Insights

Malcolm Galloway is a partner in the commercial team, Jordan Highstead is a solicitor in the same team.
 

Considering defaulting on your mortgage?

With rising interest rates and increased cost of living it is inevitable that some will find themselves having to navigate defaulting on their mortgage. Although most banks seem to have been slower to hit the eject button than they were in the fallout from the global financial crisis of 2008, enough commentators and economists have expressed concern that the major banks will be shifting up a gear on their recovery action in the coming 12 months.
 

Firstly, revert back to your loan agreement

If you have a home loan that is secured by a mortgage and find yourself in financial strife a useful first step is to revert back to your loan agreement. When you purchased your property you probably met with a solicitor and signed a loan agreement which sets out the terms and conditions of your loan. This document also covers financial hardship and will detail the lender’s policies regarding financial hardship. Lenders are required under the Credit Contracts and Consumer Finance Act 2003 to include hardship provisions in loan agreements, and although the terms may slightly differ between lenders, all must consider any hardship application you make.

You should also be mindful of the kind of mortgage that was secured against your home. Often this will be a “all obligations mortgage.” If so, this means that if you default on your home loan, your lender can call up all lending including any credit card, personal loan and overdraft debts.

If you do default on your home loan payments and have not been able to reach a resolution with your lender, then as a mortgagee, they have the right under the Property Law Act 2007 to deliver formal notice to you to remedy the default. This notice, often referred to as a “section 119 notice” or a “PLA notice,” will specify a period of time (no less than 20 working days) to remedy the default. If you are unable to remedy within the specified time your lender can assert their powers under the Act, most commonly in the form of a mortgagee sale.
 

Can you negotiate?

You may find yourself in a situation when negotiating with your lender around options to remedy your default, where the period of time in the section 119 notice has lapsed but the lender has not yet exercised its powers to sell or take possession of your land. That situation might have arisen because the lender has agreed to delay taking enforcement action while you put a recovery plan in place. Be aware, this does not mean the default notice is no longer valid and that the lender would have to start the process again in order to exercise its powers as mortgagee. The courts have found that a mortgagee has the discretion when to exercise its power to sell or take possession of mortgaged land on an unremedied section 119 notice and have recognised unremedied section 119 notices as valid, even years after being served.[1]

There are limited legal avenues where one could require a lender to issue a new section 119 notice so you should always treat an unremedied section 119 notice as live and anticipate that your lender could invoke its powers under the Act at any time. By ignoring the notice and hoping that the lender will not exercise their rights under law will only cause further financial strife as penalty interest is likely to be accruing on a daily basis.
 

Do you seek further advice?

Should you find yourself on the receiving end of a section 119 notice, please contact us at Gibson Sheat so that we can help you navigate this process.

Malcolm Galloway has vast experience in helping his clients navigate the options when faced with difficult situations such as defaulting on mortgages.