What Causes Mortgage Arrears?

Is Your Home Loan In Arrears?

Below we have listed the main causes of mortgage-related arrears and financial difficulty

There are many reasons people find themselves with mortgage arrears or default. Many of these reasons are listed below and all of them will increase the risk of finding yourself in arrears with your home loan. There are other factors that increase the incidence of mortgage default too, such as the capacity to pay (diminishing an ability to meet commitments such as with gambling issues) along with loan type, interest rate and other factors. Our point is, this is a list of the most common issues that cause mortgage arrears.

Most Common Reasons For Home Loan Arrears

• Mental incapacity or mental illness such as depression or severe anxiety
• Physical incapacity caused by injury
• Physical incapacity caused by illness or disease
• Gambling
• Loss of a job
• The sickness of a partner
• Economic changes affecting work and hence income.
• Business related issues if the party is self employed.

Loan factors that affect the rate of mortgage arrears :

Studies by the RBA (Reserve Bank of Australia) have highlighted contributing factors within loan products or approvals that also contribute to home loans going in to arrears or default. They are listed below.

• Probability of entering arrears increases with loan equity ratios, especially noting higher loan ratios >90%. This is when the borrower makes a deposit of less than 10% on a home loan for example.
• Low doc loans are more likely to enter arrears
• If a loan has previously been in arrears there is a higher chance of arrears in the future.
• Incidence of arrears increases with a higher interest rate.
• Higher debt servicing ratios, such as high debt payments compared to income ratio, increases the incidence of arrears. So borrowing close to your maximum financial capacity.
• Higher incidence of mortgage arrears when there is a negative equity position. This is when a home loan value exceeds your property value.

The factors above are important to understand as they assist in analysing the background reasons for home loan arrears. They can also prevent home loan defaults from occurring.

The details abover are included in a mortgage arrears assessment & can provide an effective financial profile to help create a complete debt or mortgage arrears solution. It is likely that one or more of the above points applies to any mortgage arrears case. Mortgage arrears solutions can only occur when the root cause is identified. 

We have been asked about a different range of loan facilities called 2nd mortgage loans. Also, if 2nd mortgage loans can be used to fix a mortgage in arrears? There are in fact 3 answers to this question:

1. Yes, if the existing loan is a business loan and the resulting issues are related to a business.
2. Again, Yes, if you intend on selling your home and wish to control the sale as opposed to the bank.
3. No, if you intend on keeping your home and only wish to pay the arrears debt.

The reason for these 3 answers relates to the the NCCP (National consumer credit protection act) and the use of specialist 2nd mortgage loans for consumer purpose. To explain further, the purpose of private second mortgage funds is to be only used for business purpose. However, there is some availability for 2nd mortgage finance when a consumer has mortgage issues and wishes to sell the home. 

If you have got behind on your home loan, then contact us for mortgage arrears advice today.