Rates unpaid? Councils dip into mortgages
COUNCILS HAVE taken millions of dollars in unpaid rates directly from homeowners' mortgages in the past year.
A little-known legal clause gives local authorities the right to force people's banks or finance companies to cover unpaid rates – at worst this can put mortgages into default, with the ultimate sanction being the sale of a home from under the owner's feet.
Instances of councils dipping into mortgages have climbed since the global downturn hit in late 2008. The Sunday Star-Times has obtained figures which show that in the 12 months to July 2009:
Auckland City Council took $5.34 million in unpaid rates out of 3840 mortgages (up from $1.86m out of 2205 mortgages in 2005/2006).
Christchurch City Council took rates out of 1486 mortgages, up from 980 the previous year. In the past six months alone, the council has actioned 1199 rates demands on mortgages. It could not provide dollar figures.
Wellington City Council took $1.32m from 571 mortgages.
Local Government New Zealand's governance manager Mike Reid said there had been a "small but noticeable" rise in rates defaulters as a result of the recession.
Councils usually phone, email and send letters as soon as people skip rates payments. By law they cannot try to take the debt out of rates defaulters' mortgages until November 1 of the following financial year.
Debt collectors are hired by some councils to extract late rates – including in Wellington where collection agencies last year chased 14 ratepayers owing $30,000. All those people owned their homes outright so there was no mortgage for the council to tap into. Christchurch City Council currently has $20,000 worth of unpaid rates with a debt collector.
Other councils employ in-house rates chasers and Auckland City Council has four staff doing this fulltime. At the end of June last year, 14,989 Auckland ratepayers owed $13.67m to the council. By comparison, $9.56m was owed by 13,042 Christchurch ratepayers – of whom 9074 owed more than $100. And about 3000 Wellingtonians owed approximately $3.5m.
Grant Hewison, a lawyer specialising in local government, said a clause in the Local Government (Rating) Act 2002 ensured councils never lost out. "If you don't pay your rates they contact your bank and say the rates haven't been paid, and have substantial powers to recover unpaid rates, including the power to force a sale."
Rates bills generally tallied about $2000-$3000 a year so "even if your house burnt down and there was only bare land left, there'd generally be enough to repay the council", Hewison said.
If a rates defaulter owns a property outright, and thus has no mortgage, a council has the power to go to the high court for an order to sell or lease the property to recover the rates.
Reid said for councils, dipping into mortgages was a "last-gasp effort". "They [councils] usually go quite soft. They will try to find a way of payment that makes it easier for people." That could mean rolling the debt into the following financial year and tacking it on to ongoing rates bills in instalments.
Before interfering with mortgages, councils sent people reminder letters.
Rob Thumath, a South Auckland mortgage manager, said he met one or two people a year about to lose their homes because they had fallen behind with rates and mortgage payments. "It's usually when people get in financial stress and don't pick up their mail."
HOW COME COUNCILS CAN DO THIS?
Section 62 of the Local Government (Rating) Act 2002 gives councils the right to extract rates from a person's mortgage, reaffirming powers that existed in previous legislation. But they have to wait until November 1 of the following financial year in which the rates are unpaid before going to the bank. For example, if a person does not pay rates between July 1, 2009, and June 30, 2010, the earliest that could affect their mortgage would be November 1, 2010.
The law also allows councils to add a 10% penalty to rates as soon as they are overdue. Further penalties can be imposed.
Relief is available through the Department of Internal Affairs' Rates Rebate scheme, which subsidises rates for low-income earners – but only up to $550 a year. If your name is on the rates bill and you earn less than $21,910, you can get up to $550 a year off your rates (with the income threshold increasing by $500 for each dependent child). Individual councils administer it, so contact your council for an application form.
Additionally, some councils offer to postpone pensioners' rates and take payment when their properties are sold.
Sunday Star Times