How does missing a home loan repayment affect my credit score?

• Missing a home loan repayment may or may not affect your credit score, depending on whether it is a one-off event or has become habitual.
• Repayment beyond the 14 days after the due date will be listed on your credit report as a late payment.
• Failure to pay beyond 60 days after the due date will have you listed as in ‘default’, and defaults have serious consequences on your credit score.

Did you miss a home loan repayment recently? Or are you likely to miss an upcoming mortgage repayment? Are you wondering how it could affect your credit score? Your concerns are justified.

If you can make a repayment within 14 days after the due date, you are safe and there will be no issues at all for your credit score. Going beyond that is asking for trouble. A late payment will be listed on your credit report and remain for two years. A default stays on your credit report for five years and has a serious impact on your credit score.

What is considered to be a missed mortgage repayment?

A missed mortgage repayment is any repayment you make (or fail to make) after 14 days of the due date. The two-week period following the due date is considered a grace period. Payments made within this window are neither considered late payments nor listed/reported as such in your credit report.

When does a late repayment become a default?

When you fail to make a repayment past the 14-day grace period, your lender can make it a default. However, a lender cannot list a missed payment as a default before taking concrete steps to collect the full or a partial amount from you.

This includes the following actions:

• Sending you a letter of demand, a notice that you have missed a repayment. This offers you the opportunity to negotiate a repayment plan or ask for a hardship variation. Or, if you can, just catch up with the repayment.
• Sending you a default notice asking you to catch up with your repayments. Usually, default notices will be sent if your repayment is overdue by 90 days or more. The default notice gives you a 30-day window in order to repay missed payments (or payments in arrears) together with your regular repayment on the mortgage.
• The default notice will come together with a document known as Form 12 which provides you information about debtor’s rights after default, as required by law.

After taking these steps, your lender can list your missed payment as a default.

How missing a mortgage repayment impacts your credit score

The current credit reporting system in Australia takes into account the payments you make on time as well as late payments and defaults. As a result, if you missed a repayment, but manage to catch up soon after, and avoid it going into default, that one late mortgage repayment is unlikely to create a big impact on your credit report. It will be overshadowed by your habitual timely payments that came after it.

But if your repayments are late month after month, all of these late payments get listed on your credit report. This indicates a pattern of financial distress and can impact your credit score, and future loan and credit card applications. It is worth noting that amounts as small as $5 can be listed as late payments.

How late payments and defaults are recorded by credit bureaus

Credit bureaus report both late payments and defaults.

• Late payments will be listed under the consumer credit liability information section of your credit report. They will remain there for up to two years and be displayed as a number that indicates how many days in arrears your mortgage account was in a given month.
• Defaults occur when you fail to make a repayment after 60 days of a due date. Even if you make the payment later, that is still a default and has a serious negative influence on your credit score. Information about defaults are found in the overdue accounts section of your credit report.

A missed payment of more than $150 that is more than 60 days overdue will be recorded as a default. Each default will remain on your credit report for five years before being removed.

How long do late payments and defaults stay on my credit report?

• Late payments remain on your credit report for two years.
• Default payments, which are considered more serious, remain on your credit report for five years.

What to do if you can’t pay your mortgage

If you are unable to make a mortgage payment on the due date, or within 14 days afterwards, it is best to contact your lender immediately. The sooner you do this the better. It is best if you are proactive about it. Call your lender before the payment due date to discuss your options.

The lender will ask you:

• the reason you missed or anticipate missing the payment;
• how you plan to pay this and where the money would come from;
• what the lender can do to help you get payments back on track.

It is necessary to understand that no lender wants you to fall behind on your mortgage repayments. To deal with this — it’s quite a regular occurrence for mortgage lenders — they have dedicated staff to assist their borrowers who are undergoing periods of financial difficulty. You should not hesitate to reach out and seek advice on what to do about a late payment or a potential one.

If you feel you are going to miss loan repayments going forward and not just one monthly repayment, then you need to contact your mortgage lender. Remember that a defaulted payment, made 60 days or more after the due date, will be listed in your credit report for five years. You want to take all possible steps to stop this from happening.

Here’s what you can do:

• Get into a repayment arrangement by calling your lender. Your lender will provide you with financial guidance and help you work out a new payment schedule and budget. Make this realistic. If this still appears difficult, you may want to explore whether selling out and renting would be a better solution for you.
• Work on a realistic repayment budget. Carefully consider your expenses, cut down on nice-to-haves and stick to essentials if that is what it takes to be able to make repayments on your loan.
• Contact the financial hardship department of the lender. Have a repayment arrangement ready and request for the loan term to be extended. You can also ask for financial hardship assistance in writing. Make sure to attach all necessary information.
• Work on a statement of financial position. This is a document that shows your lender the extent to which you are unable to make repayments on your home loan. Consider getting assistance from a financial counsellor to make it accurate. Sometimes lenders may question whether certain expenses are necessary. Then it becomes a discussion about whether you can do without them, in order to be able to pay the loan instalments.

However, if after all that, your statement of financial position still shows that you cannot afford to make loan repayments under a new arrangement, they may reject your proposed repayment application.

• Changing the terms of the loan is another option. Where the lender can see that your cash flow issue is a short-term one, the lender may help by changing the terms of your mortgage. But if the problem is a long-term one, you may want to consider selling your home or explore the possibility of refinancing.
• If you are not satisfied with the solutions given by your lender, contact the ombudsman at the Australian Financial Complaints Authority (AFCA).
• Other options are downsizing to a more affordable home or renting until your finances are back on solid ground.

FAQs

Can you pause your home loan repayments?

A repayment pause is a feature that lenders allow on eligible home loans. When you need a respite from loan repayments, you can ask your lender to stop or pause repayments for an approved period, usually between three to 12 months. Only some loans are eligible and you will have to pay a fee.

You need a valid reason to ask for a repayment pause. You can also ask for a repayment pause on your home loan if you are ahead of your repayment schedule. Other common reasons include:

• Being on leave from the workforce
• Transitioning between jobs
• Parental or maternity leave
• An eco pause while installing water or energy-saving devices
• Short-term injuries
• Extraordinary circumstances

Repayment pauses on home loans can be used to:

• pause home loan repayments entirely, or
• to reduce the value.

All pauses are subject to the approval of your mortgage lender or bank.

What’s the difference between a foreclosure and mortgagee repossession?

Although we see the terms ‘foreclosure’ and ‘mortgagee repossession’ being used interchangeably, there is a legal difference.

• In a foreclosure, the lender goes through the legal process of transferring the title of the property from the borrower to the lender.
• In a mortgagee repossession, the borrower remains on the title of the property while the lender, or mortgagee, sells the property. In Australia, a mortgagee repossession is the simpler and more cost-effective method compared to a foreclosure.

The verdict

Missing a home loan repayment could happen to anyone. If you know you are likely to miss a mortgage payment in any month, be proactive and contact your lender, and make arrangements or seek relief.

When you miss a payment, if you pay it within 14 to 60 days after the due date, it will be listed on your credit report as a late payment and remain there for two years. However, it is unlikely to make a big difference to your credit score, especially if it is an exception and you continue to pay your loan instalments afterwards.

Missing home loan repayments habitually can have a negative impact on your credit score and ability to borrow. If you fail to pay your loan instalment until after 60 days past the due date, you will then be listed as in default. A default stays on your credit report for five years and creates a significant impact on your credit score.

If you defaulted on a mortgage payment once, and wish to lessen the impact of that default on your score, you need to begin making timely repayments of your mortgage. All timely payment behaviours that follow a default will help improve your credit score. Plus, it will give lenders an idea of how financially responsible you are.