With increasing numbers of home loans in arrears, consumer credit groups are advising people to deal with problems early if they want to have the best chance of avoiding a disastrous outcome.

"Don't leave it until the locksmiths are coming the next day," says Karen Cox from the Consumer Credit Legal Centre in NSW (cclcnsw.org.au).

"At that time there are very few options. But if you get good advice as soon as you experience difficulties, you'll have a much greater chance of achieving a satisfactory solution.

"You mightn't be able to keep your property but you'll be better off."

The mix of high interest rates, lower property prices, falling equities and rising unemployment has been a recipe for financial stress for many, if not most, households this year.

When tough economic circumstances follow an extended period of aggressive commission-driven home-loan marketing - as they have - the consequences for home buyers are dire.

In a paper late last month, the Reserve Bank estimated the number of home loans more than 90 days in arrears had increased 13 per cent since earlier in the year.

The RBA says about 17,000 borrowers across all home-loan types are more than 90 days behind in repayments compared with about 15,000 in arrears earlier this year. The people most affected live in the mortgage-belt suburbs in western Sydney, Melbourne and south-east Queensland, as well as regional areas around Newcastle and Wollongong.

The RBA paper links the rising number of home loans in arrears with marketing by mortgage originators or brokers.

Hard sell

Mortgage brokers, like commission-based financial planners, take an upfront fee and trailing commissions when they negotiate (or sell) a loan. Although it is hardly the first time commission-driven selling of financial products has left consumers with poor outcomes, with home ownership the stakes are particularly high.

The RBA says arrears among "full doc" loans increased slightly during the past year but the big growth was from "low doc" or "non-conforming loans" - made to people who don't have good credit histories or are unable to provide evidence of their ability to service the loans. Unfortunately the outlook for widespread mortgage stress is not encouraging. AMP economist Shane Oliver notes the boom in house prices during the past 15 years has been accompanied by hefty increases not just in household debt but in debt as a percentage of disposable income.

He maintains that Australian houses are significantly overvalued.

"The ratio of average house prices to average household disposable income has nearly doubled in the past decade," Oliver says. Property buyers in NSW and Victoria are already the most highly geared in the country.

In August, mortgage finance group AFG's survey of loans had average gearing at a nerve-racking 71.5 per cent (NSW) and 69.3 per cent (Victoria) of the value of properties.

Falling wealth

Australian net household wealth fell 3.6 per cent during the past year, a recent report from CommSec shows. A potentially more immediate issue is that the ratio of household debt to liquid assets rose by 4.2 per cent to a record high during the June quarter.

The implication, says CommSec economist Craig James, is that households do not have sufficient readily liquefiable assets to cover outstanding debt, making them vulnerable to an economic downturn.

So at a time when interest rates are likely to remain high and economic conditions flat or worse, households have little room to move with their mortgage payments. But the question is, what to do? If you are on the brink, should you sell and rent for a while? If your situation is precarious, are there any options?

Seek help early

The RBA's statistics are hardly a revelation for consumer credit organisations in Melbourne and Sydney.

For some time, they have been pointing to the increased requests for help from people with huge debts on the verge of losing their homes.

Karen Cox says the volume of calls the legal centre is receiving is higher, up about 8 per cent on last year, and the problems are more serious.

"We keep a close watch on the foreclosures in western Sydney, so the increase in arrears was no surprise," she says. "Today by lunchtime we'd had four calls from people facing foreclosure."

In Victoria, the situation is similar. Nicole Rich, the director of policy and campaigns for the Consumer Action Law Centre (consumeraction.org.au), says her group has been receiving inquiries from people unable to meet their credit card and mortgage payments, and the scale of the problem is intensifying. Rich, like her NSW counterpart, says it is critical to seek professional advice early.

Be realistic

The typical scenario for a loan in arrears is for the lender to issue a default notice, which gives 30 days for outstanding payments to be made. If that doesn't happen, the whole loan becomes due and payable and the lender can take action to repossess the home.

"On consumer loans up to a maximum amount, a person experiencing a period of temporary hardship has the right to request a variation to the terms of the loan," Rich says. "Options include suspension of payments for a period or reducing the amount of payments and extending the period of the loan.

"The maximum loan amount varies every month. It is fixed to 110 per cent of the average loan size for the purchase of new dwellings in NSW and released monthly by the ABS.

"For September 9 to October 8, the maximum amount is $332,750."

The hardship provisions don't apply if your loan is for a greater amount, meaning the lender is not compelled to agree to your extension request.

But again, there can be other options. Many lenders, although not all, are members of external dispute-resolution schemes.

The matter may also be heard by the Consumer Trader and Tenancy Tribunal (NSW) or Victorian Civil and Administrative Tribunal.

"We tell people to be realistic," Rich says. "Selling may be their only real option but managing the sale themselves is going to achieve a far better result than having the bank foreclose and having to pay thousands of dollars in trustee fees."