The Nz Mortgage Magazine (TMM) issue 6 2014

Issue

201406

MORTGAGEE

SALES TOP TIPS

AND ADVICEREQUIRE A

MAKEOVER?

DOES YOUR WEBSITES

CONNECT WITH GENERATION Y

BUILDING RELATIONS

12 HOUSING COMMENTARY Despite a marked reduction in turnover in the housing market for August, better times are just around the corner. Susan Edmunds tells us more.

14 LEAD FEATURE TMM takes a look at the property investment market and brings you tips and information from advisers active in this space.

26 MY BUSINESS: FELECIA HEWSON Phil Campbell catches up with mortgage adviser Felecia Hewson, who reflects on the Rotorua market and what it takes to be a successful broker.

28 GDS Margie Macalister brings you TMM’s quarterly update on the big bank home loan market share.

04 EDITORIAL Change in inevitable.

05 NEWS Catch up on Harmoney’s launch, the new course for advisers offered by the PAA, news about a new dealer group, and more.

CONTENTS

UPFRONT

26

20 PAA NEWS Michelle Harrison finds out what advisers need to do to appeal to Gen Y.

22 SALES AND MARKETING What makes an effective website? Paul Watkins looks as ways to improve your website.

24 INTEREST RATES ASB’s Chris Tennent-Brown brings you the latest interest rate information and looks at future movements.

30 LEGAL Our resident legal expert Jonathan Flaws looks at mortgagee sales and what it means.

34 INSURANCE Steve Wright tells us what to look out for when it comes to insurance exclusions.

14TMM looks at the potential of the property investor market and advice on how to break into this lucrative market segment. Felecia Hewson

COLUMNSFEATURES

" With Gen Y increasingly active

as home buyers and investors it is

worth considering how your marketing approach needs to

change."

Change is inevitable

As the pace of life speeds up in response to rapid-fire developments in technology, the one thing we can be assured of is change, and the mortgage adviser

market is not likely to prove to be an exception. We’ve got four generations active in the

market place from the Veterans who grew during depression between the two world wars (the 69- to 89-years-olds) through the ambitious and collaborative Baby Boomers (the 50- to 68-year-olds) who are nearing retirement age, to the independent and self-reliant risk takers that compromise Gen X (the 33- to 49-year-olds), to Gen Y – the new kids on the block aged from 20 to 32.

Also known as millennials or the entitlement generation Gen Ys, born between 1982 and 1994, are technologically savvy and technology dependent; they are fast movers and creative problem solvers who value diversity, collaboration and change.

With Gen Y increasingly active as home buyers and investors it is worth considering how your marketing approach needs to change to capture the attention of the first generation to grow up with technology, social media, and instant gratification.

Michelle Harrison’s article Connecting the generational dots on P20 does just that, while the update on the reserve mortgage market on P34 looks at an underutilised

product that might interest the Veterans and Boomers. It has lots of growth potential.

Change in market conditions is also inevitable, which means it pays to diversify your home loan market base so that you’re not reliant on only one segment of the market. With this in mind, TMM takes a closer look the property investor market. Our lead article on P14 includes advice and tips on how to break into this market, and we look at the new five property rule and what it means for property investors on P16 to bring you up to speed on impending changes for investors.

Advancements in technology have also facilitated another change. Although we’re about 10 years behind the UK and US due to a lag in the regulatory environment, peer-to-peer lending is now live in New Zealand. TMM interviewed the chief executive of Harmoney, Neil Roberts, to find out what this might mean for banks and whether he has his sights on the mortgage lending market in the future. See P8 for the details.

Steve Wright also considers the changes in technology and what you need to do to keep your website effective and relevant on P22.

To balance all this change, this edition of TMM also includes our regular features which keep you up to date with developments in the market place including the Housing Commentary (P12), interest rate news (P24) and TMM’s quarterly update on the bank’s home loan market share (P28).

Sharon DavisEditor

PUBLISHER:Philip Macalister

SENIOR WRITER: Susan Edmunds

SUB EDITOR:Phil Campbell

CONTRIBUTORS:Paul WatkinsChris 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

Jenny Campbell

Campbell expects to officially launch the group towards the end of October.

She says there is a place in the market for a “truly independent” group that is solely focused on mortgage advisers.

It isn’t focused on the risk market but will look to form a relationship with a risk dealer group.

While the group will have members nationwide, it will also have a strong focus in the Auckland market.

Campbell doesn’t expect to have too much difficulty recruiting members and expects to have 100 people on board in a year’s time.

NEW DEALER GROUP COMING

NEWS

Former PAA manager Jenny Campbell is setting up a new dealer group for mortgage advisers.

She says it’s not a “bums on seat exercise” and the group “won’t be the biggest but it will be the best.”

A number of advisers are already involved in the group and it is looking to recruit people with “established track records”.

Meanwhile, Kepa, which was formed through the merger of TNP and Ginger Group, is looking for someone to head up its mortgage business.

Darren Pratley was not replaced after he left the group a year ago and current business development manager Jodi Anderson is leaving to travel overseas. ✚

05

NEWS

RBNZ SAYS DEBT-TO-INCOME IS NOT THE BEST MEASURE

FOR RESPONSIBLE LENDING

In its submission on the government’s proposed Responsible Lending Code the Reserve Bank (RBNZ) says responsible lending

should include both variability in income and that of interest rates.

“Banks in New Zealand, as in other countries, are prepared to lend much more to a household for a mortgage (both in terms of the percentage of the collateral value and as a multiple of borrower’s income) than they are for other consumer lending products. In our view, this could create some risks for

borrowers,” the RBNZ said.“Mortgage interest rates are much more

responsive to the Official Cash rate than most other consumer credit rates,” and while the RBNZ “tends not to issue explicit guidance to lenders about their terms, with the exception of the recent introduction of LVR restrictions, but we do consider it important that diligent serviceability assessments are undertaken by lenders.

“On their own, current interest rates and income information are not sufficient for

testing affordability of a mortgage,” says the RBNZ. It suggests that the wording from the responsible lending code should read: “ For products where interest rates are likely to vary in the economic cycle and over the life of a loan (such as mortgages), lenders should ensure that borrowers will still be able to service the mortgage if interest rates rise significantly.”

