and potentially sell it to recoup expenses.

Here’s what you need to know about mortgagee repossession – the common reasons and consequences of defaulting on mortgage repayments, the process, steps for avoiding it, and the opportunities it presents for investors.

Who Is The Mortgagee And Who Is The Mortgagor?

The mortgagee (lender) provides the mortgagor (borrower) with the money to purchase real estate. 

The mortgagee can be an individual or an entity (such as a bank or other financial institution). The mortgagee also sets the terms of the loan, including the interest rate and repayment schedule. 

In contrast, the mortgagor is the person or entity that borrows the money and needs to make regular repayments on the loan according to the agreed-upon terms. 

What Are The Most Common Reasons For Defaulting On A Mortgage?

If a borrower falls behind on their mortgage repayments (either missing payments or not paying in full), it’s known as defaulting on the mortgage. 

According to the National Bureau of Economic Research, the most common reason for mortgage defaults is negative life events such as job loss, divorce, or disease or death in the family. [1] 

Other reasons relate to economic factors like recessions, rising interest rates, and negative equity. 

Ultimately, you can categorise the causes of mortgage defaults into two categories: cash-flow defaults and strategic defaults. 

Cash-flow defaults occur when a mortgagor’s life events make them unable to make repayments. Strategic defaults relate more to the decline of the property’s value and the mortgagor’s subsequent choice to stop paying the mortgage.  

What Are The Consequences Of Defaulting On Mortgage Repayments?

Being a mortgagee comes with financial risk, especially when mortgagors can’t make their mortgage payments. To mitigate these risks, mortgagees have certain measures in place to recover their funds if the mortgagor defaults.

But what happens to the mortgagor if they default on their mortgage repayments? The most immediate consequence is usually an impacted credit score. Having a bad credit score can affect your ability to secure loans or credit in the future. Combine that with the additional fees and penalties you might incur from your lender, and this could take some time to recover from. 

If the default continues, and if you’re unable to negotiate new debt solutions 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.

Once the mortgagee has taken possession of the property, they have the right to sell it or take other measures to try and recoup lost expenses. 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, the mortgagor may still be liable for the remaining debt.

Note: Property law 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.

The Mortgagee Possession Process

Any mortgagee taking possession of a property must follow a series of legal steps before they can repossess it. These steps can vary depending on the jurisdiction, but they generally follow this process.

Step 1: Issue A Default Notice

The first step a mortgagee usually takes when the mortgagor can’t fulfil the obligations of their debt agreement is to issue a default notice. 

This notice is a formal document sent by the lender. It outlines the nature of the default (usually missed payments) and provides a specified period to fix the situation by catching up on outstanding payments. 

If a default notice is received, it’s a good idea to act fast. Seek financial advice, contact the lender to explore debt negotiation options, or consider mortgage refinancing. 

Step 2: Issue A Demand Letter

If the default continues past the specified date in the default notice, the mortgagee may then issue a demand letter. Demand letters are more serious than default notices, despite containing much of the same content (details of the claim, amount owed, deadlines, etc.).

At this point, the mortgagee is prepared to demand repayment of the full loan amount, and not just the missed payments. Keep in mind that this is the lender’s last attempt at dispute resolution before taking legal action. 

Step 3: Initiate Legal Proceedings (Statement Of Claim)

If the mortgagor fails to make repayment by the loan due date after receiving the demand letter, the mortgagee may initiate legal proceedings to recover the debt. 

Typically, a statement of claim is filed in the local court, outlining the details of the loan, the default, and the amount claimed.

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

Step 4: Eviction

Once the judgment is granted, the mortgagee can issue an eviction notice. This notice informs the mortgagor that the property must be vacated by a certain date. 

If the property is not vacated by the date specified in the eviction notice, the mortgagee can take physical possession of the property. If necessary, law enforcement can get involved. 

Step 5: A Mortgagee In Possession Sale To Cover Outstanding Loan

Once the lender has taken possession of the mortgaged property, they can sell it. This sale is known as a mortgagee in possession sale. 

The proceeds from the sale cover the outstanding loan amount, interest, and any associated legal costs. 

What Steps Can I Take To Avoid Mortgagee Possession?

If you’re worried about potentially losing your investment or personal property due to financial hardship, try not to let the worry take over. Know that you have options and resources available to help you avoid mortgagee possession. 

Step 1: Contact Your Lender ASAP

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.

After doing this, consider seeking help from a financial counsellor (which is different to a financial advisor). They can provide free, independent, and confidential advice to help you understand your options and rights.

Step 2: Formulate A Financial Strategy

Once you’ve contacted your lender and/or financial counsellor, you should develop reliable financial strategies that will help you keep on top of your debts. 

Budgeting And Financial Planning

Before exploring any other strategy, you need to know where your money goes. Review and list your net income and expenses. Within this list, you’ll be able to spot and allocate funds for essential expenses, including mortgage payments and any debt repayments.

Debt Consolidation

If you have several debts (for example, personal loans and credit card debt), consider debt consolidation. Debt consolidation is a type of debt refinancing where you combine your debts into one loan. 

Debt consolidation is a good option if you want to simplify your finances, steady the ship, and potentially take advantage of lower interest rates.

Refinance Your Loan

By refinancing your loan, you benefit from lower interest rates and (possibly) lower monthly payments.

