How to Avoid Home Mortgage Loan Default

You have been paying your home mortgage loan diligently and on time, but lately you've been experiencing a cash flow problem.  This may be due either to a job loss or a sluggish business. 

And so the question is: What should you do if you find yourself unable to service your loan? Can you default (not deliberately, though) and still avoid the auctioneer's hammer?



How to Avoid Defaulting on your Mortgage Repayments

If you find that you cannot meet your mortgage repayments or you are worried you might fall behind, the first thing to do is contact your lender as soon as possible. Lenders have procedures for tackling payment difficulties and they'll try to help.

Depending on your payment history and whether your difficulties are likely to be long or short-term, your lender might agree to reduce your payments for a period of time, charge you interest for a while, give you a payment holiday ( a temporary break from making an repayments), or even extend your mortgage term to reduce your monthly payments.

Sometimes after falling behind and trying to 'make a comeback', you might find that servicing mortgage arrears is burden-some. You may need to request the bank for debt restructuring to deal with that.

Debt restructuring simply means that you draw out a new loan to pay the old loan. The bank will close your old loan with them and set up a new one. And given the high level of competition in the banking sector, most banks nowadays are open to the possibility of debt restructuring.

Note: Default rate is high among the first-time homeowners because they usually have little understanding of the dynamics of how a mortgage works.Unfortunately, hiding or running away when you start falling behind in your repayments under the misconception that banks/lender are only keen on getting money from you is NEVER the solution.

Other options  available in case you default due to a change in your financial circumstances especially for people who have lost their jobs is taking a retrenchment insurance cover that pays mortgage for up to nine months for those who have lost their jobs. This allows such people to either get another source of income or make an informed decision about the next step to take regarding their home.

This insurance cover sees to it that the most important asset of your life and symbol of security is not pulled from under your feet just because you have lost your jobs.

If you do not get another job or source of income that will enable you continue with the repayment even after the nine months catered for by the retrenchment cover, you can choose to sell your property by private treaty (at the open market price), pay off the loan balance, and keep the rest, which include the capital appreciation realized over time.

You can use part of what remains after clearing the balance to buy a cheaper house. If you wait for the bank to auction the house, you will not get any proceeds from it because the lender is usually only keen on recovering the outstanding debt and will, therefore, not have a problem selling it below the market price.

You can also use your pension savings up to 60% of accrued retirement benefits to offset outstanding mortgage loan in case and you're unable to service pay back. With this new law, particularly in Kenya. You can now access credit up to 110% of the value of the home. Ordinarily, financing was up to 80% of the value of the property, leaving you to to raise the remaining 20 per cent plus closing cost estimated at 10% of the value of the home.

For instance, for a home worth Sh8 million, the lenders will ordinarily finance you to the tune of Sh6.4 million leaving you to raise Sh2.4 million to cover the deposit and closing costs including stamp duty (Sh320,000), legal and other closing costs (Sh480,000).

By using your pension savings, you can be financed up to the tune of Sh8.8 million, removing the need to raise any funds as long as 60 per cent of the accrued retirement savings can guarantee the Sh2.4 million required.

The bottom line is that it's your responsibility to track you repayments and interest rates to get as much information as possible about your mortgage to enable you explore these available options. You only need to be well-informed and you are safe.