The RBNZ said that: “A strict debt-to-income limit is not an efficient way to ensure responsible lending,” and suggested “a more explicit interest rate buffers would be a more efficient option.” ✚

To find out more and explore how a Heartland Home Equity Loan** could work for your clients, try our online calculator at www.heartland.co.nz or call us on 0800 488 740.

** Heartland Bank Limited’s lending criteria, conditions, fees and charges apply. * Statistics New Zealand – New Zealand Income Survey: June 2013 Quarter

The median income for NZ retirees is just $20,228 per annum*.

At Heartland Bank we set out to solve a problem – many retirees aged 65 or over who own their own homes have a lot of money tied up in their property, but little left over once the day-to-day bills are paid for.

A Heartland Home Equity Loan** works by allowing your clients to borrow against the equity in their home without having to sell it.

It’s simply a mortgage with no need to make regular repayments – designed specifically for seniors.

HARMONEY LAUNCHES WITH $100M IN CAPITAL

NEWS

Harmoney is going head on with banks in the prime lending market writes Sharon Davis. New Zealand’s first peer-to-peer

(P2P) lender, Harmoney, officially launched its new lending service on

September 10 with $100-million in capital – a world first for any P2P lender.

Heartland Bank has bought an approximate 10% shareholding in Harmoney for an undisclosed sum. This makes Heartland the second largest shareholder in Harmoney, after founder Neil Roberts. Heartland will also be lending a significant amount through Harmoney’s lending platform.

“No other P2P funder has had institutional support before they launch. You can only do that if you have your back office in order,” says Harmoney founder and chief executive Neil Roberts.

Operating much like a financial dating service in the personal loan sector, Harmoney’s online lending platform links lenders and borrowers, effectively cutting out banks as the middleman.

“The problem with P2P lending is that you can sit around waiting for funding for two weeks,” says Roberts. But this won’t be the case for Harmoney.

“We’ve been working together over three to four projects, including personal loans. We developed a personal loan business from scratch a year and a bit ago. We saw the P2P law change and since then we’ve been heads down and bums up building the business and the team.”

Prime lendingRoberts plans to go head on with the banks in the prime lending market. “I’ve never heard of a consumer platform that has gone after sub-prime business,” he says.” It wouldn’t work. You wouldn’t get any lenders. We’re strictly for credit-worthy borrowers with a clean credit record – which is exactly who the bank targets.

“We couldn’t be more confident,” says Roberts. “We’ve had two high-level endorsements, one from the Financial Markets Authority in granting them their licence, and from Heartland Bank.

08

Neil Roberts

“We also did an exercise with Dun and Bradstreet and they gave us a Gini co-efficient score or 60 for credit modelling – which is the best score you can get.”

Their taglines: “Borrow for less; Invest for more,” neatly sums up the business model. Borrowers are able to borrow up to $35k over a three- to five-year term at interest rates of between 9.99% and 39.99%, depending on risk grade. The rates are expected to average out at lower rates than those available from the four main banks in New Zealand.

Real-time approvalRoberts says loan approval can take as little as five minutes. “It depends how quick you can type! Five minutes if you’re super fast, 10 to 12 minutes for the average person and up to 15 minutes if you have sausage fingers like me,” he says.

The online credit checking and approval is doneimmediately. “We get 90 days worth of bank statements almost instantaneously. We access 12 databases, including two bureaus instantly, and use in-built face scanning technology using a webcam – and you get a live decision within 120 seconds.”

The 35K cap on loans is not going to increase in the near term. Very few personal loans are for more than this and 35 captures 90% the market, says Roberts.

Retail investors can invest as little as $500, or more, and expect net returns of between 10% and 24%, depending on their risk appetite. Each loan is fractionalised and divided into $25 “notes” allowing investors to spread their exposure over numerous individual loans.

Mortgages and SME fundingHarmoney would consider grabbing a slice of the mortgage market, but this was probably a long way off. “Mortgages would be perhaps one of the most rewarding, but one of the hardest, for P2P lending – simply because of the margins,” says Roberts.

“We’re trying to build a great value proposition and the best lending experience. Once we have a strong business, then we really want to get into SME funding. We’d love to look at mortgages. We might find a niche way to enter the market, but it’s down the track.

“We’ve also got Australia to think about,” he says. The team is looking at the Australian market as well, and they are about to bring a couple of Australian bankers on board. ✚

" We’re trying to build a great value proposition and

the best lending experience. Once we have a strong

business, then we really want to get into SME funding.

We’d love to look at mortgages. We might find

a niche way to enter the market, but it’s down

the track. "

09

LENDERS WANT BROKERS INCLUDED IN NEW CODE

Currently the Ministry of Consumer Affairs is consulting with the industry on a Responsible Lending Guide. Almost

60 submissions were made on the discussion document, which is required under the Credit Contracts and Consumer Finance Act.

Lenders says brokers and advisers should be included in the code otherwise they will end up redoing advisers’ work.

Non-bank lender RESIMAC made a submission, saying the code needed to recognise the place of advisers.

“Without relieving the lender from its over-riding duty to adhere to the lender responsibility principles, the code must permit a lender to delegate certain activities to a trusted adviser. The lender should be entitled to rely upon information provided by a trusted adviser.”

RESIMAC said an adviser who abused their position should incur legal consequences, and the Financial Advisers Act should be amended to require a registered financial adviser to adhere to the lender responsibilities when dealing with a category two credit product.

Code requirements such as giving the customer a chance to ask questions and ascertaining that clients have sufficient understanding of the loans they were taking out needed to be amended to allow lenders to rely on advisers to have met those obligations, RESIMAC said.

Advertising requirements also needed to be adjusted to reflect the 25% of mortgages brokered by an adviser. “In the case of mortgages, the lender has no direct control over the information provided by a trusted adviser

There are calls to have mortgage advisers included in the new Responsible Lending Code.

to the borrower. Yet if the information provided to the borrower is misleading, deceptive or confusing, the lender, under the lender responsibility principles may be liable.”

