Selling vs Foreclosure — What Happens If You Default on Your Mortgage in Australia
If you cannot resolve your mortgage arrears through repayment or hardship assistance, two paths ultimately lead to the property being sold: a voluntary sale you control, or a mortgagee-in-possession sale the lender controls. Understanding the difference can save you tens of thousands of dollars.
Key Point: “Foreclosure” in Australia
The term “foreclosure” comes from the United States and is not the precise legal term used in Australia. In Australia, the equivalent process is called mortgagee in possession (or mortgage enforcement). The practical effect is similar — the lender takes possession of and sells the property to recover the outstanding debt.
Option 1: Voluntary Sale
You sell the property yourself — through your choice of real estate agent, at a time that suits the market, with control over the listing price and sale strategy.
Advantages of voluntary sale:
- You choose the agent and timing (within limits)
- A properly marketed property typically achieves market value
- You retain any equity after the mortgage is repaid
- Lower legal costs (no lender enforcement proceedings)
- More control over the process
- Better psychological outcome for many sellers
Process:
- Notify your lender of your intention to sell
- Engage a real estate agent
- Market and sell at market value
- From settlement proceeds: repay outstanding mortgage, agent fees, conveyancing, other costs
- Receive any remaining equity
Note: If the lender has already commenced enforcement proceedings, a voluntary sale may still be possible — contact your lender immediately. Most lenders prefer a voluntary sale to the cost and complexity of mortgagee-in-possession.
Option 2: Mortgagee-in-Possession Sale (Forced Sale)
If arrears are not resolved and the lender obtains a possession order from the court, the lender takes possession of the property and conducts a sale.
Disadvantages of mortgagee-in-possession sale:
- You have no control over the selling agent, timing, or price strategy
- Properties sold under mortgagee conditions often achieve below-market prices
- Lender’s legal costs (which can be substantial) are added to your debt
- If the sale proceeds do not cover the outstanding debt, you remain liable for the shortfall
- Your credit file records the enforcement action for 5–7 years
Lender’s duty to mortgagor: Australian lenders selling under power of sale have a duty to take reasonable care to obtain a price not less than market value. In practice, lender-controlled sales can still achieve lower prices due to rushed timelines and limited marketing.
Comparison: Voluntary Sale vs Mortgagee-in-Possession
| Factor | Voluntary sale | Mortgagee-in-possession |
|---|---|---|
| Who controls the process | You | The lender |
| Likely sale price | Market value | Often below market |
| Legal costs to you | Low | High (lender’s legal costs added to debt) |
| Shortfall risk | Lower (better price) | Higher (lower price + added costs) |
| Credit file impact | Sale itself not recorded | Enforcement action recorded |
| Timeframe | Your choice | Lender’s timeline |
| Equity protection | Maximum | Minimal |
What If the Sale Doesn’t Cover the Debt?
If the property sells for less than the outstanding mortgage balance, you still owe the shortfall (also called the deficiency judgment). The lender can pursue you for this amount through debt collection or legal proceedings.
This is most likely to occur in:
- Negative equity situations (property worth less than the loan)
- Mortgagee sales that achieve below-market prices
- Cases where lender legal costs have significantly increased the outstanding balance
→ See Negative Equity — What If My Home Is Worth Less Than My Loan?
What Happens if There Is Equity Left After the Sale?
If the property sells for more than the outstanding debt plus all costs:
- The surplus is paid to you (the borrower/mortgagor)
- You are entitled to any remaining equity — the lender cannot keep it
This is why protecting equity through a voluntary sale is so important.
Frequently Asked Questions
Can I sell my house myself while in arrears?
Yes — being in arrears does not prevent you from listing and selling your property. Notify your lender of your intention. The mortgage is paid out from settlement proceeds. The lender does not need to “approve” a voluntary sale, but will require the outstanding loan (plus any fees) to be repaid at settlement.
Can the lender take my house without going to court?
Generally no — in most Australian states, a lender must obtain a court possession order before physically taking possession. However, the process can move relatively quickly once enforcement proceedings are commenced. Do not ignore legal notices — seek legal advice promptly.
How long does the mortgagee-in-possession process take?
From commencement of formal enforcement proceedings to completed sale is typically 6–18 months, depending on the state, whether proceedings are contested, and the sale timeline. Voluntary sale is almost always faster.
Related Guides
- What Happens If I Miss a Mortgage Payment?
- Negative Equity — What If My Home Is Worth Less Than My Loan?
- Mortgage Hardship Provisions — Your Legal Rights
- Bankruptcy and Home Loans — Will I Lose My Home?
- Mortgage Hardship Hub
This article provides general information about property enforcement in Australia. This is not legal advice. If you are facing mortgage enforcement, contact a community legal centre, Legal Aid, or a solicitor immediately. For financial counselling, call the National Debt Helpline on 1800 007 007. Find mortgage help through MoneySmart.