does it happen in Australia?

No one likes to think about losing their home because they can’t meet their home loan repayments, but it pays to understand your options if you ever find yourself in that situation.

Before we set out, there are a wide range of alternatives that can get you through a financial rough patch before you consider the drastic option of giving up your home. It’s also important to note your lender is legally obliged to assist you in accessing them.

See also: Home Loan Arrears vs Defaults: Differences and Implications

These are generally short-term measures designed to get you back on your feet. But if you can’t see a realistic way out of financial difficulties in the foreseeable future, there are generally three ways you can offload a home loan:

1. Sell the property

2. Allow the property to be repossessed

3. Voluntarily surrender your property to the lender

The last option is little spoken about in Australia, but let’s consider what it means.

What is voluntary surrender?

‘Voluntary surrender’ is the legal term that describes a homeowner with a mortgage voluntarily handing over their property to their lender because they can no longer meet their repayments.

A colloquial term for it in the United States is ‘jingle mail’ – the act of mailing keys back to a lender. The practice gained some traction during the Global Financial Crisis, particularly in states that allow non-recourse home loans where lenders can’t pursue a borrower’s other assets should they default on their home loan. Even then, it’s not common.

Likewise in Australia, it is a relatively rare phenomenon with no official figures on its prevalence, but it can be an option if a homeowner sees no prospect of being able to make their mortgage repayments over the long term.

Legal experts often see it as a better alternative than having a home repossessed as it can be less costly and time-consuming for both parties than going through a formal foreclosure process.

See also: Guides on buying Foreclosed Properties in Australia

How would voluntary surrender work

In Australia, mortgages are set up so that while you’re the legal owner of your property, your lender holds a legal interest in it as security over the loan. This is recorded on the Certificate of Title, which your lender will hold until you’ve paid off your home loan.

This arrangement gives the lender the right to ‘repossess’ your home should you fail to meet your home loan repayments.

Repossession is a formal legal process that essentially gives your lender the power to evict you from your home and sell it to recoup your debts and other resulting costs, such as legal costs and expenses incurred in selling your property.

See also: What does a Mortgagee in Possession Sale mean?

But if the sale price doesn’t cover those costs, you – the borrower – will still be on the hook for the shortfall. (This is where Australian home loans can differ from some US mortgages – it’s best not to post the jingling keys and drive off like you can in some US states.)

In Australia, there are safety nets and processes built in before repossession can happen, with lenders legally required to have hardship resources for borrowers facing financial difficulties.

For instance, you may be able to defer or reduce your loan repayments until you can get back on your feet.

See also: Mortgage stress: The what, why, and how

However, if you’re in a situation where you can’t foresee meeting your home loan repayments beyond the hardship arrangement period, your lender may advise you to sell your home.

Selling your home vs voluntary surrender

Experts widely agree selling your home yourself gives you the best chance of achieving the price you need to pay off your home loan, release your mortgage, and, if you’re lucky, have some leftover sale proceeds.

While lenders routinely sell repossessed homes on the private market, they’re not in the business of property sales and are likely to be less concerned with the price your home fetches than securing a quick sale to get the encumbrance off their books.

Co-principal of DBL Solicitors John Devlin said in almost 40 years of practicing law, he has not come across a voluntary surrender situation and would advise a client facing difficulties with their home loan to speak to their lender before doing anything.

“Banks aren’t in the business of selling properties, so they don’t want to have to take your house off you and sell it,” Mr Devlin told YourMortgage.com.au.

“If they can reach an agreement with you whereby they give you a bit of time and you sell the place yourself, there’s a big saving there because they haven’t had to push through and do it themselves.”

John Devlin, Co-Principal DBL Solicitors (supplied)

He said selling the property yourself also allows you to have better control of the outcome than handing the sale process over to your lender.

“If you were to hand over your property for the lender to sell, you would still need to come to a legal agreement for them to be able to sell the property, what’s called ‘a power of sale’,” he said.

“That sort of agreement would short circuit the steps they would otherwise have to take to be able to sell the property [via repossession] so there may be some saving of time and legal costs – I can’t imagine a whole lot, but what it might do is create a situation where it takes the stress and stigma out of it.”

Voluntary surrender vs foreclosure

However, there may be some people who aren’t in a position to sell their own homes, whether for health or other reasons. If that’s the case, it may be best to negotiate a voluntary surrender agreement with your lender rather than wait for them to instigate formal foreclosure proceedings.

Different lenders will approach such a request differently depending on their policies. Some may offer an ‘assisted voluntary sale’ scheme, giving you time to sell your home – or appoint someone else to do it – and perhaps even offer some leeway until the property is sold.

Others may agree to lower or suspend your home loan repayments during the sale period, while others may help you appoint a third party to assist you. Of course, they will be aiming to recoup any reduced or missed repayments after the sale has taken place.