Lawyer and industry commentator Jonathan Flaws, of Sanderson Weir, said it was important that the code reflected the roles and responsibilities of advisers. “It would be counterproductive and contrary to the interests of consumers if a lender considered that the Code meant the lender had to rework and re-verify each piece of information provided by the Adviser on behalf of the borrower.”

Kiwibank agreed, saying care should be taken not to prescribe processes that could not practically followed in circumstances where advisers were involved, such as the requirement that lenders meet face-to-face with borrowers. ✚

010

PAA OFFERS NEW ADVISER TRAINING

RE-FI BUSINESS OUTLOOK STRONG

The Reserve Bank says the average time to reprice a mortgage has doubled, but it is still extremely low.

In the recent Monetary Policy Statement it said the average time to re-price a mortgage has moved from a low of 4.7 months in 2012 to 10.9 months in July.

It also says borrowers continue to migrate from floating rate home loans to fixed terms. In April 2012 63% of mortgage holders were

The Professional Advisers Association (PAA) is set to launch a new five-day course, Mortgage Lending for New

Advisers, with its inaugural course starting in Auckland on September 29.

“In the absence of regulatory-imposed standards of competence, knowledge and skill, industry stakeholders agree that the course provides new entrants the training they need to provide professional and appropriate advice for clients,” says PAA chief executive, Rod Severn.

The course is National Certificate aligned and assessed at level five and includes three days’ mortgage stream training, and one day each of business and specialist lending and business development management.

“This course is an excellent foundation for new advisers,” says Angi Mann, learning and development manager at the PAA, says. “The practical format prepares advisers for their regulatory requirements; how to work with lenders; meeting client needs and the practicalities of running a mortgage advice business.”

“The new course is another example of the industry’s commitment to providing excellent advice,” says Severn. “We want more New Zealanders to use a mortgage adviser and to

benefit from quality advice. Professional development is one of the strongest tools we have to achieve this.”

An industry initiative, the course has received strong support from adviser dealer groups and lenders, with stakeholders actively providing feedback on the content and structure of the new training course.

“Westpac will make completing the new PAA training course, or a comparable qualification, a requirement prior to accepting a new application for adviser accreditation,” says Kylie Kneale, Westpac’s director of third-party banking.

Westpac views mortgage advisers as partners in building customer relations and that when people make the biggest purchase of their life the advice they received should be of the highest quality. “That is part of why we are supportive of raising the bar on the qualifications of the new advisers we work with,” she says.

The course is for both new mortgage advisers - those who are beginning their career in offering personalised mortgage advice - and for advisers who have not been active in the industry for more than two years. Advisers can attain the Mortgage Advice Strand of the National Certificate during the five-day course. ✚

on floating rates and that level has fallen to 29.9% in July this year.

There were about $11.3 billion of mortgage flows into the one-to-three year fixed rate buckets in the three months to July, which is up from only $3.9 billion over the same period a year ago.

The central bank notes there has been strong competition for home loans, particularly around the two-year fix point. ✚

011

A spring bounce in the property market may have been delayed this year but it hasn’t been eliminated entirely. That’s the message from

commentators who say, despite a marked reduction in turnover in August, better times are likely just around the corner.

Real Estate Institute statistics showed there were 5481 homes sold in August, down 16.3% from the same month in 2013 and down 7% from July.

Chief executive Helen O’Sullivan said the market appeared to be idling as buyers and sellers waited for the outcome of the election. But said the looming vote was probably not the only factor holding things back in August, because it was the 10th consecutive month of sales volumes below the level of a year earlier.

She said LVR restrictions were still being cited as a significant factor affecting the market but a lack of listings was also an issue in most parts of the country as low stock levels restricted buyer choice.

“All eyes are on listing numbers which would normally be increasing at this time of year, but which may be impacted by the timing of the general election. Prices are relatively steady, with the median price rising by 1% from July, and year–on-year price increase now at 7.7%. Auckland and Canterbury remain the dominant contributors to the increase in the national median price, with regions outside of these two areas representing just 14% of the increase,” O’Sullivan said.

“Price-wise the residential housing market remains a tale of two cities and the rest of the country, although the volume decline is now apparent in all areas.”

Property listings website Realestate.co.nz said there were 9482 new listings in August, 11.5% down on the same time last year. The fall affected most regions around the country, with only Northland, the Coromandel and central North Island bucking the trend.

Marketing manager Paul McKenzie said: “Every August, we start to see strong lifts in new home listings after the quieter winter months. The expected lift did come this year, but it’s not nearly as dramatic as in the past. For instance, we have seen an increase of 3.5% from July to August this year, compared to the same time last year, where we saw a significant lift of 8.7%. However, we still expect an upsurge before the end of the year, as new listings usually peak in October and November.”

While the total number of sales was down 16.3% compared to August 2013, REINZ said the number of sales below $400,000 fell by 24.8%. This follows a fall in sales below $400,000 of 21.8% between July 2013 and July 2014 and may be indicative of fewer sales in the lower price brackets since the imposition of the LVR restrictions.

REINZ’s national median price increased $30,000 on the year before, to $420,000. Of that increase, 70% was in Auckland.

Westpac’s economists said that once the REINZ data was seasonally-adjusted, it painted a slightly different picture.

The elections have put a pause on listings, but commentators expect the market to pick up soon.

012

HOUSING COMMENTARY

By Susan Edmunds

Slow spring warm-up for the housing market

Economist Michael Gordon said: “After adjusting for seasonal patterns, both house sales and prices edged higher for a third straight month in August, according to the REINZ's data. While the upturn has been modest to date, it supports our view that the housing market would regain some momentum over the second half of this year.”

Westpac expects the market to pick up over the rest of this year, before dropping off again.

QV’s latest Residential Price Movement Index shows that nationwide, prices have increased 6.9% over the past year and 1.7% over the past three months. That’s significantly down from the 10% year-on-year price rises that it was reporting in December.

Spokeswoman Andrea Rush said: “Home values in Auckland, Christchurch and Tauranga are still increasing but at a slower rate than this time last year. Hamilton and Dunedin home values have decreased slightly and Wellington values are continuing to show the downward trend seen over the past few months. Sales volumes and home loan approvals are down year-on-year and interest rate rises, LVR restrictions and the upcoming election appear to be keeping the number of homes on the market low as well.”

