When someone approaches us looking for a debt consolidation solution, it is not unusual that they are already feeling the pressure of unaffordable debts. Often they are behind with existing loans and even their mortgage.
While the reasons for falling behind on your mortgage may be very legitimate – perhaps a loss of employment, serious illness or closure of business, this does not help to get a debt consolidation loan approved with a new lender.
Borrowers who intend to rely on the equity available in their property in order to apply for a debt consolidation loan, should make every effort not to incur mortgage arrears. If any of the debts need to go unpaid, it should not be the mortgage as mortgage arrears can preclude qualifying for a refinance and consolidation using your available equity.
Prior to the GFC and the tightening of lending regulations in Australia there were a number of lenders prepared to consider refinance applications with mortgage arrears. The main consideration was a declaration by the borrower that they can afford the new loan and the availability of equity in the property.
Quite a number of families on the brink of loosing their homes were able to refinance and give themselves a chance of staying in the family home.
However today, qualifying for a mortgage refinance with unpaid arrears is next to impossible. Arrears are seen by all potential lenders as a strong indication that the borrower is unable to afford their current loan. The new loan is not likely to be any cheaper because the only lenders who will consider refinance applications with arrears previously, priced their mortgages fairly high because of the added risk of non-payment.
Given the obligations of responsible lending and ASIC penalties for the breach of these, no lender will be prepared to approve a mortgage with unpaid arrears unless the arrears are small and there is a clear change for the better in the borrower profile financially going forward.
In the even that the situation is such that mortgage arrears simply could not be avoided, it is best to enter negotiations with current lender for a special hardship arrangement rather than looking for any refinance assistance.
Mortgage providers are required to assist borrowers who are experiencing temporary repayment difficulties with reduced payments, repayment holiday or some other assistance. However in circumstances where the situation is not likely to improve and the borrower simply can not afford their current mortgage, the best strategy is to look to sell the property before it is repossessed and sold by the lender.
Unfortunately if you need to sell under mortgagee sale conditions, more costs will be incurred and less will be left after the bank debt is covered.
While early access to superannuation may be available to assist with maintaining mortgage repayments, be careful in not putting in good money after bad. What are you going to do to cover mortgage repayments after the superannuation money is spent? This strategy is only useful where financial difficulties are temporary.