Step 3 – Default Notice

The next step is to issue a default notice claiming the higher interest rate.

It may seem harsh to claim the higher interest rate. After all the poor borrower seemingly cannot afford the lower interest rate and here you are claiming the higher rate. However it is one of those circumstances where you unfortunately have to be cruel to be kind. It is a tool for concentrating the borrower’s mind. Just as speeding tickets motivate people to slow down the higher interest rate is a tried and tested mechanism for preventing future breaches of the mortgage. It is used, and has been used, in loans all around the world going back at least two thousand years. It is used because it works.

The worst thing you can do is to waive the higher rate of interest. The borrower sees that as an indication that you are not going to insist they abide by the terms of the mortgage. The borrower may think that if you don’t want your interest in a timely manner, maybe you don’t want your principal back on time, maybe you might agree to part with some of what you are owed on account of extenuating circumstances (seeing as you are clearly generous).

The notice must be issued by a mortgage lawyer. A mortgage default notice is highly technical and if you get it wrong that can give rise to a spurious defense that will tie you up in court down the track.

A default notice is prescribed by the Torrens legislation in each state and territory. Technically its purpose is to trigger the statutory power given to mortgage lenders to sell the property. That power only arises upon the service of, and non-compliance with, such a default notice.

The notice says to the borrower:

1. You have made a default;
2. This is what the default was;
3. This is what you need to do to remedy the default;
4. If you do not remedy the default within 30 days the lender can and may sell your property.

To remedy the default the borrower must pay the higher interest rate and the costs of issuing the notice. If they do that then the law deems the default not to have taken place.

If the default was a failure to repay the loan on the due date then to remedy the default the borrower must repay the loan and pay the higher interest rate on all interest payments subsequent to the expiry date.

After 30 days you will have the power to sell the property. This means the ability to sign a contract selling the property to someone else. This is called exercising the power of sale.

In the vast majority of cases a default notice works and the borrower rectifies the default or contacts your lawyer to inform you that the property has been put on the market.

If the property is owner occupied you will need to obtain an order for possession of the property from the court before you can begin your marketing campaign.

If the property is tenanted, and the tenants agree to cooperate, or the property is unoccupied or a vacant lot, then you can begin your marketing campaign straight away (skip to step 10).