Mortgagee in possession sales – how to protect your home

In Australia, mortgages are guaranteed by the value of the property being purchased. If you can’t keep up with your mortgage repayments and default on your loan, the lender will have the option to repossess the property and sell it to recover the money you owe. 

The exact process can vary depending on the individual circumstances, but often goes something like this:

1. You fail to make a mortgage repayment on time.
2. Once your repayment is 30 days overdue, and the lender hasn’t been able to contact you, it will issue a default notice.
3. After 30 days, if you haven’t repaid the default, the lender will go to court to declare mortgagee in possession.
4. You will be evicted from the property, which the lender will then sell.

Though similar and often used interchangeably, there are important differences between mortgagee in possession and foreclosure.

When a lender takes possession of a property as mortgagee in possession, your name remains on the property title as owner of the house. The lender can still sell the property to recover the money you owe, but legally you still own the house until the sale settles.

In a foreclosure, the lender takes your name off the property title and replaces it with its own. As this can be a complex legal process involving court orders, lenders in Australia often prefer to stick with mortgagee in possession arrangements.

It’s important to remember that most banks and mortgage lenders don’t actually want to take your house. A mortgagee in possession sale tends to be an option of last resort, and you will often have several opportunities to take steps to keep events from reaching this point.

If you're having trouble paying your mortgage, some of your options could include:

Enter a hardship plan

If you're experiencing financial hardship, you can contact your lender to ask for a hardship variation or hardship plan. Some options that could become available include switching over to interest-only repayments for a limited time, or taking a temporary ‘mortgage holiday’ where you make no repayments. However, these options come with their own share of risks, and may only offer temporary relief.

Restructure or refinance

Depending on your financial situation, you may be able to negotiate with your lender to restructure your loan, such as adjusting the loan's term length or switching to a more accommodating interest rate. Alternatively, you may be able to switch to another lender, though this may involve paying fees and charges.

Distressed sale

Rather than defaulting on your mortgage repayments and letting your lender sell your home, you could choose to sell the property yourself before reaching this point. This has the benefit of hopefully keeping defaults and other negative credit events from appearing in your credit history. This can help to keep your credit score relatively healthy, so that it should hopefully be easier to borrow money again in the future.

Ask for help

If you’re in financial stress, you can contact your bank or mortgage lender and they may be able to provide options to help you avoid having to default on your repayments. You could also consider contacting a mortgage broker to learn more about what options you may have available regarding your home loan and refinancing.

Financial advisers may also be able to offer personal advice, though their fees could be costly, which may not be ideal if you’re already in financial stress. You could also consider contacting the National Debt Helpline for advice from a free financial counsellor.