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Station 4 · When repayments are hard

Refinancing when repayments are hard

A new lender still has to work through the responsible lending checks when repayments are already hard, and ASIC’s guide says past repayment difficulty calls for more inquiries, not fewer. The National Credit Code also keeps a separate path open with the current lender, the hardship notice, and Moneysmart points to free financial counsellors for help applying for it.

General information, not financial advice: this page explains rules and does not say whether refinancing suits anyone. To check a rule, start with ASIC’s Moneysmart; for free financial counselling, the National Debt Helpline.

Two paths, side by side

This page sets the two out as the sources describe them. It does not say which suits anyone. The National Debt Helpline says a free financial counsellor can help a person explore their options and negotiate with creditors.

A new loan with a new lender

  • The responsible lending checks apply, and RG 209 asks for further inquiries where a borrower has had repayment difficulty, to judge whether the same circumstances would affect the new loan.
  • Moneysmart’s example: a $20,000 debt refinanced to a lower interest rate over a longer term will lower the weekly repayments, but could raise the total cost.
  • For a secured debt, Moneysmart says the home put up as security may be at risk if the new loan cannot be repaid, because the lender can sell it to recover the money lent.

A change to the loan you have

  • Under section 72 of the National Credit Code, a debtor who considers they are or will be unable to meet their obligations may give the credit provider a hardship notice, orally or in writing.
  • Moneysmart says your lender must consider you for hardship assistance when you ask, and must write within 21 days with the outcome, or within 21 days of receiving any further information it asked for.
  • Moneysmart says you may be able to change the loan’s terms, or pause or reduce repayments for a time, and calls this a hardship variation. If the lender refuses, it must give a reason.

Hardship, seen from each lender

RG 209 reports a point from the Act’s Explanatory Memorandum: where a consumer is refinancing while having difficulty meeting repayments, or is in arrears, a new contract will be prima facie unsuitable if its repayments are at the same or a similar level. RG 209 also says the responsible lending obligations should not, on their own, stop someone who has had repayment difficulty in the past from getting an appropriate loan.

With the current lender, section 89A of the National Credit Code limits enforcement after a hardship notice. It applies where the credit provider must give a default notice under section 88 before beginning enforcement proceedings, and the debtor gives a hardship notice under section 72, before or after that default notice, provided the debtor gave no other hardship notice in the 4 months before, or the credit provider reasonably believes the new notice rests on a materially different basis from the earlier ones. The credit provider must then not begin enforcement proceedings unless, in response to that hardship notice, it has given the debtor a notice under section 72(4)(b) “stating that the credit provider and debtor have not agreed to change the credit contract”, then let 14 days pass from the day it gave that notice. The section’s one exception lets a credit provider take possession of mortgaged goods if it reasonably believes the debtor or mortgagor has removed or disposed of them, or intends to, without its permission, or that urgent action is needed to protect them.

If the credit provider does not change the contract after a hardship notice, the Code lets the debtor apply to a court to change its terms. Moneysmart also says that where no agreement is reached, a complaint can go to AFCA for free dispute resolution; complaints about a refinance covers how that works.

Who is a financial counsellor, and who is not

Moneysmart describes financial counselling as a free, confidential service offered by not-for-profit community organisations. It is blunt about imitators: you never pay for financial counselling, and a business charging a fee for it is a debt consolidation or refinancing company, not a financial counsellor.

Moneysmart also warns that some companies advertise they can get people out of debt however much they owe, which may be unrealistic. Financial counsellors do not give legal advice, so Moneysmart says anyone facing legal action should get free legal advice straight away.

The National Debt Helpline is free, and Moneysmart says a call is transferred to the service in the caller’s state. Moneysmart’s advice on timing is short: the earlier you get help, the more options you will have.

If a default notice has already arrived

Moneysmart says a lender can send a default notice on the day a repayment becomes overdue, though it may wait until the repayment is 90 days or more overdue. The notice gives 30 days to pay what was missed plus the regular repayment, Moneysmart says, and a hardship variation can still be asked for at that point. Section 88 of the National Credit Code puts that period at no less than 30 days from the date of the notice. Moneysmart’s word on receiving one is not to ignore it, and to talk to the lender or get free legal advice immediately.

A broker who suggests you stay with your current loan has its own rule to meet. A broker on a refinance sets out section 124 of the Act, and the hardship procedure it names. The checks a new lender makes are in the new lender’s checks.

Next station: Complaints about a refinance