24 November 2022

What to do if you can’t pay your mortgage

Higher interest rates will see more people struggling to pay the mortgage in 2023. Rather than letting it keep you up at night, you can start taking action now.

It’s uncanny timing when I call financial mentor David Verry for his advice on what people can do if they’re worrying about paying higher interest rates on their mortgage.

He’s just got off the phone from a couple in their 40s who are terrified they won’t be able to afford the higher mortgage repayments on their $1.3 million home when they refix next year. They bought when house prices were high last year and will have to come up with an extra $500 each week to service their million-dollar mortgage. They’re also getting close to being in negative equity, which is when the amount you owe on a house is higher than its value, as house prices fall.

Image of NZ houses

The number of homeowners coming to ask Verry for help is steadily rising, as more start to realise the implications of their mortgage coming up for renewal soon. The two-year fixed rate was 4.65% a year ago. The same rate is now between 6% and 7% at the big four banks.

The Reserve Bank’s recent Financial Stability Report says those who bought their first home in the past two years will be hardest hit.

“The number of households in financial difficulty will grow as more fixed-rate mortgages reprice, and could increase significantly if mortgage rates rise materially above the servicing assessment rates of around 6% that banks applied through the pandemic period,” the report said.

At the moment, 2% of borrowers are in negative equity but the report said that number could rise “considerably” if prices fall further.

The report said lenders would need to support customers in stress and gave two options that could help people get through:

  • Term extensions: By extending how long you have to pay your mortgage, you can reduce your regular payments. The downside is you’ll have a mortgage for longer, and over its life you’ll pay more interest.
  • Interest-only periods: Your repayment amounts will drop if you’re not paying any principal. However, when you go back to paying the principal you’ll have less time to pay it so your repayments will be even higher – unless you change the term.

Chief executive of the New Zealand Bankers’ Association Roger Beaumont said it was important to talk to your bank as soon as you realise you need help.

“Our banks are very conscious of the impact current economic conditions will have on many New Zealanders,” he told Consumer NZ. “Anyone experiencing financial difficulty should contact their bank to discuss their options.”

Verry, from North Harbour Budgeting Services, said more people were also realising it was free to get the help of a financial mentor such as him.

He said anyone who would be moving to a higher interest rate next year should look at whether they could save extra money while they’re still on the lower rate, to provide a buffer when it happens.

When clients ask for his help, first he helps them look at ways they could increase their income. The couple mentioned above are now thinking of taking in a homestay student.

Then Verry encourages people to form a realistic budget – not one that just takes into account bill payments, but also things like Christmas presents.

“Any realistic expense you have has got to be in the budget. It’s better to know it’s not going to balance than find out there’s not enough money left in a couple of months.”

If people had a large deficit at the end of the process, he was advising them that one option was to take a break from making KiwiSaver contributions until they could increase their income.

“It’s not ideal but if it balances the budget for just a short time it can help,” Verry said. “A downside is you may lose the employer contribution.”

As an ex-banker, he thinks people shouldn’t be shy to ask their bank what it could do for them to keep their mortgage.

“The banks are making huge profits. They’re not bearing the pain – their customers are. I think a lot of people need to have that conversation. Ask what else is available, what can they think of. Could they provide a special mortgage rate for a short period when there is going to be genuine financial hardship?”

If your mortgage is coming up for renewal soon, don’t bury your head in the sand: “It can be a bit scary, but it’s better to know and get organised.”

You can find a financial mentor near you on the Money Talks website.

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