The NZ Mortgage Magazine (TMM) Issue-2 2014

Issue

201402tmm

The New Zealand Mortgage Mag

DAVID

WINDLERTHE ART AND SCIENCE

OF BROKINGFOR MORTGAGE

ADVICE

PRIME TIME

LATEST BANK NUMBERS

MARKET SHARE

14 HOUSING COMMENTARY Interest rate rises will make little difference to many buyers.

18 LEAD FEATURE KiwiSaver provides some useful options for first home buyers. TMM has produced a guide around what advisers can do in this area.

22 MY BUSINESS: DAVID WINDLER Helen Twose catches with David Windler and finds out his best and worst moments as a mortgage adviser.

30 BANK MARKET SHARE We analyse the latest numbers from the Reserve Bank to find out which banks are doing well at the moment.

04 EDITORIAL One up for mortgage advisers

06 NEWS Westpac on brokers, Liberty’s new product, advice on clawbacks, new specialist products and more.

12 PEOPLE ON THE MOVE The latest appointments

FEATURES

CONTENTS

COLUMNS

UPFRONT

12

24 PAA NEWS PAA board member Karen Mooney updates you with the latest news from the Professional Advisers Association.

26 SALES AND MARKETING Paul Watkins says a rising interest rate environment is the time all advisers should be relevant.

28 INTEREST RATES Chris Tennent-Brown from ASB updates mortgage advisers on interest rates and where they maybe heading.

32 LEGAL Peer-to-peer lending is now available in New Zealand. Our resident legal expert Jonathan Flaws looks at what it means for mortgage advisers.

34 INSURANCE Steve Wright asks if you should duck for Trauma Cover.

18

How to use that nest egg to buy a first home. In this issue of TMM we provide a practical guide on how to use KiwiSaver to help clients into their first home.

Banking on KiwiSaver

Sian Jones

" KiwiSaver has a number of options

and intricacies which we explain and also

point out some of the fish hooks that you need to

be aware of."

One up for mortgage advisers

The biggest themes on the mortgage world at the moment are rising interest rates and the Reserve Bank’s LVR restrictions.

In this issue of TMM we explore these two topics and have put together a practical guide about how you can use KiwiSaver with your clients to help get them into their home.

KiwiSaver has a number of options and intracacies which we explain and also point out some of the fish hooks that you need to be aware of.

This piece is a follow on to what we did in the previous issue and put Welcome Home Loans under the spotlight.

This issue also has a good update on interest rates from ASB economist Chris Tennant-Brown. Added to that the PAA and sales and marketing expert Paul Watkins give you some tips on how to maximise the opportunities in the current market conditions.

NZ Top BrokersIn the next issue of TMM we are planning to run a feature on the Top Brokers in New Zealand. Some of you may have heard of this through your group, others may have had an email from me about taking part.

This feature is a little like the Broker of the Year Awards where we recognise and acknowledge the best in the business.

The key measurement is volume of loans settled. While there can be some discussion about other metrics, it’s important to recognise that to run a successful and profitable mortgage advice business you have to have volume.

To find out more about how you can take part go to www.mortgagerates.co.nz/topbroker or call me on 0274-377527.

ProgressJust as TMM was going to print I watched a piece on TV3’s 6pm news bulletin about interest rates and property.

Besides the fact the journalist had done some work and provided more than the television once-over-lightly sound bite piece, he continuously referred to mortgage advisers. That, to me, was a sign that progress is being made in the public and professional perception of the industry.

I have seen the term mortgage adviser used a bit more and hope this continues and the old term mortgage brokers slowing gets expunged from the media’s lexicon.

Philip MacalisterPublisher

MANAGING EDITOR AND PUBLISHER:Philip Macalister

SENIOR WRITER: Susan Edmunds

SUB EDITOR:Phil Campbell

CONTRIBUTORS:Paul WatkinsKaren Mooney Helen TwoseChris Tennent-BrownSteve WrightJonathan Flaws

GRAPHIC DESIGN:Jonathan Harding

ADVERTISING SALES:Sarah Smith Freephone: 0800 345 [email protected]

SUBSCRIPTIONS:Dianne Gordon Phone 0800 345 675

HEAD OFFICE:1448A Hinemoa St, RotoruaPO Box 2011, RotoruaPhone: 07-349 1920 Fax: 07-349 [email protected]

The NZ Mortgage Mag is published by Tarawera Publishing Ltd (TPL) in conjunction with the Professional Advisers Association. TPL also publishes online money management magazine Good Returns www.goodreturns.co.nz and ASSET magazine. All contents of The NZ Mortgage Mag are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.

The NZ Mortgage Mag welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in The NZ Mortgage Mag, or on other issues, please send your comments to: [email protected]

EDITOR’S LETTER

04

NEWS

T he bank’s head of product, Shane Howell, who oversees the broker

unit, says he wants to build up a true relationship with advisers.

This relationship is likely to extend beyond the traditional home loan product.

“There’s such a big opportunity (with brokers) as a true partnership rather than an outsourced sales unit,” Howell says.

That is why the new appointment to the broker unit, Kylie Kneale, has the title director of third party banking, while her predecessor, David Gopperth, was the head of the broker unit.

Howell says Westpac wants to build a sustainable business model with a good two-way relationship with brokers.

Brokers, he says, are not mortgage advisers but “third party bankers.”

He says the advisers own the customer and it is up to the bank to provide products they can use with them.

When asked whether the bank would change its remuneration model and re-introduce trail commission, as it does in Australia, Howell wouldn’t be drawn other to say that doing so would be either “brave or stupid”.

Overall, Howell was aiming to

change Westpac’s model but not the people or location of the broker unit.

The change needs to be done in a “consultative way” to take the business “to the next level”.

Howell also said one of the things that he found frustrating in the New Zealand market was that no-one was standing up for mortgage advisers.

“There’s no one representing advisers to the bank,” he said.

He has talked to most of the dealer groups and they have differing views. There are a variety of operators with some in it for the long game while others were “churners and burners”.

Howell says as the aggregators have different views, they are fragmenting the market and slowing things down.

The aggregators offer views but “aren’t pushing back with anything”.

“It’s tricky without that voice in the market,” he says. ✚

06

Westpac intends to take a new approach in its relationship with mortgage advisers.

Westpac looks to change broker model

" There’s such a big opportunity (with brokers) as

a true partnership rather than

an outsourced sales unit"

- Shane Howell-

Kylie Kneale

We would like to invite all mortgage advisers to take part in this feature. The main criteria will be the volume of loans settled over the past 12 months. To take part in this feature either contact

Philip Macalister (Ph) 0274-377527 (E) [email protected] or go to www.mortgagerates.co.nz/topbrokers

In the next issue of TMM we plan to compile a list of the country's top brokers. The feature will celebrate the success and good work mortgage advisers do for their clients. It is also an opportunity to profile the biggest writers in the business and find out what makes them successful.

NEWS

08

The listed bank announced last month that it had entered a deal to buy Sentinel New Zealand and the Australian Seniors Finance business for $87 million. As part of the deal

SMI gets a 9% stake in Heartland.Heartland chief executive Jeff Greenslade says the company hopes to do about $90 million of new lending a year, which is similar to what Sentinel did before the Global Financial Crisis.Currently the only players in this space are ASB, which takes a very low profile, SBS and Tauranga-based First Mortgage Trust has an equity release product.Sentinel chief executive Vaughan Underwood says Heartland will use third party distribution for the loans, but it will be a different model than previously used.

He said that Heartland is building infrastructure so mortgage brokers and advisers can refer business back to the company.

Overall he expects around 15% of new business will come from third party distribution.

Sentinel had been the leading player in the market, but has been limited to doing just top-up loans since 2012 when ASB’s parent company, Commonwealth Bank of Australia, stopped providing funding.

“The home equity release loan product caters for an aging population with much of its wealth invested in real estate. As a result of the acquisition, Heartland is well placed to take advantage of the compelling sector fundamentals," Greenslade said.

It said the product was a timely response to the demographic changes of an ageing population. “The ability to monetise these assets without the need to sell and exit the family home or to demonstrate external sources of debt servicing allows seniors to remain independent and to age with dignity in their own homes.”

Heartland’s strategy is to occupy niche markets that have low contestability, such as invoice financing, livestock financing, motor vehicle financing, and home equity reverse mortgages.

Ratings agency left the bank’s credit rating unchanged at BBB-.\ ✚

New life for Sentinel Heartland hopes to breath new life into the home equity release market following its purchase of Sentinel.

NEWS

09

ANZ’s Baden Martin told delegates at the NZFSG development day in Auckland that the bank had been

committed to working through all its preapprovals that were in place when the restrictions started in October.

“It has been very difficult of late to get new lending cross the line,” Martin said.

Low equity appetite increasingBanks are expected

to increase their appetite for low equity

loans now the first six-month period of the Reserve Bank’s lending restrictions

are coming to an end.

The product, Boost, which can go up to a 90% LVR, is made up of two parts, a first loan from Liberty and a second mortgage

from its plant and equipment subsidiary.The first loan can have an LVR up to 75%

and the additional 15% comes from the second mortgage.