You may also be able to extend your loan term, which can help you relieve your short-term financial burdens. It’s worth noting, however, that if you opt for a longer payoff term, you will likely face higher interest rates than if you shortened it. 

Step 3: Look Into Government Assistance Programs

Check if you’re eligible for any government assistance or grants. Some states, like Queensland, have mortgage relief schemes you can apply for. [2] There are also national assistance programs.

The National Credit Code

If you have credit contracts for less than $500,000, you can apply for hardship variations, providing you have a reasonable cause like illness or unemployment. [3]

The First Home Owner Grant (FHOG)

As a first-time homebuyer in Australia, you can benefit from the First Home Owner Grant. This national scheme provides a one-time payment to eligible first-time homeowners. The grant amount and eligibility criteria differ in each state and territory.

The First Home Super Saver (FHSS) Scheme

To access this scheme, you must be 18 or over and a first home buyer. Your name must also be on the title of the property you bought, and you mustn’t have a completed release request for an FHSS determination. 

The Australian Taxation Office must confirm you’ve suffered from an FHSS financial hardship. 

Buying A Mortgagee In Possession Property

There is another side to the mortgagee in possession process and that is the opportunity it offers to potential investors. Before diving in, it’s worth doing your homework to fully understand the benefits and risks of purchasing a repossessed property.

What Are The Benefits Of Buying A Repossessed Property?

The main benefit of buying a repossessed/mortgagee in possession property is that the purchase price of the property is often lower. Mortgagee in possession properties are usually considerably cheaper than their market values. Most of the time, the lender is simply interested in debt recovery and does not want to waste time marketing and selling the property. This means the transaction process can often be quicker than a traditional sale.

By purchasing a property at a bargain price, it gives you options to rent, renovate, or sell, all of which have potentially substantial financial benefits.  

What Are The Risks Of Buying A Repossessed Property?

Repossessed properties come with risks. There may be possible legal implications, including outstanding liens and encumbrances. 

In addition, the lower price often attracts a lot of competition, which can swiftly turn into a bidding war, eliminating the cost-effectiveness of the purchase. 

You also might not have the time or opportunity to do your due diligence, which could result in hidden complications or repairs, ranging from water damage to foundational issues. 

You might get a real bargain. However, there is also the chance you’ll get complications you didn’t bargain for.

Understanding The Process For Buying A Mortgagee In Possession Property

Buying a repossessed property isn’t the same as buying a traditional property. Here are steps you should consider as part of the purchasing process.

Step 1: Do Your Research

Research your local property market, as well as the listings within it. This research will help you understand current market values, assess the conditions of current properties, and determine what a reasonable purchase price looks like in that area.

Step 2: Find Your Property 

Sift through online real estate portals and look for mortgagee in possession properties. Once you find a property you’re interested in, consult with a legal expert to determine its financial state and uncover any encumbrances. 

Step 3: Finance Your Property 

To gain an advantage over your competitors, have your finance options ready before attending the auction or making an offer. It’s best to secure a pre-approved home loan. This demonstrates to sellers that you are a serious buyer who can afford the property.

Step 4: Bid Strategically

To bid successfully, you need to think strategically. That’s why it’s a good idea to set and stick to your budget so you have extra financial leeway should you face unexpected property-related costs. Keep due diligence in mind before placing your bid, and prepare yourself for decisive thinking. 

Summing up

Mortgagee in possession is a difficult (and often emotional) subject. However, knowledge is power. It’s best to avoid the situation if you can. If circumstances change and paying the mortgage becomes challenging, be proactive about managing the situation, including getting professional and/or legal advice and taking whatever steps are necessary to avoid escalation.

From an investment point of view, mortgagee in possession sales pose genuine opportunities, but there are risks to be aware of. Again, doing your homework and seeking professional advice will help you make the most of the opportunity while being clear-eyed about the risks. 

And we can help. 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. Contact us today to learn more.

FAQs

Can I sell my house if I can’t pay my mortgage? 

Yes. If paying the mortgage has become an issue, you can sell your house. However, it’s best to check if the sale of your house will cover the debt recovery (i.e. the outstanding cost of your mortgage and repayment debts). If not, you’ll need to discuss this avenue with your lender.

How long can a loan stay in default?

Regardless of whether you pay off your debt fully, partially, or not at all, a default will stay on your credit file for five years. [4] During that time, it will negatively impact your credit score. However, by paying off what you owe, you can begin to repair your credit rating. 

How many mortgage payments can be missed before repossession?

Don’t let it come to that. It is the mortgagor’s responsibility to let the lender know if they need more time or if their circumstances have changed. By being proactive, hopefully both parties can come to a debt agreement and find a solution that works for everyone, avoiding dispute resolution or having to settle the issue in a local court.

By missing payments (and not informing the lender), most lenders won’t initiate the repossession process until 90 days have passed. However, that isn’t legal advice or a hard and fast rule – just a guideline.

Sources: 

[1] National Bureau of Economic Research – Why Do Borrowers Default on Mortgages? Sourced August 2022.

[2] National Debt Helpline – Home Loan Help: Mortgage Relief & Hardship Assistance. Sourced February 2025.

[3] The National Credit Code – Inquiry into Consumer Credit and Corporations Legislation Amendment. Sourced 2011.

[4] Office of the Australian Information Commissioner – What stays on a credit report? Sourced February 2025.