How the IRD can put a stop to your mortgage

Home buyers and homeowners who are behind on their taxes could find themselves under pressure, as the Inland Revenue Department (IRD) up its efforts to recover overdue tax.

Nearly 400,000 New Zealanders are carrying tax debts, with the New Zealand Herald reporting this month that the number of individuals with payment plans to manage overdue tax debt had nearly doubled in the past two years from 17,460 to 33,478.

Loan Market mortgage adviser Lisa Meredith says she sees cases of the IRD standing in the way of a mortgage at least once a year, adding that borrowers are often very surprised when their bank refuses to extend the mortgage to pay off their tax debt, even when they have good equity.

“People don't understand. They might say, ‘But I've got a house worth $1.4 million, and I only owe $300,000 in mortgage. Why won't the bank lend?’.” The answer often comes down to the Responsible Lending Code, she says.

Typically the answer is for the homeowner to take a second mortgage out with a non-bank lender and refinance the entire loan back with a mainstream bank once the debt is cleared. The other option is to move their mortgage to a non-bank lender for a few years.

Meredith most recently dealt with a homeowner who came to her after the bank refused to roll their IRD debt – a six-figure sum – into the mortgage. “The bank wouldn’t assist, unless we can prove they can service the tax debt over a one-year term, which was impossible. So the solution was to move them to a non-bank lender,” she says.

“It’s ridiculous when you think about it, but it’s what we have to do. Consolidate the debt first with a non-bank and essentially ‘clean’ it before we can refinance back to a main bank.”

Most non-bank home loans are only available via mortgage brokers and not direct to the public. If IRD debtors are not aware of this non-bank lending, some may be at risk of losing their homes, says Meredith.

Rates for the larger non-bank lenders range between 5.29% and 6.89% for borrowers with good credit, which not all tax debtors will have.

The Inland Revenue can issue a “deduction notice” and dip into people’s bank accounts to get its money in certain circumstances. It does have processes that it must follow, such as informing the person and issuing a final warning letter.

Then it issues a deduction notice, which allows it to ask the debtor’s bank or employer for a lump sum, or to start making regular deductions. That’s in addition to PAYE, student loan, child support or KiwiSaver deductions.

One New Zealand homeowner recently posted on Facebook that she was horrified when the IRD demanded that she take money she’d been saving for urgent renovations out of her revolving credit loan.

Loan Market adviser Bruce Patten says he expects to see more such examples of this now that the IRD is chasing debts that they didn’t during the first two years of the pandemic.

“Expect more cases like [this] where they tell people to draw against [revolving credit] to repay their debts. The reality is there aren't many ways around it. It’s just like having a car loan or student loan or similar. It’s got to be paid back at some point.”

Tax debt can also shut buyers out of the property market, with banks unlikely to lend to those in financial difficulty. Self-employed people are most at risk because they can quickly rack up IRD debt trying to keep their businesses afloat, using money that should be earmarked for PAYE, GST or other taxes.

And student loan debtors who choose to go bankrupt rather than repay the IRD may also find themselves shut out even once they’re discharged.

Patten had a first-home buyer who found getting a mortgage through mainstream banks impossible after declaring bankruptcy to clear an unmanageable student loan that had escalated out of control while living overseas.

“Fortunately we were able to put the property in the partner’s name only as their income was sufficient to meet the bank’s criteria.”