Changes to obligations under credit contracts, mortgages and guarantees

Contributed by SigourneyDrane and current to 27 July 2018

Unilateral changes by credit provider

Certain changes to a credit contract can be made unilaterally by a creditor without agreement of the debtor, provided that the credit contract allows for the change.

Unilateral changes include changes to interest rates, repayments, credit fees and charges, credit limits in continuing credit contracts and tenancy protection in reverse mortgage contracts.

In most cases, the NCC requires the creditor to notify the debtor in writing of any unilateral change within a specified period of time (see sections 63 – 70 of the NCC.

If the annual percentage rate under a credit contract is fixed for a specified term (including the whole term of the contract) then the credit contract cannot be changed unilaterally by a creditor if that change would increase or change the method of calculation of a fee or charge:

• payable by the debtor on early termination of the credit contract; or
• payable on pre-payment of an amount under the credit contract.

Changes by agreement of parties

If the parties under a credit contract, mortgage or guarantee agree to change its terms then the creditor must give the other party written notice setting out the particulars of the change within 30 days of the date on which the agreement is made (see section 71(1) of the NCC).

Notice does not however have to be given where a change defers or reduces the obligations of the debtor for a period not exceeding 90 days or the parties agree to increase the amount of credit under the credit contract (see section 71(2) of the NCC).

Where the parties agree to increase the amount of credit under the credit contract then the creditor must give the debtor a written notice containing the information required by the Regulations before the agreement is made (see section 71(3) of the NCC).

Changes on grounds of hardship

If a debtor is unable to meet their obligations under the credit contract then they may give the credit provider oral or written notice (known as a 'hardship notice' or 'hardship variation') to this effect (see section 72 of the NCC).

A hardship notice may be given where the debtor wishes to:

• extend the credit contract and reduce repayments;
• postpone repayments for a specified period of time; or
• extend the credit contract and postpone repayments for a specified period of time.

The credit provider must respond to the debtor's hardship notice within 21 days of receipt.

The credit provider may respond to the debtor either orally or in writing and request that the debtor provide additional information within 21 days of the date of the credit provider's notice where that information is required by the credit provider to decide:

• whether the debtor is or will be unable to meet the debtor's obligations under the credit contract; or
• how to change the credit contract if the debtor is or will be unable to meet those obligations.

The credit provider may take into account the following factors:

• any 'reasonable cause' for the hardship, such as illness or unemployment;
• whether the situation is temporary; and
• whether the debtor will be able to repay the loan, even if the repayments are changed.

A debtor may also need to demonstrate how they propose to make any missed repayments, which may include:

• extending the term of the credit contract;
• increasing future repayments; or
• making a lump sum repayment in the future.

Before the expiry of the 21 day period, the credit provider must give the debtor notice:

• recording the fact that the parties have agreed to change the credit contract; or
• recording the fact that the parties have not agreed to change the credit contract and the reasons why. The credit provider must also include the name and contact details of the Australian Financial Complaints Authority (AFCA) scheme and the debtor's rights under that scheme.

Where the parties have agreed to change the contract, the credit provider must give the debtor and any guarantor under any guarantee relating to the credit contract, written notice setting out the changes to the credit contract and any other information required by the Regulations within 30 days after the date of the agreement (see section 73 of the NCC).

A debtor to may apply to the court if the credit provider does not change the credit contract as a result of a hardship notice from the debtor (see section 74 of the NCC).