Auckland valuer Bruce Wiggins said: “Winter has seen a continued reduction in transactions and listings are low across the Super City region. The upcoming election may also be a factor in the market being quiet as

well as people wait to see the election result before making a decision. Good properties are still attracting good money but if there are any issues with a property then it is likely to take longer to sell.”

He said new builds were selling well, for good prices. “As there are no LVR restrictions on lending for new builds this may account for the stronger interest in this sector.”

Property commentator Olly Newland said he expected to see a spring lift once the election was out of the way. He said buyers and sellers had been nervous about the possibility of a capital gains tax from a Labour government.

He said if one was introduced, it would push up prices because sellers would withdraw their properties from the market.

Newland expected the market would be helped by the Reserve Bank’s indication that interest rates could stay low for some time. Markets have priced in the next move in the official cash rate in seven months’ time, and floating home loan rates will likely stay at current levels until then.

Fixed rates, which are largely determined by what is happening in offshore markets, may come down.

Newland said loan-to-value restrictions, limiting the amount of low-deposit lending banks can do, were still having an impact and were keeping people renting for longer – pushing up rental prices in the cheaper end of the market.

Some apartments in central Auckland were good buying, he said, selling for less than half the cost of new units.

He expected turnover to return to 2013 levels by next year. “If the New Zealand dollar drops considerably we’ll have an influx of buyers. They’re holding back but pulling the dollar down will have an inverse effect on foreign buyers. If it drops 10% their money will be worth more.”

Auckland real estate agency Barfoot and Thompson is also expecting a busy couple of months. It reported a 7.5% drop in sales in August and turnover was down almost a quarter compared to August 2013.

The average sales price was down 1.1% to $711,768 compared to the month before but up almost 10% on the same time a year earlier. Peter Thompson, the company’s managing director, said it was common for the market to go quiet in the lead-up to an election.

“Buying or selling a house represents a major financial decision, and without certainty people put that decision on hold. It means the normal lift in market activity we see with the approach of spring is still some weeks off.”

He said market certainty would return after the election and the last three months of the year would be busier than normal. ✚

013

REINZ SALES: DOWNTurnover was down 16.3% in

August on the same month in 2013.

INTEREST RATES: UPFloating rates are likely to

remain on hold for now and fixed rates could fall.

IMMIGRATION: UPImmigration is still at

10-year highs.

RENTS: UPRents are picking up in the bottom

end of the market. Government statistics show a nationwide average

4.7% annual increase in the price of four-bedroom rental houses.

MORTGAGE APPROVALS: NEUTRAL

Lending has dropped compared to last year but more loans are

being issued now than were granted in the middle of the year.

OCR: UPThe OCR is unlikely to move

again until next year.

BUILDING CONSENTS: NEUTRAL Activity is picking up but is

not yet at a level where it would have an impact on prices.

" Buying or selling a house represents

a major financial decision, and

without certainty people put that

decision on hold. It means the normal

lift in market activity we see

with the approach of spring is still

some weeks off."

014

Anecdotal evidence suggests property investment activity is up. Sharon Davis looks at the market potential and what advisers need to do to be successful in this market.

The LVR restrictions which came into effect on October 1, 2013, had a noticeable impact for advisers who focused most of their attention on the first home

buyer market – particularly those outside Auckland and Christchurch.

The property investment market appears to have picked up just as the first home buyers slacked off, which could mean this segment is worth considering as an alternative income stream for advisers.

A lot can be said for spreading your business activity over a number of buyer markets, so how active is the investor market at the moment?

Investor activitySince the beginning of the year, lenders and advisers have reported that property investor market appears to have notched up a gear with lots of activity. Industry statistics suggest this might have tailed off, so we spoke to several advisers who work actively with property investors to find out more.

According to Kris Pedersen, of Pedersen Mortgages in Auckland, there was a spike in property investor activity. Although this might be slowing, he says, the market is “pretty” active. “The market is pretty active. The LVR rules made it interesting. From October to February we were busier than normal. Home buyers were not at auctions as much and property investors were able to close more deals. Our conversion rate spiked for four or five months and activity has increased outside Auckland again.”

Auckland-based Glen McLeod of Edge Mortgages says the increase in business is not necessarily because property investors are more active, but rather because more investors are seeing the value of using advisers.

“Statistically speaking, the property investment market is not really busier, but we are seeing more property investors dealing with mortgage brokers,” says McLeod. Traditionally clients went directly to their bank and had all their properties with one lender.“Now they are seeking advice on how best to deal with things.”

Andre Hutley of Vantage NZ says 95% of his business is with property investors; he agrees that the investor segment of the property market is “pretty active” – particularly in Auckland and Christchurch. There is not as much activity in Wellington, where Hutley is based, but a lot of Wellington investors are buying outside of Wellington, he says.

Market potentialShould advisers look into the property investor segment area? Advisers active in that space seem to think so.

“It’s a good area to be in from a loan-size side. It’s never to be sniffed at,” says McLeod.

One of the benefits of working with property investors is that they are not looking in one area and will consider suitable properties with a wide geographical spread. This meant that an adviser’s business would be less vulnerable if property sales in their traditional areas happened to slow down.

015

Another advantage is the higher potential for repeat business. “With a home buyer it will be years and years between transactions,” Pedersen says. “With an investor, there is a much higher chance of repeat business.”

But he warns it’s not the best place for newcomers to start off. “For new entrants with no experience in property investment, it’s not the market to start in. The bank’s job is to look after the bank and tie up the investor as much as possible. Our purpose is just the opposite – and quite a bit of understanding goes into this,” he says.

“The property investment market is a good market and you need to play in it if you are a broker, but it’s important to stick to your values and be honest, even if that means you won’t write a loan,” says Auckland-based John Bolton from Squirrel Mortgages.

But he cautions on focusing solely on this market. “I’d never recommend building a business around this segment as it’s too volatile. You also risk your independence if you are working with refers who are ‘selling something’,” he says.

Investor’s needsGiven that the investor segment of the market has some appeal, it’s worth looking at what is involved in dealing with investors, and what their needs are.