Overall the loan has a blended interest rate of 7.4% but this number decreases as the second mortgage is on a seven year term and paid off first. The second mortgage has a rate of around 14.95%.

TMM understands a number of approvals have been made but settlement rate has been low. The product is thought to be competing with The Co-Operative Bank’s Fresh Start product. ✚

Liberty’s prime product pushLiberty has developed a new prime loan product it is pushing through Mike Pero Mortgages brokers to help first home buyers.

Now that pipeline of business had been cleared and the bank better understood its ability to make low equity loans with the restrictions, it was looking to increase its activity in this space.

Baden Martin

“Our appetite will increase in the next six to eight weeks,” he said.

Martin said the bank would be focussed on serviceability and will be interested in non-ANZ customers.

According to the Reserve Bank’s statistics only about 5% of loans being written in February were with LVRs above 80%.

Banks have, however, taken various approaches to low equity lending. ANZ and SBS worked through pre-approvals. SBS is understood to have gone above the 10% mark in the early months of the speed bump restrictions to honour preapprovals and subsequently stopped low equity lending so that it was within the limits. It could do this as the RBNZ is measuring lending on a rolling six-month basis.

Westpac head of product Shane Howell said the bank was doing low equity lending and indicated it was looking to become more active in this space.

“We do not want to be leaving any capacity on the table,” he said. ✚

NEWS

010

This is an issue for advisers working in the home loan and life insurance markets.

Financial Services Complaints (FSCL) has found in favour of the complainant every time a case like this has come before them for resolution.

The key element advisers need to be aware of that whatever they charge has to meet the test of fairness. Often that means they will not be able to charge the client for all the commission lost.

Some advisers have tried this and the biggest case so far was where the adviser billed the client $28,000.

Be reasonable about clawbacks

Specialist lending arrives

Mortgage advisers have been warned to be careful how they charge clients if a loan is repaid early and the lender seeks to claw back commission.

Non-bank lender, RESIMAC Home Loans has launched its specialist lending products to all its accredited brokers and advisers following a successful three-month pilot.

It is recommended that advisers make clients aware of the issue at the time of engagement and that they should charge a reasonable fee for service rather than trying to recoup the full commission loss.

An example of what maybe reasonable is to charge for four to five hours work at between $150 and $200 an hour.

Another issue that has come up is that if the terms of engagement specify an annual client review then it is important to do it each year. ✚

New Zealand general manager Adrienne Church says there is a real opportunity for advisers now that

more and more borrowers are fitting into the specialist category.

She says the products “perfectly complements its prime offering, catering to borrowers who for various reasons do not fit the profile of a mainstream loan.”

“Lenders have continued to amend policies over the last 12 months which has made it difficult for some borrower segments to obtain a home loan, many whom present as strong applicants.”

Around a quarter of the New Zealand working population are self-employed, so the size and scope of this market is quite significant, she says.

“By offering lending solutions to clients who don’t fit into the mainstream space, an adviser can bolster their volumes, increase their bottom line and enter long standing relationships with new clients. RESIMAC also offer competitive upfront commissions and trail on specialist products.

Church says this is the first of a number of announcements over the coming weeks as RESIMAC looks to continue to grow market share.

“We are planning on launching a range of new initiatives which will revolve around solution based lending”, she says.

“These initiatives will assist a range of different borrower segments including, first home buyers, investors and upgraders.” Church says. ✚Adrienne Church

011

These two license types are the first of the new market services licenses to be operative under the Financial Markets

Conduct (FMC).Peer-to-peer lending service is one where

someone acts as an intermediary between borrowers and lenders. These parties can’t otherwise be connected to each other or the intermediary, and usually the loan must be for personal, charitable or small business purposes.

Under the new regulations, offers engaging in equity crowd funding and peer-to-peer lending will no longer need to prepare a prospectus or an investment statement before fund raising from the public.

“This is an exciting development for both start-up businesses and investors. With the regulations coming into force on April 1, New Zealand will lead the Asia-Pacific region is the development of crowd-funding regulation,” Commerce Minister Craig Foss says.

Organisations who want to operate in this new area can apply for a licence from April 1. The first offers are likely to be taken to market towards the end of the year.

For more peer-to-peer lending and crowd funding see Jonathan Flaw’s article on pages 32. ✚

Peering at new lending opportunitiesRegulations for crowd funding and peer-to-peer lending have been approved by the Government

PEOPLE ON THE MOVE

PEOPLE

Rod Severn

PAA appoints new CEOThe Professional Advisers Association has appointed an Australian, Rod Severn, to take over the role of chief executive.

“Severn is a strong advocate and supporter of the value of advice and the adviser service,” PAA chairman Bruce Cortesi says.

He brings a wealth of business development expertise and a strong background in sales and general management, Cortesi says.

Severn was previously the chief operating officer at listed company SmartPay. That company designs, develops and implements innovative payment solutions for customers in Australia and New Zealand.

“Rod’s business and management experience coupled with his drive to support the adviser industry make him an ideal leadership choice. This appointment will further strengthen the PAA’s voice in the interests of advisers and enhance value for members.”

“Supporting advisers in reaching their business objectives is a key focus for the PAA. We are very pleased to bring members a CEO with considerable energy and expertise,” Cortesi says.

Underwriter roleNon-bank lender RESIMAC Home Loans has added added five new people to its New Zealand team.

Stuart Evans has taken on a role as Underwriter. He has 12 years’ experience working in the banking and finance industry with Westpac, ASB and Sovereign Home Loans. Evans has also spent time at the coal face working as a mortgage broker.

“This has given Stuart first hand knowledge of how hard it can be out there for brokers. Helping brokers and clients is something that comes naturally to Stuart and he always strives to provide solution based outcomes for customers,”

012

Sian Jones

general manager Adrienne Church says. RESIMAC has three new loan co-ordinators.

Shannon Tapuke has more than 20 years’ experience in the banking and finance industry both nationally and internationally with Countrywide Bank, Dresdner RCM Global Investors (UK), Foreign and Colonial Investors (UK) National Bank, Sovereign Home Loans and First Mortgage Services.

Sonia Singh has nine years’ experience working both domestically and abroad in the banking and finance industry. She has worked for Westpac NZ and Westpac Fiji and was previously working for First Mortgage Services which is a company offering fast lending services in NZ and Australia. Shireen Hook is someone many brokers will know from the 14 years she spent at GEM Home Loans.

Victoria Kernohan has been appointed as a Customer Relations Officer at RESIMAC.

Loan Market hireingsLoan Market has three new brokers.

Donna Collins has moved from mortgage administration and customer relationship position in John Schell’s SurePlan business to being a Loan Writer.

Antonia McAtamney joined Loan Market in Christchurch, from a pharmaceutical and

consumer finance background. She is working with Bruce Condliffe in Christchurch and has started with instant success looking after the Ray White team of Opawa and Sumner

Nick Torjussen joins the group in Auckland with a pure insurance focus, operating as Insurance Market. He looks after clients for any Loan Market adviser in the area on a commission split basis.

He has worked in the insurance industry since 2001. His roles have been varied, allowing him to fully understand the intricacies of the business. Torjussen has had an extensive career as an adviser as well as working for ASB and AMP in the insurance field.

Mortgage Express adds twoMortgage Express has added two new advisers; Sian Jones and Michelle Hutchens.

Sian Jones, hails from Wales where she spent 11 years at Barclays as a Regional Performance Coach. Her management role here included coaching and training her team, as well as working directly with customers in a lending environment. She joins Mortgage Express from Westpac. She is based in Christchurch, and offers a full range of insurance and mortgage advice, including personal, risk, commercial and residential insurance, as well as advice about

budgeting, home loans, refinancing, personal loans and more. Hutchens has worked as a personal banker at two major banks in New Zealand and comes from South Africa.

Her speciality is working with new home buyers She is based in West Auckland. ✚

013

Last month’s official cash rate increase came as a surprise to no one. But while everyone expected the increase, how home loan borrowers and the property market will respond

after years of cheap money is still an unknown.The Reserve Bank used its most recent

Monetary Policy Statement to increase the OCR by 25 basis points. It was a move that was well-signalled, some said overdue, and the first real increase in the rate for several years.

But property commentator Olly Newland said

it would take a lot more than a 25bps increase to make any significant difference to property market behaviour.

Once rates got to 8% people might take notice, he said, but in the meantime the hit to borrowers’ pockets would not be enough to cause any noticeable shift. “Go for a walk or drive and witness the restaurants and cafes bursting at the seams with people who will spend the equivalent of three months’ interest rate rises on wine and food within two hours without blinking an eyelid.”

The increase in costs should not make much difference to property investors, he said. Any increase in costs would provide a small tax benefit and would be passed on to tenants as a rent hike.

Rising interest rates meant a thriving economy, he said.

“If they go to 8.5% but you’re making twice the money you were the year before, will it matter?” Newland said. “Seven or 8% might be the tipping point, but by then we must be in a seriously booming economy that takes care of

INTEREST RATES INCREASE WILL MAKE LITTLE DIFFERENCE TO MANY

The success of the LVR rules is having an effect on the market. An estimated house price inflation has been slowed by about 2.5% as a result.

