Penalties mount while KiwiSaver members wait for hardship withdrawal approval

Delays as KiwiSaver providers struggle to keep up with high numbers of hardship withdrawal applications may be costing members money.

The number of hardship withdrawals has increased dramatically in recent years, and an RNZ survey showed some providers were taking weeks to process applications, once all the relevant data was supplied.

One woman contacted RNZ, saying she was paying a penalty rate of 5 percent on top of her normal home loan interest rate, while she waited for her application to be processed for KiwiSaver money to clear the arrears.

"By the time it was granted, the interest had matched it," she said. "[The penalty rate] is quite a lot.

"It works out almost as much as our mortgage payment."

David Verry, a financial mentor at North Harbour Budgeting services, said providers could take a couple of weeks to open an application and prepare questions.

"Then things can go back and forth, before they're happy with the information. We try and get all the information they are going to need together at the beginning - hence some bulky applications with the evidence - including three months of all bank statements, but even then, there are questions that will come back.

"In the meantime, of course, they are still in deficit and arrears."

He said, for an application, there had to be evidence of all arrears of debts - landlord letters and arrears notices statements showing the arrears for power, phone, BNPL and other lenders.

The statements had to be dated within a month of the application, so - if approved - a hardship withdrawal would bring these up to date, although not if further arrears or additional penalties have been added since, but they would have to be of some magnitude to wipe out the withdrawal funds.

He said it was also common to see people with budget deficits.

"I don't recall ever having assisted with an application where there was not a budget deficit, whereas I am currently involved in one, a repeat application, where it's just asking for sufficient for the next 13 weeks of deficits, the arrears having been dealt with in the prior application.

"The budget deficit includes ongoing debt repayments, which might include debt collectors and WINZ, along with all other reasonable expenses, so further arrears should not arise, if the client has used the proceeds as we have presented they will.

"Regrettably it doesn't always happen this way."

Jake Lilley, spokesperson for FinCap, the network for financial mentors, said it was a frustrating position for people to be in.

"I'd hope creditors are thinking about the financial challenges so many are experiencing right now."

He said financial mentors had reported that when they were helping people through KiwiSaver applications to clear home loan arrears, they were not able to move from higher floating rates to lower fixed rates while they owed money.

"This meant further KiwiSaver hardship applications that could have potentially been avoided.

"FinCap would hope lenders would be proactive and open to finding solutions for situations where flexibility could provide a pathway away from longer term difficulty with repayments. Chapter 12 of the responsible lending code offers some guidance to explore such approaches.

"If someone is thinking about a KiwiSaver hardship withdrawal, it is really helpful to speak with a financial mentor who might know of other options or be able to help you negotiate and plan for avoiding further financial challenges."

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