“Investment lending is quite different,” Hutley says. “It’s not just about finding the best deal. You have to think about lending structures, and separating the lending between the home and investment properties.

“As a mortgage adviser, I’m concerned about what is in my client’s best interests, not the bank’s. They will take any security with any guarantees that they can – and my job is to restrict that!

“I’m always thinking about how to separate things and ring fence them; thinking about accounting issues; thinking about legal issues; about the clients’ end game.

“Most lending for property investors is not done that well – I get to fix a lot of it! You have to think about things completely differently from writing a mortgage for Mum and Dad to buy a home,” says Hutley, who has been working in the property investment space for 10 years.

Structure and adviceInvestors are looking for the value that advisers bring to the deal. McLeod says: “Clients want more than an approval – they want to structure things better. Our role is not just about getting the best rate. We’re more for the long-term interests of the client, referring them to an accountant for proper tax advice and separating family homes from investment portfolios, and moving some homes into trusts…”

"Mortgage advisers offer expert knowledge with regards to the products out there. Different lenders have different rules for different property types – and a broker might recommend one lender for one type of property and another if you were looking in the apartment market, for example,” says PedersenSays.

Bolton: “Investors need to understand what the options are across different lenders and not have all their eggs in one basket” – and

this is where using a mortgage adviser saves investors time and money.

“It’s not simply about the best deal. Clients could do that themselves. It’s about a relationship where we can help them make better decisions, help them plan ahead, and be there to help out if something doesn’t go as expected. Often the time clients most value a broker is when something doesn’t work out the way they expected and we help them solve it.

“I had a client recently get separated. He had a number of properties and needed to find a way to pay out his ex-wife and retain the properties. We worked through it with two different banks and got him an exit strategy that preserved his equity. He only needed to sell one property,” Bolton says.

Large investors, particularly, require a lot of care, Pedersen says. You need to look from an asset protection point of view. You would have one lender for the family home, but you wouldn’t want to lock in another investment property with the same lender because they will look to cross secure the properties. “If they’re cobbled together you could lose all your proprieties in a domino-like effect if things go wrong,” he says.

“Property investors need to get good tax advice to help them decide whether to apply for finance in their personal name, the name of a company or a trust,” Pedersen says. He also suggests advisers should “spend time with their clients and show when how they appear to the bank and how the bank look sat them from a servicing point of view – because

banks don’t explain their servicing rules.”

Skills and trainingIf the investment market is still sounding like an attractive opportunity, the next question to consider is what you need to learn to operate successfully in this space.

Hutley says working with property investors is quite specialised work. “You’ve got to put in the time to do it properly. You need to understand the tax and legal implications of the particular lending structures. There’s no course on this and the banks aren’t going to teach you this.”

He suggests the best way to get this specific knowledge is to work with someone who specialised in mortgages for property investors, a path Hutley used himself.

He started investing in property 15 years ago. Roughly 10 years ago, he went to work for the company that did all his property finance, learned the ropes, and eventually bought the business.

Everyone interviewed by TMM agrees that direct experience as a property investor in your own right was almost a pre-requisite, as is a passion for property investment.

“I was interested in property investment before I became a broker, in fact my property interests got me into property finance and then into broking,” says Pedersen. “You have to love property investment.

“A large proportion of property investors are self-employed. This means you’ll need to understand their business financials. You also need to know the ins and outs of retail, business and commercial banking rules…a better understanding of the whole banking sphere. It’s very different from first home buyers,” says Pedersen.

Bolton says: “You really need to understand property investment and be prepared to say what you really think. A lot of the brokers that work in this space leave their values at the door. How many brokers let their clients to buy crap properties without being honest with them about what they think?“

It’s important that anyone entering this market makes sure they’ve got all the knowledge they need. “I’m a property investor myself, so I have a lot of knowledge and interest in the area,” McLeod says.

A change is taking place as far as requirements for advisers are concerned, McLeod stresses. You can see it with Westpac requiring new mortgage advisers to meet a certain level of training before they are given accreditation, he says.

You have to accept that training will become part of your life – you’ve got to continue to learn, McLeod says, particularly because banks are going to start looking at the quality of applications and conversion rates.

New rulesOngoing training and staying abreast of developments is essential in the property investment market. The RBNZ is in the processing of finalising new regulations which will affect the way some banks deal with investors with more than five properties. See P16 for more.

"Statistically speaking,

the property investment

market is not really busier, but

we are seeing more property

investors dealing with

mortgage brokers."

- Glen Mcleod -

The RBNZ is introducing a new asset class for investors with more than five properties. TMM looks at the new five property rule and what it means for property investors.

Five Property

The Reserve Bank (RBNZ) plans to introduce a new rule that will affect property investors with five or more properties. Under the new rule, which is now expected

to come into effect early in 2015, a property investor with five or more properties will be treated as a business rather than fall under the residential investment rules.

The implications for investors with more than five properties is not yet clear, but the risk weighting to the debt increases under the business category, which could mean that lending costs charged by New Zealand’s banks would then also increase.

According to the RBNZ, the standard practice

internationally (recommended by the Basel Committee on Banking Supervision) is to restrict the residential mortgage loan sub-class solely to owner-occupiers, with loans to property investors placed in a different asset class.

Banks in New Zealand currently tend to group all residential mortgage loans in the same sub-asset class, regardless of whether they are to owner-occupiers or for a property that is being rented out.

The rule change is part of a wide-ranging review of requirements undertaken by the RBNZ. The regulatory body started work to clarify the way that banks calculate their capital requirements for housing loans back in March 2013.

017

The RBNZ says: “A consultation in September 2013 highlighted the intention to align our capital requirements with internationally recommended practice. This was followed by publication of a summary of the submissions we received and a statement of our policy decisions, which confirmed our intention to broadly align with international practice.

“A further consultation on the wording of the clarified requirement was carried out in March this year. That consultation raised some technical issues about implementing changes to the classification of residential mortgage loans for banks.

“Our most recent statement on this topic, in mid-June this year, deferred the introduction of the requirement to group exposures to residential property investors in a new asset class until 1 December 2014. We now expect implementation in early 2015.

