How to avoid a mortgagee sale
As if losing the home isn’t enough motivation, there’s also the penalty interest clause. Rob Stock reports.
Mortgagee sales are at an extraordinarily low level. On June 16, Trade Me had a mere 33 residential properties listed as going for ‘‘mortgagee sale’’.
Ten were vacant sections, mostly lifestyle. Two were apartments. One was a home and lifestyle business.
There were just 21 family houses, and, of those, only one was in Auckland.
It’s consistent with data from CoreLogic showing 95 people lost residential properties to mortgagee sales in the first quarter. By contrast, there were 800 in the third quarter of 2009, during the global financial crisis.
Forced sales of homes now seem so rare that property owners can discount it ever happening to them.
But property experts say that although banks hate mortgagee sales, they are less loathe to urge borrowers in strife to sell up.
CoreLogic’s Nick Goodall describes these as ‘‘urgent’’ sales.
Mortgage broker Campbell Hastie says an ‘‘urgent’’ sale is a better option than a mortgagee sale. ‘‘A property going to mortgagee sale equals 10 per cent less than what you might otherwise expect,’’ he says.
That’s because there is risk for the buyer. Real estate company Barfoot and Thompson says: ‘‘As the mortgagee is not the owner of the property, it offers the property for sale under different terms and conditions.’’
‘‘For example, most mortgagee sales are not offered for sale with vacant possession and do not include chattels in the sale.’’
The buyer can end up with an angry former owner to evict, or find a property stripped of light-fittings and even doors. The combination of a lower sale price and legal costs can easily result in the bank not getting all its money back.
For the borrower, things are worse. If penalty interest is charged, the borrower whose home goes to mortgagee sale faces ruin.
Banks can charge penalty interest on overdue amounts, though they don’t have to, and ASB says it doesn’t. Bank websites say they can add 2 and 5 percentage points to a loan interest rate on overdue sums, taking a 5 per cent loan to 7-10 per cent, for example.
If a bank loses confidence in a borrower who is in default, it can decide to declare the entire loan due for repayment, invoking what’s known as an acceleration clause. If a debt is not cleared, banks are entitled to charge penalty interest on the whole sum, says property lawyer Joanna Pidgeon.
Once a home is sold, any remaining debt is unsecured, and the interest cost can be much higher. However, if the bank thinks there is no chance of getting its money back, it may simply write the debt off.
In a case heard by the High Court at Whangerei in May, a couple were held liable for interest to ASB at 22.5 per cent on nearly $200,000 left owing after a shortfall on a mortgagee sale.
It’s not just urgent sales that keep mortgagee sales figures low. Hastie says: ‘‘People will die in a ditch rather than lose a house’’.
They’ll move heaven and earth to avoid missing a payment, and sometimes family will help too.
Pidgeon says banks seek urgent sales only when they have lost trust in the borrower. ‘‘It’s all about trust, and whether you do what you say you are going to do.’’
Pidgeon urges borrowers under financial pressure to talk to their bank. ‘‘Some people go into a cone of silence and before you know it are months in arrears and have no way of coming back from it.’’
Her experience is that banks will do deals with borrowers they trust.
One option is the bank letting them pay interest only for some months. Another is capitalising interest for a while, adding it to the loan.