Buying guide

What happens if I can’t pay my mortgage?

Struggling to pay your bills? You have options. Here's a list of 11 things to do if you can’t pay your mortgage.

Last updated: 20 September 2023

House prices increased quickly from 2020 onwards then interest rates started to rise soon after. As a result, homeowners all over Aotearoa New Zealand are under financial pressure and many are struggling to pay their mortgages.

The good news is that this difficult time should only be temporary. Interest rates will decrease eventually and there are plenty of things homeowners like you can do in the meantime to help alleviate the financial pressure.

11 things you can do if you can’t pay your mortgage

1. Take a close look at your finances

If you’re worried you can’t afford your mortgage repayments, the first step should be to take a close look at your finances. How much income are you going to receive before your next mortgage repayment? If you trim your expenses right back is there any way you could make your repayment? Could you increase your income by renting out a room? Do you have any savings you could use?

Note: If you have a term deposit with your lender they may waive fees for early withdrawal if you’re experiencing financial hardship.

2. Get a little help

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.

3. Talk to your lender right away

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.

Your lender will suggest options to help reduce your repayments.

4. Request financial hardship assistance

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.

5. Reduce your repayments

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.

6. Switch to interest only

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.

7. Use funds in your home loan

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.

8. Restructure your loan

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.

9. Try a repayment holiday or loan payment deferral

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.

10. Check your insurance

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.

If you're struggling to pay your mortgage there is help available.

11. Consider a Kiwisaver hardship withdrawal

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.

What if I still can’t make repayments on my mortgage?

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.

Stay calm and seek help

Not being able to repay your mortgage is stressful and the prospect of a mortgagee sale is terrifying. But remember, your lender does not want to sell your home. It’s in their best interests for you to continue making your mortgage repayments and they’ll try their best to support you so that a mortgagee sale is not necessary. For that reason, mortgagee sales are relatively rare.

If you can resolve your situation before this stage you should be able to get back on track. The key is to acknowledge that you’re struggling, speak to your lender, get financial advice and support and take steps to resolve the problem as soon as possible.


Ben Tutty
Ben Tutty

Ben Tutty is a regular contributor for Trade Me and he's also contributed to Stuff and the Informed Investor. He's got 10+ years experience as both a journalist and website copywriter, specialising in real estate, finance and tourism. Ben lives in Wānaka with his partner and his best mate (Finnegan the whippet).