Original article by Chris Siemers, posted on the Australian Financial Complaints Authority website on 05/06/2023.
Hundreds of thousands of fixed-rate loans will roll onto much higher rates in coming months, catching up on a year of rate rises from which they have so far been quarantined. Some borrowers face the prospect of being tipped into financial hardship as a result, but our experience as Australia’s financial ombudsman service suggests many will have options – if they act early.
At the Australian Financial Complaints Authority (AFCA), we work with consumers and financial firms to resolve disputes when they have not been able to reach agreement on their own. We estimate that we have looked at more than 6000 financial difficulty complaints involving mortgages since we opened our doors on 1 November 2018.
We have recently begun to see a rise in financial difficulty complaints related to mortgages and other financial products.
Our experience tells us that those who are concerned about mortgage stress and financial hardship can benefit by getting on the front foot with their lenders.
Know your options and act early.
From our complaints work, we see that there are usually more options open to a customer if a borrower acts early rather than waiting until a home loan becomes overdue.
Steps a borrower might take early could include asking their lender if their loan is on the lowest possible rate.
If a home loan has not yet fallen overdue, another option that remains open is for a borrower to investigate whether they could refinance with another lender that has a lower “comparison” rate (which includes certain fees and charges as well as the headline interest rate).
This option requires the borrower to already have some equity in the loan – usually more than 20 per cent of the home’s value. Borrowers should understand, though, that this might increase the length of the loan and the total interest they pay over its life.
When the financial difficulty is short-term, we have seen lenders offer a temporary switch to interest-only repayments for, say, 6 to 12 months. This option will not be appropriate for everyone because it will probably mean an increase in principal and interest repayments later – so the loan can still be repaid within the original term – and the borrower will need to be able to cope with that.
Consider asking for hardship assistance
If all else fails and a borrower faces financial difficulty, an important step is to request hardship assistance. The borrower should contact their lender’s hardship team as soon as possible, rather than wait until overdue repayments and arrears are accumulating.
Hardship, also known as financial difficulty, is where people are temporarily unable to make required repayments to a home loan. Depending on the circumstances, borrowers may be able to arrange a short-term repayment pause or reduction in loan repayments to help them get back on their feet.
It is important to understand that interest usually continues to be charged to the home loan even when a hardship arrangement is in place. Also, any missed repayments will accumulate and will need to be dealt with at the end of the hardship assistance period.
AFCA has seen many lenders agree to capitalise these arrears into the home loan balance following a hardship arrangement. However, this usually occurs only if the borrower shows they can service their loan again by completing a six-month repayment trial after the hardship period.
This option needs to be discussed, and agreed, with the lender before the hardship assistance ends. The capitalised arrears are likely to increase the minimum home loan repayments, and the lender will weigh that up.
Borrowers who are not happy with their lender’s response to a request for hardship assistance can make a complaint to the lender about their decision or conduct. If they remain unhappy after the complaint has been considered internally by the lender, they can access AFCA’s free and impartial external dispute resolution service.
AFCA will work with the borrower and lender through informal methods such as conciliation to try to help them find agreement, but if necessary it can investigate the lender’s conduct in relation to its hardship obligations, including those set out in the Banking Code of Practice, and may make a formal decision that’s binding on the bank if the decision is accepted by the borrower.
Talk to a financial counsellor
Another important step AFCA often recommends is to engage with a free financial counselling service via the National Debt Helpline (1800 007 007 or www.ndh.org.au).
A financial counsellor can help people with their budgeting and consider options such as seeking hardship assistance from lenders and utilities. It may be possible for someone in hardship to access their superannuation in certain circumstances, but this would be a last resort.
Finally, sometimes AFCA sees cases where the borrower is ultimately unable to recover from their financial hardship and cannot resume making loan repayments within a reasonable time. In these circumstances the last option may be for the borrower to ask the lender to give them time to sell their home. Three to four months to achieve the unconditional sale of a home is a reasonable request.
While this is an option of last resort, AFCA considers that it is better for the owner to sell their home rather than have a lender sell it via a mortgagee-in-possession sale, which will likely incur expensive legal fees and charges.
What you can do
- Consider your options, based on your individual circumstances
- Be ready to act quickly if you start to experience mortgage stress
- Seek help from a free financial counsellor sooner rather than later
- If you cannot make your required loan repayments contact your lender’s financial hardship team as soon as possible to request assistance.
- If you’re not happy with the lender’s response, lodge an internal complaint with them to have the decision reviewed.
- If you disagree with the outcome of the lender’s complaint process, you can register a complaint with AFCA.