But if you’re still wanting to hand the selling of your property to your lender, a legal agreement will need to be reached for this to take place. It will serve much the same purpose as a court-sanctioned power of sale order, but without the cost, antagonism, and time lag of the repossession process.

Under that procedure, it can be at least a few months from the serving of a home loan default notice to notice of eviction. During this time, the homeowner continues to incur the costs of any missed home loan repayments as well as the lender’s legal costs.

What to do before a voluntary surrender

If you choose to go down the path of a voluntary surrender, it’s not as easy as simply handing over your keys. There are several things you’ll need to do:

1. Speak to your lender

Before you decide anything, it’s imperative you speak with your lender. Remember, lenders are obliged to assist you with any financial hardship you are experiencing. Act early and be open and honest about your situation. Rest assured, your lender will not be wanting to take possession of your home as its first option.

2. Seek legal advice

If you’re wanting to voluntarily surrender your home, it’s recommended you appoint someone who can represent your interests in any legal agreement with your lender, giving them the power to sell your home. A lawyer may also present you with other options before proceeding down that path. (If you’re not in a financial position to appoint a lawyer, see the free financial counselling and legal services that may be able to assist you at the bottom of this article.)

3. Find new accommodation

Put simply, you will need somewhere else to live which will need to be organised in advance. This may be difficult if you’re already in arrears with your mortgage so be sure to have a plan in place.

4. Remove your possessions

You’ll have to organise the removal or transfer of all that is yours in the home as you will likely not have any access once you’ve surrendered your keys.

5. Record final meter readings and notify utilities you have moved out

Take notes or pictures of the meters and let your electricity/gas supplier know you’re no longer occupying the home. But beware, this will not get you off the hook for council rates or water charges – these remain your responsibility until the home is sold.

6. Maintain the property’s insurance policy until the sale is completed

You’re also likely liable for any loss, theft, or damage to the property until it transfers to a new owner, regardless of whether it’s been surrendered to your lender. It’s recommended you check with your insurer to clarify this under your specific insurance policy.

Pros and cons of voluntary surrender

Advantages

Less costly than foreclosure

Voluntarily surrendering your home to your lender can save considerably on legal and court costs that routinely come with the foreclosure process.

Some control over timing

As well as the cost, legal foreclosure proceedings come with built-in time periods before actions can proceed. By coming to your own agreement, you can subvert the time required before a sale can legally take place. By the same token, you may be able to negotiate an agreed time for vacating the property with your lender that may be longer than the standard procedure.

Allows the lender to work with you

A necessary part of voluntarily surrendering your home is communicating with your lender. Ideally, you will have spoken to your lender’s hardship team well before considering this step and taken alternative measures to help you keep your home.

Instigating and maintaining communication with your lender is vital as soon as you foresee difficulties in meeting your home loan repayments. In best-case scenarios, your lender can help you avoid losing your home – or at least give you the time and means to sell it. It is, after all, in both your interests.

Less stressful and antagonistic than foreclosure process

While still a difficult time, voluntarily surrendering your home to your lender may remove some stress and antagonism that can be part of the foreclosure process. It may also give you some control over the timeline rather than forcing you to comply with legal processes and court orders or, worse still, being forcibly removed from your home.

May be able to negotiate a deal with the lender

While it’s likely the lender will be looking to offload the property as soon as possible in a bid to recoup its losses and get the debt off its lending book, there may be some scope to negotiate advantageous outcomes. This can sometimes happen if the property is a working farm, for example, where it’s better for someone to remain on site to care for a crop or stock and give the property a better chance of achieving a good price. A legal representative may be able to help you negotiate an agreement that considers your individual circumstances or helps you towards your next move.

Disadvantages

Loss of control over your property

If you hand your property over to someone else to sell, you will have no control over how long it is before the property is put on the market, the state it will be in when it’s offered for sale, and the price it will be sold for. It’s likely to be a much better outcome for you if you can facilitate the sale of your home yourself.

You will still have to pay any shortfall

Even when your home is eventually sold, if your lender doesn’t get the price to cover your outstanding home loan amount and its associated expenses, you’re not off the hook. Although your lender is legally obliged to try to achieve a good price for your home, it may not be what you would need to cover all your debt. When this happens, if you can’t pay the outstanding amount, your lender can apply to have you declared bankrupt so it can access any other assets you may have.

Credit rating will still take a major hit

It will make little difference to a credit rating agency whether you surrender your property or go through the repossession process. In both cases, your credit score will be negatively impacted.

Where to seek free financial and legal assistance

If you’re in a position where you fear you can’t keep up with your home loan repayments, your first port of call should be your lender. But if you need independent and free financial or legal advice, the following services may be able to assist you:

Financial assistance

Legal assistance

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