014

HOUSING COMMENTARY

By Susan Edmunds

itself. Interest rate rises are a fine line. If the Reserve Bank raises them too much, the building industry will fall over.”

Newland said the most recent announcement was a lot of “huff and puff” from the central bank, which was looking to scare people to slow down the property market.

But he said that would not be an entirely bad thing, particularly in Auckland, where things were a bit overheated.

“We want gentle rises of 2% to 3% a year. Ten to 15% is okay for the moment, but there’s a price to pay in the end.”

The most recent statistics show a slowdown is already happening, driven partly by the expected increase in interest rates, but attributed largely to the new loan-to-value (LVR) rules. The Real Estate Institute said last month that there were signs first-home buyers in some regions were venturing back into the market, in many places they seemed still to be on the sidelines.

REINZ reported sales in February were down 7.6% compared with the same time a year earlier. It said an increase in the median price to $415,000 nationally and $592,000 in Auckland could be skewed by more sales at the top end of the market.

More million-dollar properties were selling and the number of sales below $400,000 fell by 17.7% compared to February 2013.

A New Zealand Property Investors Federation survey found that almost 13.5% of investors said the rules would prompt them to buy fewer properties.

Governor Graeme Wheeler noted the success of the LVR rules in having an effect on the market. He said it was estimated that house price inflation had been slowed by about 2.5%

because of them. “I don’t think we’re going to know the full

impact of the LVRs probably for another three to four months,” Wheeler said. “What we can say is that on a monthly, seasonally-adjusted basis, house sales are down 13% since September and in Auckland they’re down 15%,” he said.

“We’re seeing a reduction in house sales and some moderation in house price inflation… we do believe the LVRs are starting to have quite an impact.”

The Bank was worried about the supply and demand imbalance and would not want to lift the LVR rules until that was no longer an issue, he said.

Barfoot and Thompson, which primarily operates in the Auckland market, said sales volumes were down 15% in February on the same time a year earlier.

Managing director Peter Thompson said: ““We are starting to see a return to listings levels of October and November last year. For buyers, that’s good; they can start to shop around, but greater choice means more competition. Sellers will need to be realistic and not overvalue their assets if they want them sold.”

QV spokeswoman Andrea Rush said its index showed house prices had risen 1.8% nationally over the past three months, and only 1.5% in Auckland. In September, the three-month national increase was 2.9%. “This is a clear indication the LVR caps are taking effect and they appear to have led to a reduction in the rate of value growth in the residential property market,” Rush said.

BNZ chief economist Tony Alexander said no one really had any idea how sensitive homeowners might be to rising rates this time around. People would be more wary than before the global financial crisis. “Rising interest rates always cause some slowing in the market, but it depends on how rapidly they rise, how much and how sensitive people are to interest rates,” Alexander said.

Any slowdown caused by rising interest rates would be tempered by rising construction costs and an existing shortage that was going to get worse, he said. There was also evidence of increasing Chinese investment. “That will act as an offset.”

Harcourts chief executive Hayden Duncan said his agency was expecting little or no impact from the interest rate rises in Auckland and Christchurch. “It’s not cheap money driving the heat in those markets, it’s purely a supply and demand imbalance and there’s no prospect of that being fixed any time soon.”

He said further interest rate increases would not be big enough to slow the market or take the heat out of it in either of the biggest cities.

He said many regions were still struggling and had not recovered since the global financial crisis in the same way. QV shows that Hamilton’s prices are still just 0.4% above their 2007 peak and Tauranga’s are still 8.5% below it. ✚

INTEREST RATES INCREASE WILL MAKE LITTLE DIFFERENCE TO MANY

015

" Interest rate rises are a fine line. If the

Reserve Bank raises them too much, the

building industry will fall over." - Olly Newland-

With lending restrictions in place brokers need to understand and use options that are available to borrowers with a deposit of less than 20%. In the previous issue of TMM we looked at Welcome Home Loans, this time we examine options using KiwiSaver.

LEAD STORY

Banking on KiwiSaver funds

018

"Under the current rules members can only take out what they paid in, what

their employer contributed and the

returns earned."

KiwiSaver is proving to be an increasingly useful tool for prospective homebuyers, especially first home buyers and those with

deposits of less than 20%.Two options are available, and both have

catches of which brokers and advisers need to be aware.➊ The first is KiwiSaver fund withdrawal➋ The second is the Housing New Zealand KiwiSaver subsidy which can be worth up to $10,000 for a qualifying couple .

According to Government statistics, last year more than one-third of members eligible to withdraw their savings took advantage of the home deposit feature of KiwiSaver.

That number is expected to jump to nearly three-quarters over the next five years with more members qualifying, account balances swelling and the home ownership becoming increasingly unaffordable for younger generations.

The two KiwiSaver options are tools brokers need to understand as the process, particularly the subsidy, can take some time and have a couple of fishhooks.

“The key thing is there is quite a process involved,’’ Real Estate Institute chief executive Helen O’Sullivan says.

“You can’t just nip out on a Sunday and have your money the next day. You have to get all your ducks in a row in advance.’’

WithdrawalsIt may seem obvious but one of the first things to do when dealing with KiwiSaver fund withdrawals is to find out how much exactly can be withdrawn toward the deposit.

The key criteria are that a member must have been contributing for at least three years.

Under the current rules members can only take out what they paid in, what their employer contributed and the returns earned. The $1000 kick-start and all the member tax credits paid along the way must stay in the KiwiSaver fund.

The best way to do this is to use My KiwiSaver which can be found online at www.kiwisaver.govt.nz. The website allows users to view their balances and transactions.

The next step is to check that the KiwiSaver scheme allows for first home withdrawals.

If they do allow it notify them of your client’s plans to withdraw the money so you can set in motion the procedures which will also involve your solicitor.

The other options is to transfer funds to a KiwiSaver scheme that allows withdrawals.

Any KiwiSaver funds withdrawn are paid directly to the solicitor’s trust account before settlement date.

Applications need to be made early to KiwiSaver schemes.

KiwiSaver First Home Withdrawal✔ Funds can be withdrawn after three years of continuous contributions✔ Non-KiwiSaver complying funds eligible✔ Can withdraw only member contributions, employer contributions and all investment returns✔ Funds which cannot be withdrawn include government contributions such as $1000 kick start and member tax credits.

LEAD STORY

019

CASESTUDYKiwiSaver First Home Deposit subsidyLike scores of young first time homebuyers, 29-year-old Sarah Smith went into the process thinking it a straightforward matter. She consulted a broker, completed the requisite forms and documents and expected the money would seamlessly follow.

On settlement day Smith rang her lawyer to confirm the KiwiSaver funds were available. He uttered the words you least want to hear during close.

“I asked him whether he had the money and he said what money?”A crucial piece of paperwork had been lost in the shuffle. The result was

a last minute scramble that delayed the process by five days and cost her a $200 penalty in interest. Were it not for a sympathetic soul at Inland Revenue who expedited the matter on her behalf it would have been a two-week delay that might have cost her the house.

Although it was a small price to pay and the house deal had a happy ending, it was stress Smith could have done without.

“There were tears’’ she admits, stressing the importance of understanding the full protocol and timeframe for the withdrawal of KiwiSaver funds.

Sarah Smith

✔ Not all KiwiSaver schemes permit withdrawals✔ Withdrawals administered by KiwiSaver providers✔ Previous home owners may be eligible. Applications to Housing New Zealand

Housing NZ First Home SubsidyAnother resource that could help boost borderline first time homebuyers onto the property ladder is the Housing New Zealand Corporation subsidy.

The subsidy is $1000 for every year invested in KiwiSaver up to a maximum of $5000. It is worth a potential $10,000 for a couple buying a home together.

Naturally, it comes with some terms and conditions that need to be understood up front.

To qualify for the subsidy applicants must have a 10% deposit which can be made up of KiwiSaver withdrawals, money in the bank or already paid to a real estate agent and an amount gifted.

The subsidy also has income and house price caps (see box).

The subsidy is also available for the purchase of land, but the land has to be bought with the intention building a house and having construction completed within 12 months.

Yes, proof must be supplied. Further, the value of the land and the building has to be within the same price cap range as specified for regular buyers.

One of the hooks is that when the money is released, it goes directly the buyer’s solicitor for disbursement. (see case study).

Another common mistake homebuyers make is assuming they can use that money upfront for the initial deposit, O’Sullivan says.

Buyers should not rely on the KiwiSaver subsudy for cash required up front.

That said, some savvy buyers with negotiating power have insisted on KiwiSaver funds offsetting the deposit at a later date, so it’s not necessarily set in stone.

Save now, buy later?If a prospective client is looking to use their KiwiSaver money to help buy their first home they should consider the type of fund they use.

Many KiwiSavers remain invested in default funds, the most conservative type of fund on offer. This is the sort of fund a member ends up with if they are auto-enrolled through work or haven’t made an active choice.

