Hulme was born in Christchurch, in New Zealand's South Island. The daughter of a carpenter and a credit manager, she was the eldest of six children. Her parents were of English, Scottish, and M?ori (Ng?i Tahu) descent. "Our family comes from diverse people: Kai Tahu, K?ti Mamoe (South Island Maori iwi); Orkney islanders; Lancashire folk; Faroese and/or Norwegian migrants," Hulme told Contemporary Women Poets Her early education was at North New Brighton Primary School and Aranui High School. Her father died when she was 11 years old.
Hulme worked as a tobacco picker in Motueka after leaving school. She began studying for an honours law degree at the University of Canterbury in 1967, but left after four terms and returned to tobacco picking.
By 1972, she decided to begin writing full-time, but, despite family support, was forced to go back to work nine months later. She continued writing, some of her work appearing under the pseudonym Kai Tainui. During this time, she continued working on her novel, The Bone People, ultimately published in February 1984. The novel was returned by several publishers before being accepted by the Spiral Collective. It won the 1984 New Zealand Book Award for Fiction and the Booker Prize in 1985.
Hulme was a writer-in-residence at the University of Otago in 1978, and at the University of Canterbury in 1985. She lives in Okarito, on New Zealand's West Coast. Hulme has been the Patron of the Republican Movement of Aotearoa New Zealand since 1996. She identifies as an aromantic asexual and is an atheist.