Be Aware of Default Payments Amidst Continuous Interest Rate Hike
Causes of Default Payments
For those with home loans, take note! With recent interest rate hikes from banks, monthly repayment pressure has been growing, and many people are experiencing default payments—failure to pay their home loans on time. So, what situations make default payments more likely? What are the causes, consequences, and solutions? Let’s dive into this today!
There are various reasons for default payments. Here are some of the most common:
- Fixed Rate Expiry: Many customers previously had fixed interest rates (fixed rate), where interest was low a few years ago. However, when the fixed-rate period expired, the floating interest rates were much higher, significantly increasing monthly repayments. Many customers forgot to adjust their accounts to reflect the increased repayments, resulting in default payments.
- Interest-Only (IO) Loan Expiry: Some customers previously applied for interest-only loans (IO), and after the term ended, their loan terms switched to principal and interest (P&I). As the repayment amount increased, customers often continued paying the original interest-only amount, which was insufficient, leading to default payments.
- Large Increase in Repayment Amounts: For customers with variable-rate loans, repayments were previously manageable, but due to recent interest rate hikes, many customers either forgot to increase their payments or couldn’t afford to. This led to default payments.
These are everyday situations where default payments occur. So, what impact can default payments have?
Consequences of Default Payments
As we know, most people have mortgage loans, meaning their property is the collateral. When we default on payments, the bank will first attempt to contact us to collect the overdue loan payments. After all, the bank doesn’t want to auction off our property, as it’s a time-consuming and costly process.
If you receive a notice about missed mortgage payments, it’s important to pay the overdue amount within the deadline specified in the notice. Doing so allows your loan contract to continue without issue. However, if you fail to do so, additional fines and interest will accumulate, resulting in financial losses.
After persistent attempts to collect, the bank may file a lawsuit in court to seize ownership of the mortgaged property. Once the bank obtains ownership, they can auction the property to recover the loan principal, interest, and associated costs. If the proceeds from the sale don’t cover these costs, the borrower must pay the remaining balance. Additionally, if the property is rented out, the bank may also terminate the rental contract, causing the borrower to lose rental income.
Furthermore, the default payment will be recorded on your credit report, negatively impacting your credit score. With current credit reports being very thorough, your history of defaults, how many times it occurred, and the amounts will be fully documented, affecting your future financial activities.
How to Solve It
The most straightforward solution is to ensure there are enough funds in your repayment account. During periods of rising interest rates, remember to deposit extra money into your repayment account, as floating rates are generally increasing. If you continue depositing the same amount each month, it may soon be insufficient to cover your increasing repayments.
Of course, depositing more money can only solve the problem temporarily. This simple method may work for some, but for most, a more practical solution is to conduct a rate review to lower your repayment amount. This is a more sustainable approach.
To address this, all you need is a quick call or WeChat message to us:
- Whether or not you are a current customer, we will help negotiate a lower interest rate with your bank for free.
- We offer a free revaluation of your property. If you have equity, you can cash it out.
- If your bank can’t offer you the lowest interest rate available on the market, we’ll help you reassess your loan and transfer it to a bank with lower interest rates.
Don’t let default payments catch you off guard—take action now!
Visit our website to learn more: openmortgage.au