Default funds may be a dirty word among fund managers who stand to gain the least in fees from them but through the global financial crisis they proved a good thing.

Members invested in higher risk funds, namely growth and aggressive funds, experienced sharper loses. Given the conservative nature of default funds, which are 80% cash and fixed interest, and 20% equities, losses were less severe.

The implications for KiwiSavers who don’t plan to be in the scheme for a long time (because of their home buying ambitions) is conservative funds are by a larger a safer bet. Or so theory has it. This is to guard against the possibility of a market jolt eroding the value of one’s KiwiSaver funds at the time you need to access them.

On the other hand, KiwiSavers with longer time frames for buying (usually five years or longer) may be better off in more aggressive funds which have a higher exposure to equities and other growth assets. The reason being that with time funds of this nature are more resilient to market volatility and they quite often yield higher returns.

That said, some investors may be wholly uncomfortable with the higher risk. This being the case, some investors may willingly sacrifice higher returns for the sake of a good night’s rest. ✚

"The implications for KiwiSavers who

don’t plan to be in the scheme for a

long time (because of their home

buying ambitions) is conservative funds are by a

larger a safer bet. Or so theory has it."

LEAD STORY

020

KiwiSaver First Home Deposit subsidy✔ Subsidy is tax-free and $1000 for each year of contributions to KiwiSaver.✔ Minimum subsidy is $3000 after three years of contributions.✔ Maximum is $5000 available after five years of contributions✔ Couples can combine their subsidy’s to reach a total of $10,000✔ Contributions counted can be into schemes other than KiwiSaver. There are also Complying Funds and exempt employer scheme✔ Applicants must have a 10% deposit (KiwiSaver withdrawal can be counted here).✔ The subsidy has an income cap and regional price caps (see box)✔ Pre-approvals are avaible but expire 180 days after being granted✔ Subsidy is paid to solicitor on settlement day only✔ Buyers must live in house purchased with the subsidy for a minimum of six months✔ Subsidy available for new builds✔ Subsidy administered by Housing New Zealand

House price capsMaximum price caps are done on a regional basisAuckland $485,000Hamilton, Tauranga City, Western Bay of Blenty Thames Coromandel $350,000Wellington $425,000Kapiti Coast, Porirua City, Hutt City, Upper Hutt $350,000Queenstown Lakes District $425,000Tasman, Nelson and Waimakariri $350,000Christchurch and Selwyn District $400,000Queenstown Lakes District $425,000All other areas $300,000

Income CapsSingle buyer: Maximum income $80,000 pre-tax in past 12 monthsTwo or more buyers: $120,000 pre-tax in past 12 months.Proof of earnings can be accessed from IRD (www.ird.govt.nz) or by a letter from an employer on company letterhead. Self-employed need to provide financial statements/accounts for the period contributions have been made to KiwiSaver.

Previous house ownersCannot have received first home deposit subsidy or withdrawal beforeCannot have realisable assets totalling more than $20% of house price cap.

✔CHECKLISTS

021

Before you came to this business you were involved in cricket. What were you doing?

I worked for almost 10 years on the coaching staff at Auckland Cricket. When I left there, I went and worked for a couple of years as director of sport at Sacred Heart College.

I kept looking at it saying: “I'm not going to earn anything more than $50,000 for the rest of my life unless I do something different”. I felt a bit unfulfilled.

My wife saw an ad in the paper advertising a mobile manager role with the BNZ and I thought, "I could do that". I twisted their arm to give me an interview.

That took me out of the coaching and education environment into lending and the rest was history.

Mortgage clients and sportspeople: what are the similarities? I think the similarities are that both of them are a real,

genuine service proposition. When you're teaching or coaching you're helping people to achieve what they want to achieve.

When you're dealing with athletes you're just helping them achieve their goals. They tend to be motivated and have a direction they want to go in and quite often it's the same for advisers.

I'm always asking my clients: what do they want to get out of this? What it is they are wanting to do because the loan is just the mechanism for them to get what they want, and the better you can understand your clients' goals the better you can lend to them.

Is that the thing about mortgage broking that you love? I really do love what I do and I think it is about

genuinely helping people and providing them with advice.I love the fact that we've gone from broking to advising,

because I think that is our true role. Broking is a transaction, advising is a relationship and the two things are poles apart.

It's similar to coaching sport? Absolutely. I think what I am enjoying now is seeing clients

that I've engaged with for many, many years. They've changed properties, they've changed jobs, they've had babies, and going with them on that journey for the long haul is really rewarding.

You came to mortgage broking from a different career. How did you get yourself up to speed in the industry?

A science to mortgage broking is not readily understood. It can be learned. Imparting the art is as much about providing complex solutions, engaging with the client and understanding their goals.

MY BUSINESS

By Helen Twose

Cricket coach bats for mortgage brokers

David Windler

From the moment I get to the office to the

moment I leave it, it's a million miles an hour. I'm going from meeting to meeting or deal

to deal.

A grounding in a bank environment gives you the basics. There is a science to mortgage broking, which can be learned, and then there is an art and the art is more about providing complex solutions, engaging with the client, understanding their goals.

Listening rather than talking and knowing where to place the deal.

The science of lending can be learned. You can go on a course and do that and then everything out of that comes with your own personal skill set and experience.

Getting up to speed wasn't a problem. I guess that I was fortunate I've got a reasonably engaging personality so people quite like me.

I distinctly remember when I first started my sole objective at an appointment was to get out of there with all the paperwork as quickly as I could and go back to the office and find out what an earth I was supposed to do with it. There is always a little bit of "fake it 'till you make it" kind of thing.

That's how it panned out. I got taught the basics and adapted quickly on my feet from there.

So how do you keep on top of industry changes? I think training and education are weak

areas for most aggregator groups. You probably learn every day on the job as you're engaging with lenders about certain deals.

It's a really good question, actually, because I feel that quite often you get so busy with applications and deals and running the business that taking time out to become a better adviser is actually not that easy. Quite often, it's not that easy for groups or aggregators to provide more experienced brokers with what they need.

Have you had somebody who has mentored you in the business?

Not really. I started off at Auckland Home Loan as part of the Home Loan Group. I rebranded as the Mortgage Supply Company and the Loan Market Group.

Certainly, in that early period Dave Hart was a great support to me. Not so much as a mortgage broker but as the owner of a mortgage broking business.

That's where most of my learning is yet to come, in running the business rather than the mortgage broking.

David was fantastic support particularly in the first 12 months of coming across to Loan Market.

I continue to talk to David and he's probably been of most support to me while I've been a mortgage broker. He such a good bugger and he knows his stuff.

What have been the highlights being a mortgage broker?

Highlight for us was making the decision to become the Mortgage Supply Company. The brand, and the look and feel of the brand, has been really warmly welcomed. Our clients love it and since we've done it we've grown the business tremendously.

In the last two years, we've had a huge amount of growth. We've just moved premises; I've got a great team of guys working under the brand. I feel like I'm probably at the high point of my career so far right now.

And the lowlight? Mate, 2008 wasn't a great year to be a

mortgage broker. Riding that period of time post-GFC was incredibly tough. It doesn't seem that long ago really to say that we've turned things around and we're back at the peak.

What's currently your biggest challenge? I have consistently specialised in, for

want of a better work, the investor market, particular property investors who have got quite complex and have portfolios. I haven't had any problems with the change to the LVR rules. I think the biggest problem for me right now is transitioning from being a mortgage broker to mortgage business owner and being able to look on the business rather than being immersed in it.

Spending less time mortgage broking and more time running the business is my biggest challenge. Putting my time where it has the most value is challenging.

Are there any business books that you recommend?

The last one I read was "From Good to Great" by Jim Collins. Amazing book. I loved reading it. Just thinking about pushing yourself above and beyond where you are currently at. How high can you go with the right thought and the right strategy and the right endeavour.

How do you spend your working day? I tend to get up at 6am, read the paper

and reach for the coffee. I properly get to the office around 7.30am and I'll work through to 6pm, maybe later if I've got any evening appointments.

From the moment I get to the office to the moment I leave it, it's a million miles an hour. I'm going from meeting to meeting or deal to deal. It's high pressure because everything we do is time stressed and either that is stressful or exciting, whichever way you look at it and I like it.

How do you manage the busy times? I'm fortunate I've got an amazing P.A.

Anyone out there who hasn't got one or toying with the idea of having some sort of P.A. support needs to bite the bullet because I couldn't do what I do without her.

Where does family fit into this life? The business takes up the bulk of my life

so next cab off the rank is family. When I'm not working I'm making sure I'm doing what I need to do for the kids. I'm quite involved with the local cricket club. I try and do some things in the community.

So how do you relax? I still play a bit of cricket. Saturday is my day,

so Saturday I play cricket. I've dusted off my whites and have come out of retirement for about the third time.

You've mentioned goals in relation to the people you've coached and your clients, but what are your goals?

My goal for the business now that we've established it as a viable and sizeable mortgage broking business – we've got 12 advisers, which in mortgage broking terms is a reasonably sized business, we've got the insurance company established and running. I'm on the lookout now for some other good advisers and certainly looking to go through a period of growth.