“The rule clarification we’re working on seeks to eliminate current ambiguity, so that loans to property investors are classified consistently and correctly in line with their riskiness. In practical terms, this means that some (but not all) banks may have to reclassify some of their lending.

“The pricing of loans for property investors is entirely a matter for negotiation between investors and their banks, and is not regulated by the Reserve Bank.”

➜ The purpose of the change is to maintain financial stability, which the RBNZ seeks to do through the regulation of capital requirements for banks.➜ The banks’ assets are grouped into five asset classes: banks, sovereign, corporate, equity and retail when calculating the capital requirements. This ensures that loans with similar risk characteristics are grouped together.➜ The RBNZ requires banks to hold more capital against exposures to higher-risk asset classes.➜ Under the RBNZ’s current requirements, a bank may be accredited to calculate its capital requirement by using its internal (credit) risk models. The big four banks in New Zealand have this accreditation. The new requirements refer to the capital calculation of the four banks on the internal models approach.➜ All other locally incorporated banks use a standardised capital calculation.

[Source: RBNZ]

THE NEW RULE CURRENTLY READS:

“If the bank has recourse to, or is aware of, more than five properties owned and let by the borrower directly or through a company or any other ownership structure of the borrower, and the loan is predominantly serviced from the rental income those properties generate, then the loan can no longer be classified as a residential mortgage loan but should be classified as either income producing real estate or SME retail lending. The bank is required to verify whether the customer has any other rental properties or residential mortgage loans with another lender or lenders as part of its credit origination process.

“For the purpose of this section, predominantly means more than 50%.”

THE REGULATORY CHANGE IN A NUTSHELL

"The rule clarification we’re working on seeks

to eliminate current ambiguity,

so that loans to property investors

are classified consistently and correctly in line

with their riskiness. In practical terms,

this means that some (but not all)

banks may have to reclassify some of

their lending.” – RBNZ –

What does this mean for property investors? John Bolton from Squirrel does not think it will change it much, “but it will lead to more consistency across how banks deal in this market. Pricing might shift a bit away from aggressive retail pricing and cash backs.”

But for most brokers, it seems less clear.“If we knew what the implications were

we could comment,” says Wellington-based Andre Hutley from Vantage NZ. “I’ve been pestering the banks every week. Does it mean higher interest rates? Lower LVR? Who knows? Does it apply if you own five properties overall, or only if you have debt on five properties? At this stage we don’t know.”

Kris Pedersen from Pedersen Mortgages agrees that the implications are still uncertain: “We’re waiting for more information. It will have an impact, but we’d need to see the final draft of the rules to know what that is.

“A lot of bankers are still not sure themselves,” he says. “We don’t know if the servicing rules will change or if investor clients are going to pay more.”

“We’re discussing the possible implications with the banks and strategising," Auckland-based Glen McLeod from Edge Mortgages, says. “It is still in the watch category – but it should be something that everyone is aware of. It’s still evolving and it’s going to take some time to get our heads around it. There can still be a lot of changes,”

“Investors are going to have to sit down with their accountants and mortgage advisers and discuss how best to structure their properties, but its still very much up in the air,” he says.

Grey areasPedersen says the rule also doesn’t necessarily make sense. “How can you say that five properties at 60% gearing are a greater risk than four properties at 80%? It’s a simplistic way of looking at it – and there are many grey areas.”

If, for example, you have two property investors who could both buy properties themselves, but would prefer to work together, this could create a problem. They could buy five each (a total of ten properties) before being affected by the new rule, but together their sixth purchase would probably fall under the new rule. We have to figure out how it is going to be handled, Pedersen says.

There’s also the question of whether the five properties are defined as titles or dwellings. This is another grey area as banks already treat this differently.

With ANZ, for example, you need to own five or more dwellings before you become an investment banking client. This means someone with a cheap apartment with six dwellings at the bottom of South Island moves to investment banking with one relatively low-cost property purchase, while an investor with four prime Auckland properties is still on retail

banking, says Pedersen.“I’m picking the five property rule will

be based on titles, rather than dwellings, but we need to know how all of this is going to work so we can advise our clients,” he says.

Uncertainty also exists whether non-bank lenders are bound by this new requirement. ✚

The property investor market is one which many mortgage advisers should consider operating in. TMM Publisher Philip Macalister talks to Westpac Director of third party banking Kylie Kneale about the changes the bank is making to help advisers in this market.

TMM: How big is the property investment market in New Zealand?

Kylie: About 300,000 New Zealanders own a residential investment property.

TMM: What are Westpac’s objectives in this sector?

Kylie: Our objective is to position Westpac as the bank of preference for customers looking to purchase a rental property and highlight the work we are doing in this segment. This includes providing advisers with a depth of information on Westpac loan products and policies suitable for these customers helping Westpac be more of a competitive option for advisers' customers.

TMM: Can you provide some demographic information about this market?

Kylie: Our research shows these customers tend to be between 30 and 65 years old with 70% of this group being 45 or older. Overall half of this group own between one and three properties.

TMM: Your research provided some interesting insights into why people purchase rental properties. Some are a surprise, but they

also give advisers some ideas about talking points with customers. What did the research show?

Kylie: Our research identified two main reasons for wanting to purchase a rental property. The first is no surprise - they want to grow their wealth, often with a focus on preparing for retirement. The second is purchasing with their family in mind with many looking to help their children into property.

Whatever the motives there are two key customer groups - those looking to buy their first rental property and those who are already landlords.

For those customers looking to buy their first rental property there are three drivers advisers can focus on.

➤ These customers may be experiencing a key trigger that has them thinking about purchasing a rental property. This could be a partner returning to work, a child leaving home or turning their focus to retirement planning.

➤ They may need to find the balance of paying off their own owner occupied home loan and re-investing their owner occupied home’s equity into a rental property.

➤ They are very active seekers of information and look for support from numerous areas including friends, family members, seminars and online resources.

The group we call next timers are a bit different.➤ Landlords, and those looking to buy

another rental property, tend to be more focussed on developing an income stream from a number of rental properties via rental income or capital gains with the intention of creating for themselves a retirement nest egg.

