What Happens If You Can’t Pay Your Mortgage?

Throughout 2020-21, house prices went a little crazy. Many hopeful first home buyers (and investors) took advantage of the uber-low interest rates and jumped onto the property ladder. The problem was that the increased competition for homes, plus the record low-interest rates, led to house prices hitting record highs.

Fast forward to now, and those interest rates are long gone. But many of the supersized mortgages that were taken out remain…

Meeting mortgage repayments can be a challenge at the best of times. But it’s a particularly scary time for those facing the prospect of their monthly repayments jumping by a significant margin when their fixed-terms expire. Especially as many people are already struggling with spiraling inflation and the soaring cost of living.

So if you are concerned that you can’t afford to meet your mortgage repayments, what options are available to you? And what could happen if a solution can’t be found?

Before you panic…

Of course, if you’re having trouble meeting your financial obligations and paying your mortgage, you’ll already know that you are suffering mortgage stress. However higher rates don’t always lead to mortgage stress.

When banks lend they have to meet strict responsible lending regulations. And as part of those regulations, they factor in possible interest rate increases into their lending decisions.

So if a mortgage provider lent you money back when interest rates were 2.2%, it’s because they believed you would still be capable of covering your mortgage repayments if rates were much higher. This is referred to as a stress test, and while there’s no one figure used, it’s always significantly higher than the market rate.

So hopefully, while things might get tight, most people with mortgages should be able to survive periods of higher mortgage rates by applying some careful budgeting.

→Related article: Lowest Mortgage Rates in NZ

How to know if you’re facing mortgage stress

While there’s not a single definition for what constitutes mortgage stress, there are some generalised figures floating about. One of these figures is the 30% rule. If more than 30% of your pre-tax household income goes straight to your mortgage, that could be a sign that finances are getting tight.

For example, if you have a pre-tax household income of $150,000, 30% of that is $45,000, or $3750 a month. If you’re outlaying $4000 a month on your mortgage, that could be a worry.

Of course, this doesn’t apply to everyone. For example, if you have a particularly high salary then even putting half of it towards a mortgage may leave enough left over to live comfortably.

But, some signs that you could be in mortgage stress include:

• More than 30% of your pre-tax income is going towards your mortgage
• You live pay cheque to pay cheque and struggle to pay your bills and mortgage on time
• You’ve recently lost your job or are facing redundancy
• You’ve had to borrow money, take out a personal loan or use credit cards to cover ordinary expenses
• Your mortgage is interest only and you don’t have much equity in the property
• Financial stress is impacting your personal life, mental health and/or relationships

Best Mortgage Rates for Refinancing

The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for Refinancing

What will happen if I miss a mortgage repayment?

If you think you might not be able to meet an upcoming repayment (as in, a one-off scenario) then it’s not necessarily the end of the world. Although it’s certainly less than ideal.

The best thing to do is get in touch with your lender, let them know, and discuss options. You should also look at your finances to see if you can juggle them to meet the repayment.

If you do miss a repayment with no explanation, then your lender will typically continue attempting to process your repayment for several days after the due date.

So if it’s a matter of the repayment being due a few days before your paycheck, you might be okay. The repayment will just be processed a few days late. Although you could face the prospect of missed payment fees, or even a knock to your credit score.

If after a set period the overdue repayment hasn’t been rectified, your lender will likely get in touch to see what’s going on. But, as mentioned above, it’s always best to get in touch with your lender before this happens.

What should I do if I can’t pay my mortgage?

If you think it might be more than a one-off situation, and you’re concerned about not being able to pay your mortgage, then get in touch with your lender. Contact them as soon as possible, as this will stand you on a better footing when it comes to renegotiating mortgage terms or finding a solution.

Some options may include:

• Reducing repayments to the minimum amount: it could be possible to reduce your repayment amount, or to change the frequency of your repayments.
• Access excess funds in the home loan: if you have an offset account, it could be possible to use these extra funds for repayments. However, this could increase the term of your loan and the amount of interest you may have to pay. If you have a redraw facility, it could be possible to withdraw some funds to cover repayments. Check the conditions of your loan.
• Ask for a repayment holiday: you may be able to put your mortgage repayments on hold. Ultimately, however, this can significantly increase the amount of money you pay in interest over the term of the loan.
• Swapping to interest-only repayments: it could be a good idea to find out if there are any fees and charges related to this.
• Stay with your lender, but restructure loan: other options include staying with a principal-and-interest loan, but restructuring it, such as by extending the loan period, or switching to a better interest rate. However, it pays to check what fees and charges may apply to any loan changes. And extending your loan could cost you more in interest over the term of the loan.
• Refinance with a new lender: another option could be to refinance – to look for a different lender with a more competitive interest rate. If you’re paying more interest than you need to, that could be causing unnecessary stress. However, it’s important to keep in mind there could be fees and charges associated with refinancing with another bank. There could also be break fees charged by your bank if you want to swap lenders. You may want to consider all possible costs, as well as any benefits of refinancing, before making a decision.

The above are just some possible solutions available to you. Ultimately, it will come down to speaking with your lender, and potentially even a financial expert, to come to a solution.

Need help creating a budget?

Will I have to sell my house if I can’t pay my mortgage?

Worst case scenario, yes. If a solution can’t be found, your lender may force you into a sale in order to recoup their costs. And if the sale doesn’t cover your entire mortgage balance, you could be liable to make up the shortfall, resulting in further ongoing debt.

But it’s important to note that this would be a last resort. As mentioned above, there are plenty of potential solutions and compromises to be found. The important thing is that you speak up early.

Not only with your lender, but with others for support or advice. That could be a financial expert, or even just your friends and family.

Best Mortgage Rates for Refinancing

The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for Refinancing

About the author of this page

This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.