I'm not going to force it. I'm not going to get out there madly and advertise. It will happen organically.I think we've got a great brand that I'd love to take to the New Zealand consumer and I guess it's a bit of a "watch this space" time.

How are you preparing for the financial adviser regulation that will be introduced later this year?

To be fair we are probably preparing for it slowly. I think most mortgage advisers if they were to look honestly in the mirror would think they're underdone in some way.

I think the biggest challenge is while we can say we operate in an advisory way it's actually being able to prove if when we need to. So I back us to be looking after our clients day in, day out, but the paperwork required to prove that should you need to is onerous and especially difficult for high volume mortgage brokers.

Has your career switch lived up to your expectations?

And some. Absolutely. I really do love what I do.

A good mortgage broker can add some real value to people. We clean up people's mess, we help them grow wealth, we help them buy homes that they can bring their families up in.

That's what really got me with the LVR restrictions is that it has had impact. There are some good people out there who'd have handled quite easily getting a 90 per cent loan who have had the opportunity taken away from them for the moment.

A saw some customers the other day and they were one of the last of the 100 per cent deals that we did back in early 2008 and they've made great progress.

Best cricketer of all time? I'm going to show my age now and

I'm going to say Ian Botham. Outgoing, adventurous, willing to take a chance and could do the lot. ✚

Your market: Performance over predictions

A crystal ball was certainly not needed at the latest Reserve Bank of New Zealand OCR announcement

– perhaps the most signalled increase in the history of interest rate movements.

After much anticipation, we’ve moved into an increasing interest rate environment, bringing with it changes for borrowers and, many expect, the performance of the housing market.

“This kind of rate environment demands a more strategic approach for borrowers.

A sharp rate will of course always be a priority for clients,” Karen Mooney, PAA board member, says.

“ But when rates are expected to increase over time, a much broader range of considerations complete the picture.”

With a large proportion of clients happy to sit on the floating rate for the past few years, plus the fact that many borrowers (first home buyers in recent years) have yet to experience fixed rate terms, a key service of advisers in the coming months will be educating clients and helping them design a structure that is right for their income, comfort levels and plans.

A swing to a fixed rate environment, Mooney says, is an opportunity for advisers to communicate the skills they bring to the table. “Helping clients decide what they need rather than reacting to the ‘best’ rates is essential,” she says.

‘This is where the value of a solid strategy and quality relationship are strong tools advisers can use to showcase their expertise and drive more business.”

Loan to Value Ratio (LVR) restrictions have similarly been subject of media attention with recent figures released by the RBNZ showing

It’s been a busy start to the year across a number of key areas – changes in market conditions; revisions to regulation and certainly for your association, the PAA. Here’s a wrap up of the most notable developments for mortgage advisers and PAA members.

024

Prime times for mortgage advice

encourages all advisers to put some planning around is the proposed new requirement of 30 structured CPD credits over a two-year period (a change from 10 credits per year).

While strictly speaking this is only a requirement for AFAs, dedicating time to professional development not only ensures you continue to build your knowledge, expertise and skills to grow a profitable business, is also evidences best practice care in providing a quality service to your clients.

Angi Mann, PAA learning and development manager, encourages all advisers to take the time to prepare a CPD plan and offers the following pointers to get started. For more information, have a look at the Short Guide – How to Prepare a CPD Plan, available in the Publications section of the PAA website (www.paa.co.nz):★ Your CPD plan needs to demonstrate that you have considered the areas of skill or knowledge which you need to develop or maintain, and that you have actively put a plan in place to achieve this. ★ Unstructured credits are no longer mandated, but we strongly recommend you keep up with reading and other non-structured learning for best practice professional development. ★ CPD points can be achieved by attendance at courses, conferences, workshops, group development days and provider product training. However, all credits you register as being structured training, must be relevant to objectives identified in your CPD plan.★ Your CPD Plan is a living document and we recommend you review it every three months to update objectives where necessary.

Your association – PAA developmentsGearing up for a big year and one which

will be focussed on delivering more business value to PAA members, as announced over the previous weeks, your association has made two key appointments in the first quarter:

Angi Mann joined the PAA in February as the dedicated learning and development manager. Mann will be focussed on providing accessible training that delivers quick wins and long term benefits – and, importantly, which is highly relevant to what advisers need in their business. Many members may already know Angi, having run a number of PAA training events and bringing with her over 20 years experience in the financial industry.

Quickly after the appointment of Angi, Rod Severn joined the PAA as the new chief executive officer. A strong advocate and supporter of the value of advice and the adviser service, Severn brings a wealth of business development expertise and will be focussed on further strengthening the PAA’s voice in the interests of advisers and enhancing value for members. ✚

that banks are well within the 10% threshold on over 80% lending. In fact, across December and January, low equity bank lending was sitting at around only 5% and in the latter (granted generally a slow month), only $147 million in lending was above 80%.

PAA board member Karen Tatterson agrees with commentary that the LVR restrictions are primarily having an impact in lower house price brackets, which has also been evidenced by the latest REINZ figures. Compared with February last year, total sales in Auckland are down 7.6% according to REINZ, while the number of sales during the period for properties between $600,000 and $1m was up by 9.2%.

“In areas like Auckland where supply constraints continue to put pressure on price, combined with LVR restrictions, first home buyers in particular are being more hesitant to get into the market,” Tatterson says.

The main thing for advisers, Tatterson says, is to take a long-term view with all clients. The REINZ residential sales report for the year to February continued to report median house price gains in all but one region, with a national increase of $33,000 to $415,000. Unsurprisingly, the biggest gains were in Canterbury/Westland, up 12.4%, followed by Auckland with 10.7%.

Conversely, in terms of sales volumes, the market dropped over the year to February, with the total number of sales declining by 7.6%, and only two of the 12 regions reporting increases; Central Otago Lakes recording the largest increase of 26.4%, followed by Northland with 11.5%.

“When you consider that three regions contributed to 895 of the national house price gain, it is once again clear that we are not operating in a single housing market,” Mooney says.

Your professional developmentWhile we expect a transition period

will apply, proposed changes to the code are imminent. One aspect which the PAA

"Helping clients decide what they need

rather than reacting to the ‘best’ rates is

essential"

Karen Mooney

025

LEGALSALES & MARKETING

The headlines are full of it and many of your clients are no doubt worried. Don’t wait for the phone to ring – be proactive and come to your client’s rescue.

Email or phone as many as you can in the next month. Work out a suitable script based on a key statement or set of questions. This is not only potentially business generating but patch-protection as well, as it should stop clients contacting their lenders directly.

Mortgages are not seasonal as such, but there are times that they are more top-of-mind than at other times. The last few years have been flat and devoid of such ‘seasonal impacts’,

but now is one of them. What it offers is an excuse to contact a client. These are rare in the natural course of events.

The rules of marketing are: ➊ make it relevant, ➋ make it timely, ➌ make it personal, and, ➍ make it referable. I’ll run through each and explain. ➊ First is relevance. The offer has to be relevant to my life. There is no such thing as the “general public”. We are all individuals, or groups of individuals with common interests and stages of life. Advertising like, “we can arrange mortgages for first home buyers,

By Paul Watkins

property investors, those with bad credit ratings and etc, etc.” That sort of advertising appeals to no one. It has no relevance to any one group.

The way to make it relevant is to promote to just one specific target market. That’s why Facebook is so effective. You can select only those in your immediate geographical area, of a specific age group and specific range of interests.

For example, you could advertise to first home buyers in an advert that has the headline, “Mortgage rates are about to rise and you need a bigger deposit than ever before. But it’s still possible to get into your first home”. (Never be afraid of a long headline by the way). This

Mortgage.rates going.up,.your. time.to.be.relevantRelevancy, timing, the personal approach and referable are four effective tools in the rules of marketing.

026

Paul provides newsletter writing services for advisers and groups. Email: [email protected]

headline is very specific to one target market, has impact through fear then offers a glimmer of hope at the end. Very relevant to the target audience. ➋ The second aspect is to make it timely. This is how advertising works: Suppose I am sitting at home looking at my lounge suite and thinking, ‘We really do need to replace this’. Then the ad break comes on TV and in your face is a firm offering an amazing deal on lounge suites! As it’s in your brain already, the advert will have a huge impact on you. You will remember the location, the deals and can probably almost quote the ad verbatim once it’s over.

If, however, you are sitting on a quite new couch, the advertising will have no impact on you whatsoever. This applies to mortgages as well. After all if rates are stable, you are making your regular payments and enjoying life, why change your mortgage unless you are changing houses or buying investment property?

Right now is a timely reason to promote your services to those with mortgages. Rates are rising and many home owners will be worried. So advertising to home owners (not first time buyers) with a headline that reflects the impact of the rising rates should be read. ➌ The third aspect is to make it personal. Social media, most notably Facebook and Twitter, have changed things, as has the internet in general. You can pick just the news you want emailed to you to read (one of the reasons newspapers are failing so rapidly), follow specific people’s thoughts on Twitter and even design your own radio station to listen to.