➤ The major difference between these customers and first timers is that they are beginning to run their portfolios more like a business and they may be focusing more on factors such as risk and cash flow than before.

➤ They are also looking for more personalised information which they can use to help grow their portfolio and enhance their returns.

TMM: One of the characteristics of property investors large or small is that they like lots of information. What new offers has the bank developed in this area?

Kylie: We are providing mortgage advisers with up-to-date information on the residential investment property market to help individual advisers be more competitive and knowledgeable.

As you mentioned this is a segment of the market which does a lot of self-research and is

Helping tackle the property investment market

018

TMM: Investors are keen on interest-only loans. What does Westpac offer in this area?

Kylie: Westpac is the only bank to provide up to 30 years interest-only. Interest-only is often used by customers with rental properties to keep their repayments to a minimum and cash flow to a maximum.

TMM: One of the things we hear from mortgage advisers is that our segmentation isn’t always clear and it’s not very clear when a retail customer is considered a commercial customer. Can you clarify this?

Kylie: We had a lot of feedback from mortgage advisers about when lending goes to commercial. At the moment it is a $1.5 million threshold, but it’s not a TAE threshold. It’s only on the amount of lending that is rental reliant. Whatever they can service under their own personal income is not included.

TMM: Westpac is the only bank working with mortgage advisers which offers an offset product. Is this useful for customers looking to purchase a rental property?

Kylie: We have looked at Australia and what they are doing with offset where they have had a lot more traction with the product. Specifically we have talked about the way that property investors can use it. If they have extra funds coming in they can park that into their transaction or savings accounts.

When they reuse that money later the lending is untouched and interest payments on the loan will still be classed as finance for business purposes. We will be providing more details on how this works in our updates over the next two months.

TMM: What else is Westpac doing to help mortgage advisers in this market?

Kylie: One thing we have found about the whole market is that it is quite saturated with information, particularly in Auckland. There’s a lot that goes on so we are trying to focus on the role the bank can play; what products do we have to offer; how to restructure

your repayments and those sorts of things.In some areas we are doing first home

buyer seminars with mortgage advisers, accountants, lawyers and valuers together in a branch.

We are collaborating more with advisers in bringing those services together and this is giving some great leads for all parties.

They are jointly run and they are about meeting the needs of the region. I would encourage mortgage advisers to work with their local Westpac business partners, especially in areas where we don’t have strong mobile mortgage manager presence. ✚

really keen on using self-empowered tools and resources to help them in their decision making.

In response to this we have developed a number of great online resources such as a new property investment calculator, an online guide for customers looking to purchase a residential investment property alongside our great Property Investor report which we will release again around October or November. While the public will receive a high level version of this report, mortgage advisers will be given a more in depth version that they can use to assist their customers.

From an advisor point of view however we found, that though these residential property investors like to self-research they do want assistance from the likes of an advisor when it comes to making the decision to actually purchase. Many saw the likes of advisors as very important, providing help in confirming what they are thinking; helping them through the areas they don’t quite understand and asking the questions they may not have thought about.

TMM: What will the online calculator provide customers?

Kylie: There are two key versions: “How much could it cost me?” and “What might my return be?” “How much could it cost me?” is more for the first-time rental buyers focussing on what a new property may cost from a cashflow perspective while “What might my return be?” looks at what the long-term cashflow and equity returns could look like.

019

LEGALPAA

Generation Y is leading the shift in purchasing power. Michelle Harrison tells us more.

By Michelle Harrison

020

People may have been buying houses forever [in one shape or form], but how we purchase continues to change as new waves of consumers become home buyers.

Generation Y – or Millennials as they are also known – have come of age. As the biggest generation since the Baby Boomers, born between 1980 and 2000, the purchasing power of Generation Y is on the rise and in four years will account for 24% of the consumer market in New Zealand.

While this emerging consumer power isn’t fundamentally different from other generations in what they need and want, they do represent quite a shift in how we connect with and win new clients.

With this consumer group becoming increasingly important for the mortgage advice industry, we thought it would be interesting to gather some observations from advisers on working with Generation Y: What they are looking for and how to win their business.

Connecting with Gen YStarting at the beginning of the client relationship, or even before, Steve McCullough from Loan Market say the main issue – as well as opportunity – is how to connect with Generation Y earlier in the decision making process.

“It’s about how you connect with someone or get involved in their decision making even before they’ve decided to buy a house. It really is becoming a race to the start due to the amount of Facebook and other advertising targeted at them.

“There will always be room for building relationships and giving specialty advice, but the challenge will increasingly be how to connect with them before everyone else as online increases in importance.”

Online communities and social media play a big role in winning favour with this generation of tech-dependant consumers. As Darrin Franks from Conetworkz Management Solutions comments, creating opportunities to have conversations online is an important part in winning the Generation Y client.

“New generations live online and find their information online,” says Franks. “The value argument for an adviser has to be there [online] to connect with Generation Y, and you have to be prepared to constantly engage with them.

“This isn’t just the domain of big companies; small business can do this stuff but of course you have to think about practical ways to deal with it. It’s about maintaining relevance.”

This has been the experience of Karen Mooney from Lifetime Group. “I use Facebook for new client acquisition, but also just for keeping in contact. If I send an internal message on Facebook, they respond. But on the other hand, leaving messages on mobiles phones doesn’t always work.

“I guess the point is that if that’s where [Facebook] your consumer is spending their time, then you move to you consumer.”

Gen Y’s channelsLisa Meredith from Loan Market also points to the importance of moving with the needs of Generation Y. “They are definitely bringing

change – slicker websites, online communities. These channels are being driven by the younger generation. They expect to be able to find you online and really, you’re off the shopping list if you’re not.”

While online and technology in general plays a big role in the lives of Generation Y, it’s important that this doesn’t distract from what these actually help deliver. And that is experience.

It’s all about the experience for Generation Y, which is good news for mortgage advisers. Why? Because advice is an experience. But the trick is figuring out how to deliver that experience in a way that resonates with this new generation of home buyers.

Consider the Generation Y clients you have worked with – what kind of experience do you think would get them chatting up a storm in their online communities? One example Mooney refers to is simply working with Generation Y’s preference for visual communication.

