Michael Cullen says responsible borrowers can count on their banks' support. Photo / Mark Mitchell

Michael Cullen says responsible borrowers can count on their banks' support. Photo / Mark Mitchell

Banks have promised to relax mortgage repayment conditions for struggling home-owners as part of a deal with the Government guaranteeing their overseas debts.

Announcing the wholesale funding guarantee on Saturday, Finance Minister Michael Cullen said he had been assured responsible borrowers could "count on support from their banks" during the hard times ahead.

Westpac bank told the Herald it had assured the minister it had dedicated more resources to helping people who were struggling. It had told the Government it would not force mortgagee sales lightly.

BNZ chief executive Andrew Thorburn wrote to Dr Cullen saying mortgagee sales were a "reluctant last resort" which would happen only after exhaustive efforts to get people back on their feet. He sent a similar reply to a query from the National Party.

Dr Cullen said the major banks told him they would work with borrowers to avoid forced sales, provided the borrower could start making payments again within a reasonable time.

In its letter to Dr Cullen, the BNZ said it shared his concerns about the potential risks to New Zealanders paying off debt in challenging economic times.

If a customer was having trouble, the bank could help by:

* Changing the timing and frequency of payments

* Giving a longer term to pay back the mortgage or changing repayments to interest only

* Capitalising interest payments if there was an unexpected setback, such as redundancy, sickness or a marriage break-up.

BNZ spokeswoman Diane Maxwell said the bank had triggers to alert staff to people who missed more than one mortgage payment.

If staff could see someone was having trouble - for example, if they were frequently withdrawing cash from a credit card account - someone would contact them before they entered "debt paralysis".

Ms Maxwell said the bank tried to contact borrowers before debt spiralled and "they stop opening the post".

"If they do that it just gets out of control."

On Saturday, Michael Cullen said the Government would offer a wholesale funding guarantee facility to investment-grade financial institutions.

The scheme, which comes after the Government's guarantee of up to $1 million for retail deposits, will apply to individual securities issues, and will have a graduated fee which gets more expensive for banks with low credit ratings and the longer the guarantee is intended to apply.