This is not going to change, in fact it will get even more personalised. Internet sourced TV is with us now, so scheduled programming full of ads will disappear in the not too distant future. We will design our own schedule of programmes and viewing times – and everyone in the household will be different.

So how are you making your promotional activities personal to the prospect? For a start,

make sure every emailed newsletter that goes out is personalised to the recipient, as in, ‘Dear Paul’. It is a simple piece of software to achieve this. You can even personalise printed postcards. Never send a, ‘Dear Client’ letter.

Next is to divide your clients into categories, perhaps as basics as those with just own home mortgages and those with investment properties. You could send different newsletters to each group. Perhaps divide them into age groups if you also offer insurance. If I was 62, it is unlikely that I would be very interested in income protection or trauma cover. So your messages should change based on the segmented group. ➍ The fourth part is to make it referable. When you write content, it should be able to be talked about to others. Your advertising, newsletters, postcards, letters and all client communication should be written with this in mind. It is not easy to do, but try.

Of course you can just ask! This can be as blatant as adding, “Most of my business is referred from happy clients, so if you know of anyone, I would be delighted if you passed my name on….” You can also have a “forward to a friend” at the bottom of emailed newsletters.

So I want a new mortgage for whatever reason, but how do I choose a broker? Or do I simply go direct to my bank? What advertising or promotional activity will inspire me to call YOU? This is what you must ask yourself each time you place advertising or communicate with clients.

As virtually none of you have a clear point of difference, the trick is the first three steps outlined above. If what I read about you is relevant to me, timely to my current situation and addressed to me personally, then I will pick you! I will choose you because you appear to be talking directly to me and no one else. If I have never used your services before, I have no way of judging your ability to meet my needs. By addressing the steps above, however, I am inclined to give you the benefit of the doubt and call you.

Effective client and prospect communication is not easy. The advent of the Internet has not helped. It has meant learning new skills and marketing practices, all of which seem to challenge previously held thoughts. Facebook didn’t exist just seven years ago, yet is already a tremendously powerful promotional medium. Twitter? What is Twitter? That’s the normal response I get. But these and others must be understood.

Whatever the medium or group of media you choose, the rules outlined above still apply. I am still not going to respond if it’s not perceived to be directed at me and only me. And right now is a very good month to start! ✚

❝Effective client and prospect

communication is not easy. The advent of the Internet has

not helped. It has meant learning new skills and marketing

practices .❞

Mortgage.rates going.up,.your. time.to.be.relevant

027

INTEREST RATES

RBNZ’S TIGHTENING CYCLE HAS BEGUNAs widely expected, the RBNZ lifted the Official Cash Rate (OCR) from 2.5% to 2.75% at its March review. Just as importantly, the RBNZ sent a strong signal that it expects a more aggressive tightening cycle than previously indicated. For borrowers, this move from the RBNZ has immediate consequences. The interest rate on floating rate mortgages has already lifted by 0.25% to 6% at several of the main banks, and shorter-term fixed rates may also be in line for some adjustment. And looking ahead to the next few months, more OCR increases look

One way for borrowers to avoid increases is to move to a fixed term. The economy is on its firmest footing for several years. The RBNZ seems determined to lift rates several more times this year and next. But nothing is 100% certain.

almost certain (ASB Economics expect another OCR increase in April). Floating mortgage rates and short-term fixed rates are likely to lift again very soon.

This prospect of higher rates has been discussed regularly by the RBNZ and communicated through a variety of channels in the media over recent months. If borrowers have not decided what this means for them already, now is definitely the time to give it some thought and look at strategies to manage higher borrowing costs over future years.

RBNZ MARCH MONETARY POLICY STATEMENT AND OCR REVIEW SUMMARYThe RBNZ’s decision to lift the OCR to 2.75% was widely expected by analysts and economists, including ourselves.

The RBNZ’s intention to return interest rates to more normal levels had been well signalled over recent months, and communicated in the media, including earlier versions of this publication. So the RBNZ’s decision to lift the OCR should come as no surprise. Importantly, in addition to the rate hike itself, the RBNZ sent a strong signal that it expects a more aggressive interest rate tightening cycle than we have been forecasting, and the RBNZ had previously indicated. The RBNZ’s forecasts indicate around six 25bps hikes by this time next year, and the OCR rising to 5-5.25% by early 2017.

We had been calling a March 2014 start to the tightening cycle for a long time. When we first made that forecast at the start of last year, it implied an earlier and more aggressive tightening cycle than the RBNZ was predicting at the time. More recently, though, as the RBNZ has moved to a more hawkish stance, our interest rate forecast had been predicting a more gradual cycle of hikes than the RBNZ forecast. We have now changed our forecast to build in a follow-up OCR hike in April, then subsequent hikes in July and December 2014. We also expect a further four OCR hikes over 2015, taking the OCR to a peak of 4.5% (previously we had anticipated three hikes this year and three more next year). That is still less aggressive than the RBNZ’s forecasts, and also slightly less aggressive than market pricing over 2014. We expect an OCR peak of 4.5%. We still see several reasons why the tightening cycle should be fairly cautious or gradual, including the strong NZD and the potential for higher interest rates to have a swift, noticeable impact on the economy.

WHAT DOES IT MEAN FOR FUTURE MORTGAGE RATES?The RBNZ’s decision to lift the OCR has

Chris Tennent-Brown

RBNZ more hawkish in interest rates forecast

028

"We have now changed our

forecast to build in a follow-up

OCR hike in April, then subsequent hikes in July and

December 2014."

Home Loan Rates %%

Source: ASB

VARIABLE RATE

1 year rate

3 year rate

5 year rate

1111

1010

99

88

77

66

55Jan 07 Jul 08 Jul 11Jan 10 Jan 13

Home Loan Rates %%

Source: ASBHigh (past 10 years)

10 -year average

Mar 2014

Low (past 10 years)

1111

1010

99

88

77

66

551-year RateVariable Rate 3-year Rate 5-year Rate

had immediate consequences for borrowers - floating mortgage rates are already on the rise. Whenever the RBNZ raises the OCR, the floating rate typically goes up fairly much in lock-step with each increase, all other things being equal.

The only way for borrowers to avoid these increases is to move to a fixed term. Right now the economy is on much firmer footing than it has been for several years, and the RBNZ seems very determined to lift rates several more times this year and next. Nothing is 100% certain, but financial market pricing implies around 200bps or 2% of OCR increases over the next two years, and the RBNZ’s forecasts imply slightly more tightening, taking the OCR to around 5-5.25% by early 2017%. We think the OCR peak may be slightly lower – around 4.5%. Based on our forecasts, the floating rate will lift to around 7.75% by late 2015, and should stay around that level if we are correct in forecasting an OCR peak of 4.5%. But borrowers need to consider that if the RBNZ delivers the extra OCR increases that are implied in its longer-term forecasts, then floating rates will likely be above 8% by 2017.

Some fixed-term mortgage rates in New Zealand had already been lifting in anticipation of a series of OCR increases from the RBNZ. For example, the 2-year fixed rate has lifted from around 5.5% to 6.3% over late 2013 and early 2014. The 5-year fixed rate lifted by a similar amount, and is now around 7.2%.

OCR increases will have the greatest impact on short-term rates. Long-term rates have already moved in anticipation of OCR increases, and are also influenced by developments in global interest rate markets, particularly the US Treasury market, where rates are gradually rising. If our forecasts prove correct, in two years’ time we would expect to see the OCR at 4.5% (up 1.75%), and floating rates around 7.75% (up the same 1.75%). For term rates, we would expect the 1-year fixed rate to lift to around 6.9% (up 1.2%), while the 5-year rate may only lift another 0.25% or so, to around 7.5%.

It is very important to note that any forecast will be based on a number of assumptions.

Two important assumptions in our current mortgage forecasts are:➊ Our view that the OCR only lifts to 4.5% which is lower than the RBNZ’s latest forecasts suggest; ➋ Long-term global interest rates remain historically low over the medium term, and in doing so keep New Zealand’s long-term rates relatively contained.

There are risks to both of these assumptions, and this means New Zealand interest rates could be higher or lower than our forecasts. But one thing that does seem reasonable to assume is that with the economy now growing well, and the RBNZ’s tightening cycle underway, the lowest mortgage rates are behind us. And steady increases from today’s level should be planned for over the coming months and years.

IDENTIFYING THE BEST STRATEGYOnly with the benefit of hindsight can we be sure what the best mortgage strategy is. But based on our forecasts, there are a number of things that we can identify.

Firstly, floating rates are not the cheapest rates right now (the 6-month rate is) so borrowers can create some certainty, and obtain a lower rate than floating by fixing for 6 months.

Secondly, all fixed rates are below their long-run (10-year) average. So by this simple measure, the fixed terms are reasonable value, as shown in the charts.

