For most New Zealanders buying a home is not just a financial move. It’s also an emotional step that comes with excitement and hope. However, there are instances where the buyer’s circumstances change, and they are no longer able to continue paying their mortgages.

It could be an unforeseen job loss or loss of business. Or maybe you are sick and can’t pay the mortgage anymore. Whatever it is, defaulting on a mortgage is not something anyone wants to do. No one wants to face a mortgagee sale.

But, there are occasions when mortgage defaulters can be indifferent and assume that nothing can happen when they default on a mortgage. This can be dangerous. Here are the reasons why.

Default Damages Your Credit Score

Banks and other non-bank mortgage lenders report the status of each borrower to credit referencing bureaus which in turn use this information to compile credit reports. The same information is applied in credit scoring models when calculating a credit score.

Your repayment history significantly influences your credit score and ultimately affects your ability to receive other forms of credit. It also affects your ability to take advantage of certain opportunities or access resources.

Defaulting on your mortgage could destroy your creditworthiness.

The Debt Sustains Even After a Mortgagee Sale

A common scenario that often leads homeowners to default on the mortgage and have a sense of impunity is when the mortgage is “underwater.” Or, when the market value for the home is far less than what the homeowner owes the lender. This may be due to dwindling property prices or a catastrophe such as a value drop in beachfront properties due to rising sea levels.

In such a scenario, the property owner may figure that a ‘strategic walk away’ is a good option out of the awkward situation. However, it is the wrong move.

The bank can mortgagee sale the property for the best value it fetches. It’s under no obligation to stick to a price. The proceeds would first be used to clear any costs associated with the process of mortgagee sales. After which the balance is applied to the outstanding loan. This means that there will be less money available to clear the outstanding mortgage bill.

Your debt balance could be larger even after a mortgagee sale.

The danger of Insolvency or Collection of Civil debts

Should you fail to settle the outstanding debt, the lender can apply to a court for the authority to collect the remaining amount as a civil debt. The court may grant the lender authority to attach other valuables you own – such as your car. Or the lender could get permission to collect directly from your employer.

If these options still don’t settle the outstanding mortgage, the lender could request the High Court to declare you bankrupt. Bankruptcy restricts your ability to get credit, to carry out business, access employment opportunities as well as your freedom to own property or even to travel.

Assume that nothing can be done to you when you default on your mortgage is dangerous. It will ruin your creditworthiness. The lender can also mortgagee sale the property, and collect the balance as a civil debt. Worse still you risk being declared bankrupt.

Instead of walking away from your mortgage payments, reach out to an experienced mortgage broker. You’ll get invaluable help in reviving your situation.