What happens if I can’t pay my mortgage?

For help figuring out your finances you can call MoneyTalks, a free helpline for advice and support from trained financial mentors or other free services. If you need further assistance they can connect you with services in your community.

Otherwise, it’s also a good idea to share your difficulties with family and friends that you trust.

As soon as you’ve had a good look at your finances and you’re sure you won’t be able to afford your mortgage repayments, talk to your lender – the sooner the better. They will approach the problem practically and suggest options that may help temporarily reduce your payments or even stop them for a short period.

If you allow your mortgage to default before contacting your lender they will most likely continue to attempt to process your repayment for a few days. If this doesn’t work, they’ll contact you to check what’s going on. In the meantime, this failed payment may affect your credit score and you may incur missed or late payment fees if you don’t contact your lender in advance.

When something happens that you couldn’t reasonably foresee (e.g. loss of a loved one, loss of job, injury) and you can’t meet your financial obligations, financial hardship assistance can help ease the pressure. If you believe you’re experiencing financial hardship, mention this when talking to your lender and ask for help. They’ll assess your financial situation, run through your options, suggest other ways you can access support and possibly waive certain fees and charges. At this stage you may need to provide evidence of income, personal circumstances and any health conditions.

Note: Before you go down this route, keep in mind that the fact that you’re receiving financial hardship assistance will be recorded on your credit report, which means that the next time you apply for credit it could be harder for you to reach the lender’s requirements.

If you were paying more than the minimum repayment on your mortgage you should be able to decrease it temporarily (or permanently if you’d prefer). Doing this may increase the time it takes to repay your loan and the total amount of interest you pay.

Most mortgages are ‘principal and interest’ meaning each repayment features an interest portion plus a repayment on the original loan amount (the principal). To give yourself some breathing room, you could switch to interest only repayments – meaning you wouldn’t be paying off your loan principal or reducing your loan amount at all.

Most lenders will allow interest only payments for a limited period of under 3-5 years but it’s usually best to switch back to principal and interest as soon as you’re able.

If you have an offset account you may be able to use those funds to make repayments – same goes for revolving credits and redraw facilities. Ask your lender what’s possible.

You may also be able to restructure your loan to make repayments easier or provide some temporary relief. You could extend your loan term, which will reduce your regular repayment amount and provide some relief - but it could increase the amount of interest you pay over the life of your loan.

You could also refinance to a better interest rate (if available), but there may be fees associated with this, which may make it impractical. If there’s another lender with better rates you could also refinance and move your mortgage to them, but again – there will be fees associated with this.

If you’re experiencing financial hardship, your bank may agree to a repayment holiday or loan payment deferral, which will mean you won’t have to make any repayments during an agreed upon period. If you go with this option keep in mind that you may have to increase your repayments once the deferral period is over to catch up on payments or increase your loan term.

Remember that this may increase the amount of interest you pay over the life of your loan, so make sure you understand what your repayments and loan term will be after your loan holiday ends.

What’s caused your financial hardship? If it’s the loss of a loved one, losing your job, a health issue or an injury it may be worth checking your family’s insurance policies to see if you’re covered. This could help ease financial pressure.

In some circumstances, if you’re experiencing financial hardship, you can withdraw your Kiwisaver early and use those funds to make mortgage repayments and meet your financial obligations. This may be an option if you can’t meet minimum living expenses and your lender is seeking to recoup the mortgage.

This might be a quick fix, but keep in mind that you may miss out on the returns that you would have otherwise earned. and your Kiwisaver balance may be significantly lower when you reach retirement age. Make sure you get professional advice before you withdraw your Kiwisaver.

Most of the above options are great short term fixes but if your financial situation doesn’t improve they may not help in the long run. Here’s what may happen if you are still unable to make repayments on your mortgage:

• When you are three months behind on your mortgage the bank can issue a letter of demand. This will set out a timeframe to pay the arrears and any fees.

• If you can’t meet these demands, the bank may then issue a Property Law Act Notice or PLA, which must be served to you in person and sets out how much you need to pay by a certain date (minimum 20 working days from issuance of PLA).

• If you don’t meet the terms of the PLA the bank may have the right to progress to a mortgagee sale.

A mortgagee sale is when your lender sells your property to recoup the debt you owe plus any reasonable costs associated with doing so (legal fees, interest, real estate agent commission). Your lender has a duty of care to ensure they get the best possible price for your home so they will usually engage a valuer then hire a real estate agent to carry out a marketing campaign.

If your house sells for less than what you owe you still be required to repay the remaining principal balance.