We can also calculate the cost of other strategies such as rolling 1-year terms for the next 2 or even the next 5 years, and compare the interest rate expense to the interest rate of the fixed terms available today for 2-5 years. Based on our forecasts, rolling short terms is still the cheapest strategy. This really hinges on our view that the RBNZ will have several pauses in its OCR increases over the coming years, and the OCR will peak at 4.5%. We stress that if the RBNZ hikes more aggressively than we expect (i.e. more hikes early on in the cycle), or lifts the OCR higher than 4.5%, then these shorter-term rates will lift more than we are forecasting, making this strategy more expensive than the longer-term rates on offer today.

To illustrate, we can estimate what would happen to mortgages if the RBNZ lifts the OCR to 5% (in line with its latest forecasts, rather than our 4.5% peak). By 2016 we would expect the variable rate to be around 8.25%, and fixed-term rates to be up around 8% too, rather than the 7-7.5% level we are currently forecasting.

A key thought is that fixing for longer terms now does give extra insurance against stronger OCR increases than we are expecting. Depending on borrowers’ risk appetite, that insurance may be worth taking. In this vein, the cost of some certainty is not actually too high, based on current mortgage rates.

This is perhaps easiest illustrated with another example: ➔ The current floating rate is 6%. If the RBNZ lifts the OCR again in April, then say again in July (as we are forecasting), the floating rate will most likely lift to around 6.25% in April, then 6.5% soon after the subsequent hike in July. ➔ A borrower can fix a 2-year mortgage for a carded rate of 6.3% right now. In other words, a borrower can lock in now a rate that is in line with what we expect the floating rate to be very soon, and lower than what we expect floating rates to cost around the middle of this year.

FINAL THOUGHTSThere are always risks to a forecast, with both upside and downside implications when it comes to interest rates. But right now there is quite a skew of risks pointing to higher interest rates over the next two years. And borrowers can at present lock in some certainty without paying too much more than the current floating rates which look set to rise the most out of all the mortgage rates.

Ultimately the best mortgage strategy is one that also takes into account an individual borrower’s cash flows, tolerance for uncertainty, and ability to deal with changes in future mortgage payments as interest rates change. It is always important for borrowers to weigh up their own priorities and make the mortgage choice that looks the best aligned with them: there is more to it than just picking

the lowest interest rate. ✚

029

ANZ AGAIN HOME LOANS LEADER, CRACKS $1B FOR SECOND TIME

GDS

By Margie Macalister

Reserve Bank figures show total home loans increased $2.57 billion (1.4%) to $187.6 billion in the quarter ended December 31 2013.

Home loans for the top five banks grew $2.6 billion according to their December GDS reports. (See table below)

Kiwibank and ANZ were the big winners in writing home loans in the December quarter. ANZ writing a massive $1.3 billion in loans would have kept staff and brokers there very busy indeed. This is the second time ANZ has cracked the $1 billion and it is the only bank in

Comparing Apples with ANZ PearThe new LVR rules beg the question about what is high LVR and what is low.

Generally the reply is, over 80% is high and under is low.

So where does 80% exactly sit, and why does it matter?

TMM looks at the latest bank data on home loan lending and finds out who were the winners and losers last year and who wrote the most low equity loans.

New Zealand to have achieved this milestone.Two years ago ANZ was going backwards

with the loan book shrinking in the September 11 and December 11 quarters.

Similarly impressive is Kiwibank with 8.6% annual growth which includes a 10% increase in its low LVR loans.

ASB had been having a great run up until the September 13 quarter when the Reserve Bank rained on its parade. In December 12, it came close to the magic $1 billion in new loans with an increase in the loan book of $932 million –

$882 million and 95% of this was in the high LVR range.

In the December 13 quarter lending increased by just $362 million and high LVR lending actually dropped by $213 million.

The following graph shows how the share of new business was divided between the top five banks in the December 13 quarter and for the Past 12 months in relation to their overall stake of the total lending.

It matters because a heck of a lot of people (and most property investors) borrow 80% exactly when they purchase a property.

It is the maximum amount where the bank believe they have sufficient equity in a property that they will be able to recover their loan in the event of default.

It follows that if some banks split their LVR lending into under 80% and 80% and over they will show a higher proportion of their total loan book as high LVR than another bank that splits it as 80% and under and 81% and over.

Let’s look at how the big banks report:

Market Share Total $ Billion Qtr Change Annual Change

Dec-12 Dec-13 Dec-12 Dec-13 $Billion % $Billion %

ANZ 31.9% 32.2% 53.955 57.877 1.296 2.40% 3.922 7.3%

ASB 22.9% 22.9% 38.641 41.227 0.362 0.94% 2.586 6.7%

BNZ 16.9% 16.5% 28.504 29.597 0.097 0.34% 1.093 3.8%

Westpac 21.2% 21.1% 35.891 37.982 0.477 1.33% 2.091 5.8%

Kiwibank 7.1% 7.3% 12.076 13.118 0.413 3.42% 1.042 8.6%

100% 100% 169.067 179.801 2.645 1.56% 10.734 6.3%

030

In the graph to the right, BNZ and Kiwibank look conservative in terms of the composition of their loan books. It is possible, however, that ASB and Westpac are actually the banks out of kilter. Their “high LVR” lending looks more in line with ANZ’s. ANZ, however, excludes 80% lending from its High LVR breakdown.

Even the Reserve Bank is a bit ambiguous. It’s guide to borrowers on the LVR rules says: “When we talk about high-LVR lending, we are generally referring to LVR ratios of at least 80%. A borrower with less than 20% deposit would be considered as having a high LVR.”

Um, so where does that leave a borrower with exactly 20% again?While it might seem semantic, it is reasonable to assume that the

banks are classifying their new lending in the same way they report in their disclosure statements. That suggests that ANZ will be doing a lot less lending at exactly 80% than the other banks. They may be doing a lot more at 79% of course but we do not get that level of breakdown.

It does seem ANZ is out of line with the others as the LVR restrictions on new lending applies to loans with LVR over 80%, not 79%.

Storm off a Balance SheetAfter the LVR restrictions were introduced ASB and Westpac caused a huge brouhaha announcing they would cancel pre-approvals, or in the case of Westpac look very closely at them.

Presumably these pre-approvals are included in the “Off Balance Sheet” figures reported when reporting Loan Book by LVR in quarterly disclosure statements.

If that is the case it appears to have been much ado about nothingRight - is a break down of “Off Balance Sheet” loans for these banks in

December 12, September 13 and December 13.

Reserve Bank StatisticsThe Reserve bank is reporting on monthly bank lending which shows the graphic drop in high LVR lending after September.

There has been an average of 6,762 home loan approvals weekly during February and March with an average weekly value of $1.178 billion or $174,300 per loan.

Since the increase in loans for the top 5

ANZ

0-79% $44.811 billion (77.4%)

80%+ $13.066 billion (22.6%)

ASB

0-80% $31.848 billion (77.3%)

80.1%+ $9.379 billion (22.7%)

BNZ

0-80% $25.394 billion (85.8%)

>80% $4.203 billion (14.2%)

Kiwibank

0-80% $10.714 billion (81.7%)

>80% $2.404 billion (19.3%)

Westpac

Does not exceed 80% $29.551 billion (77.8%)

Exceeds 80% $8.431 billion (22.2%)

Off Balance Sheet - $Billion

Dec-12 Sep-13 Dec-13

ASB 5.935 6.056 6.044

Westpac 6.762 7.096 7.326

$Million

New lending LVR 80% or below LVR above 80% Exempt above 80% LVR

High-LVR share before exemptions

High-LVR share after exemptions

Monthly

Aug-13 4,472 3,336 1,136 .. 25.4% ..

Sep-13 4,735 3,549 1,187 .. 25.1% ..

Oct-13 4,485 3,913 572 54 12.8% 11.70%

Nov-13 4,435 4,124 310 57 7.0% 5.80%

Dec-13 4,509 4,258 252 43 5.6% 4.70%

Jan-14 3,090 2,942 147 31 4.8% 3.80%

Feb-14 3,863 3,663 200 40 5.2% 4.20%

banks in the December quarter was only $2.65 billion the inference is that only 20% of new lending translates to an increase in bank loans, the new increase offset due to refinancing or repayment of loans. ✚

031

By Jonathan Flaws

From April 1, it will be possible to apply for a license under the Financial Markets Conduct Phase 1 Regulations 2014 (the FMC Regs) for a license to provide a peer-to-peer

lending service. Crowd funding and peer-to-peer lending

have been available overseas for some years and although some horror stories have been generated by high default rates, in concept, the technique is just another way of matching

lenders with borrowers. The fundamental “lending risks”, i.e. credit

and adequacy of security, remain the same but to these you must now add “intermediary risk” the risks associated with the party providing the service that matches the lender with the borrower. The FMC Regs and the licensing regime are intended to manage and regulate the intermediary risk.

This is nothing new. Every investment you make via a third party involves intermediary

Crowd cuckoo land – or legitimate market

based financing?Should time be critical, unsecured peer-to-peer lending may

provide an opportunity for a low deposit borrower to raise additional funds to meet the deposit requirements of banks

LEGAL

risk. Everyone who has lost out by investing in badly run finance companies knows intimately what this risk can lead to. The satisfaction of seeing finance company directors and executives in the dock is cold comfort to an investor when the income expected to help pay their power bills stops.

What is crowd-funding?Crowd-funding is a term used to explain a method of raising money, generally an

032

❝ The principal purpose of the

facility must be to facilitate the matching

of lenders with borrowers who

are seeking loans for personal, charitable, or

small business purposes.

amalgamation of small amounts from multiple investors, for the purpose of funding a specific project or a small business or personal loan. The facility is generally provided by an on-line system that matches lenders with borrowers. The funds may be lent, generally unsecured (peer-to-peer lending) or invested in a project or company for an equity participation in the venture with revenue being received by way of dividends and profit distribution (equity crowd-funding).

There are several different categories of crowd-funding. At first it was referred to as social lending and was used by charities to raise money for projects or for people with a good story to borrow small amounts unsecured to help them through a hard time or with a special need.

This article is only going to focus on what is referred to in the FMC Regs as a peer-to-peer lending service rather than the equity focused, crowd-funding service.

You can find in-depth analyses of crowd-funding at www.iosco.org/research in a report, Crowd-funding: an Infant Industry Growing fast.

Benefits and RisksThe IOSCO report list the benefits of crowd-funding as:(a) helping economic growth by providing a new source of capital to smaller users;(b) filling gaps left by banks;(c) lowering the cost of capital by a more direct link between investor and user;(d) providing a new product for portfolio diversification(e) cost-efficient;(f) convenient;(g) increases competition.

It then lists the risks as:(a) risk of default – default rates have proved to be higher – a result of less due diligence and less credit assessment(b) platform risk – the providers of the service collapse;(c) risk of fraud – it is easier for a borrower in a web based environment either to provide false information or impersonate another;(d) information quality – most crowd-funding tends to be anonymous – details are provided over the web – and hard information on the borrower is often lacking – lenders base their decision on unverified soft information – to the extent that a platform provides a credit/risk assessment on the borrower, the lender is reliant on the quality of the model used; (e) risk of investor inexperience – the investor makes the call on the investment, not a trained analyst;(f) liquidity risk – most platforms do not provide a secondary market so the investor is locked in once the investment is made;(g) risk of cyber-attack – being internet based, there is always the potential for the system to be taken out.

How does the FMC Regs address the risks?First the FMS regs focus on the provider of the peer-to-peer lending service and requires that they be licensed.

❞

A person provides a peer-to-peer lending service if that person provides a facility by means of which offers of debt securities are made. The principal purpose of the facility must be to facilitate the matching of lenders with borrowers who are seeking loans for personal, charitable, or small business purposes.Anyone applying for a license must meet certain criteria. These include having systems and procedures:➤ that are fair, orderly, and transparent for providing the service;➤ for checking the identity of issuers of debt securities (borrowers) and all officers of any borrower;➤ for assessing the risk of default, the credit risk and adequacy of any security;➤ for providing information about the checking and the results of the assessment to investors;➤ for excluding borrowers who, following the assessment, it believes may be providing misleading or deceptive information or false information;➤ to ensure that the maximum amount lent to any one borrower ($2 million) is not exceeded.

The licensee must enter into a client agreement with each investor and must provide a disclosure statement and required transaction information to the investor. This information is less than a full prospectus but is nevertheless extensive. Among other things, it needs to explain the investment; the way the investment is managed and monitored, all costs associated with the investment and an outline of any security and the risks involved in the transaction.

The licensee is required to have adequate professional indemnity insurance and is required to provide reports to the FMA regarding the service it operates.

These and other provisions are designed to manage the risks outlined above. They are also designed to ensure any investor is adequately and properly advised.

There is, however, no requirement for the investor to be qualified so as to understand the risks inherent in the investment. Like most credit such legislation, the FMC Regs are about disclosure to enable an informed decision to be made rather than ensuring the person making the decision is themselves qualified or in fact able to make an informed decision.

Similarly, the licensee requirements are that the licensee has adequate systems and procedures, it doesn’t require that the licensee meets any standard of education or knowledge or indeed the ability to adequately use those systems and procedures.

What are mortgage broker opportunities?On the face of it, the opportunity for a broker is to develop relationships with providers of peer-to-peer lending services and use them as an alternative means of obtaining finance for a client. However, it may be difficult for the service to recover the cost of the broker’s commissions. The concept behind peer-to-peer lending is to make it cost efficient by removing any additional intermediaries.

If time is not so critical, unsecured peer-to-peer lending may provide an opportunity for a low deposit borrower to raise additional funds to meet the deposit requirements of banks.

The FMC Regs anticipate that some licensees may also provide a broking service in conjunction with the peer-to-peer system. In this case the broking service falls within the scope of the license and the licensee must be a registered financial adviser and must subscribe to a dispute resolution service.

It is perhaps here that the most obvious opportunity lies for a mortgage broker. It raises the potential for a broker to become a licensee and provide a peer-to-peer lending system. Before the General Financial Crisis, a breed of intermediary known as the mortgage manager played a role in the industry between brokers and lenders – particularly non bank lenders. Some raised money through debenture funding to fund mortgage manager finance companies.

Mortgage managers were required to act like lenders and review loan applications, complete the underwriting process by obtaining information from credit agencies, obtaining LMI insurance, testing the loan application against a lender’s qualifying criteria and then putting a loan to the lender in the form of a mortgage purchase application. The same work required by peer-to-peer licensees in gathering information and assessing borrowers as set out in the FMC Regs.

On the face of it, mortgage managers seem to have the right qualifications and be in the right position to do provide a peer-to-peer lending service. Whether they would in fact be able to meet the more strict requirements that goes with the FMC Regs licensing regime and the oversight that I trust the FMA will exert over these licenses is yet to be seen. ✚

033

INSURANCE

By Steve Wright

Steve Wright is general manager products at Partners Life.

A couple of weeks ago I was discussing the New Year with an adviser who told me she was hoping to do more insurance business. When I

asked her how she was going to do this she told me she hadn’t really thought about it.

When trauma insurance was invented just 30 or so years ago, it was designed to pay benefits to people who had suffered a so-called “dread disease” that was likely to kill them relatively quickly.

In fact, relatively few serious conditions were covered. Over time, more and more trauma conditions have been added and definitions relaxed, significantly increasing the likelihood of clients being paid a benefit. This has been driven by demand and competitive pressures but has come at a price; premiums are becoming increasingly dear.

Over the last 30 years there have also been great advances in medicine and the treatment of “dread diseases”.

Many “dread diseases” now have much better survival rates, so peoples’ needs have also changed as a result. No one needs a million dollar trauma cover payout for something that simply puts them off work for a month or two, yet that is precisely the outcome most trauma cover policies can allow.

Nice as it may be, that is more like gambling than insurance and, because it is expensive and not really needed, it is inefficient.

So what is the problem? The problem is that

while clients might not need a large payment for something that just slows them down temporarily, they most definitely need large insurance payments for the very serious, life threatening, trauma events that do still occur. Suffering a severe medical trauma may have a significant effect on the client’s ability to work (or work as hard) but not leave them disabled.

If they are not disabled their Income Protection would not pay them anything, yet the lost income as a result would be very significant.

Most Kiwis don’t have any trauma cover and those that do are generally underinsured. I believe the average trauma cover sum insured is relatively low, depending on whose statistics you use, between $70,000 and $80,000; not nearly enough for most families. This low take-up of trauma cover and general underinsurance is caused at least in part because trauma cover has become so expensive and most can’t afford the (large) sums insured they need.

Trauma Cover is expensive because the large number of generously defined conditions covered means a high likelihood of claims, requiring in turn, a need for high premiums to cover the claims cost. Existing traditional trauma cover leaves people, even those with high sums insured, in a situation where they are either over insured for trauma conditions that only have a minor financial impact on their lives or massively underinsured against those conditions that have a major financial impact.

This is completely opposite of what clients really need and represents a very inefficient premium spend.

So what is the solution? I think a solution starts with the advice proposition and a recognition that conditions likely to have a severe financial impact on the client, their family or business, should be adequately insured before the less severe conditions. We should look after the big risks first and then decide how much we need or want for smaller risks. A “severity based” trauma advice approach is probably required, one which recognises that not all trauma conditions have the same financial consequences.

Of course, then we also need insurance solutions that allow this new advice like solutions that allow differentiation of severe and not-so-severe trauma conditions and allows separate levels of cover to be selected depending on the client’s needs. The insurance solution should be simple, flexible and structured so that the maximum premium efficiency can be achieved.

Cover for the severe traumas should cost much less than cover for not-so-severe traumas. A solution that allows clients to pay only the premium for the cover they need is much more efficient and will allow people to afford the much higher levels of cover they need for those trauma conditions likely to have a very large financial consequence. ✚

Should you duck

Cover?Insurance premiums for ‘dread diseases’ have risen along with survival rates compared with 30 years ago. It is expensive and inefficient. Is cover still relevant?

034

Offset home loans are big overseas and are now starting to grow in New Zealand with the arrival of a new player. NZ Mortgage Mag, together with NZ Property Investor, have prepared a special report. This report compares the three products in the market and all their features and benefits.To get your copy of this guide email your details to: [email protected]