“I find that my Gen Y clients really respond and appreciate visual ; they respond well to visually supported communication. You have to present things in ways that suits your clients and in my experience this is what works for a lot of Gen Ys.”

Similarly, it is about where and how they like to communicate. As Franks comments: “Gen Y tend to think in sound bites and they’re looking for solutions that are more timely in delivery than perhaps even Generation X.”

Meredith agrees: “They really expect prompt turnaround and if they email or text you they want some pretty quick answers.” But different from previous generations, a prompt response is more often also a short response, as McCullough points out.

Sounding board“Often Generation Y are simply looking for quick answers to single-questions. When you look at communication in general, it’s not like you save up your questions and then have in-depth discussions. Rather, you have a question and you get an answer. This is how Generation Y use texting: You’re a sounding board for a quick conversation.”

Dedication to researching a product or service first is one of the other well-known attributes ascribed to Generation Y.

“Overall, I think they are a lot more savvy and researched. They know what’s out there and they’re more interested in knowing that you know what you’re talking about,” says McCullough.

It makes sense of course – this is the generation with the highest education rate (they’re used to research] and have grown up with the world-wide-web at their finger tips. But that doesn’t mean that they are not as equally open to the value of an expert facilitating the right solution for them.

“As we know, there is only so much information that can be found online and the important part of the picture comes from experience,” says McCullough. “This is how we can evidence value for Generation Y clients – by bringing it all together into a tailored plan, relating the information to them personally.”

Meredith agrees and says generating awareness of this is an opportunity for advisers going forward. “I think Generation Y who are aware of what advisers do, definitely see the value – both in terms of expertise applied specially to their needs and time spent by the adviser.”

Building relationshipsThe way the advice industry connects with and grows relationships is changing – again. But in one very important way; Generation Y are no different from the generations before them – quality advice is needed just as much, if not more.

“Our role will certainly be relevant in 10 years as it is today – perhaps more. There is minefield of information online and you need someone with experience to filter it and ensure that it is relevant to you,” says McCullough says.

“But there’s no doubt that how we connect and communicate with new clients is changing and we have to move with how our clients want to interact with us.”

Mooney agrees: “I think a big part of working with Generation Y is being creative and reaching them where they are – not expecting them to come to us. You have adapt and just enjoy going with it.”

They’re here and are a growing consumer power. Generation Y may represent the need to change some practical facets of your business, but as a generation focused on experience and with influential online communities, they are a huge opportunity for your business and the mortgage advice industry as whole. ✚Michelle Harrison is attached to PAA Communications

Karen Mooney

❝ I think a big part of working with Generation Y is being creative

and reaching them where they are. ❞

021

022

LEGALSALES & MARKETING

By Paul Watkins

is your

a waste of time?

023

Once upon a time all you had to do was put up a simple website that was basically your online brochure. It had the standard options: About Us,

Services, Contact Us, and perhaps Testimonials. To get traffic you simply identified key words and made sure you over-used them in your text.

But then life changed. Websites look and work differently now. How we search online has changed and search engine optimisation (SEO) has also gone through a radical change. Add to this the fact that more than 50% of all searches are performed on phones or tablets, and a site from 2005 is now considered from the dark ages in website terms… and then consider if your website is really working for you.

Get your site rightThink of your own internet habits. You want a new TV, so you search for reviews or consumer rankings on the “best”. Once you’re happy you know exactly what you want, you then look up Pricespy or other similar sites to see who has it at the cheapest price.

Or perhaps you’re standing in a video shop and are unsure whether to hire the movie you have in your hand. So you look up IMDB.com on your phone to see its rating. Then one evening, you receive a call from an insurance provider. While the offer to see you sounds okay, you immediately look them up on your tablet and see exactly who they are.

We live our lives on the Internet. We bank, shop, keep up with news, entertain ourselves and work on it. As a result it has become so much a part of our lives that we rarely do anything without consulting its immense database of knowledge. And it’s exactly the same for professional services.

My GP recently told me that she is heartily sick of her patients arriving with a piece of paper printed from the internet, and beginning the conversation with: “I think what is wrong with me is…”

You know all too well that awareness of your personal brand and services is what drives business. Why would they deal with you if they haven’t heard of you or know nothing about you? You do a letterbox drop, advertise in the press, run a telemarketing campaign, or touch base with existing clients. In every case, there is a 90% or higher chance that they will look you up on the web. And what will they find?

❝ A term you will frequently

hear in relation to websites is that

content is king ❞Content is kingA term you will frequently hear in relation to websites is that content is king! A website’s content, far more so than its products or services, is what attracts visitors. Do you provide a reason for people to spend more than a few seconds reading your pages? Do you offer something of genuine value, something that will enlighten or inform them or make them think: “Wow, this person really does know what they are talking about”?

By the way, if you can't write good content yourself, get someone to write it for you – it’s definitely worth the investment.

So what does this valuable content look like? Start by asking yourself what a visitor would learn from reading it. Will it tell them what to look for or be wary of when taking out a mortgage? Would they learn current issues around loans and what they can do? This is how you must think about your content. Website visitors do not want to be sold to; they want to learn.

Some good ideas for content include frequently asked questions (FAQs). It should be easy to run 10 questions that your clients frequently ask you and offer one-paragraph answers. A bonus of this sort of content is that each question then becomes searchable in its own right.

Relevant servicesThe single most popular search term on the Internet is: “How to…” with the sentence completed with whatever the searcher wants to know. So if some of your questions started with, “How to get the best deal on a mortgage” or similar, then this increases the chances of your site being found. You can then link the answers to the relevant services you offer on other pages on your site. This way your valuable information subtly links to a sale pitch.

In case you are worried, you’re not giving away your expertise for free by doing this. Your prospective clients will still work with you,

no matter how detailed you get. Their impression will be that you clearly know what you are talking about.

Another idea for content is to rewrite industry flyers. Take the basic text, remove the jargon, and add slightly more emotive language and perhaps your own comment. This should not only apply to mortgages, it could be insurance, credit cards, personal loans or anything personal finance related.

Write rants. You might feel strongly about something such as council rates, bank profits, the state of the housing market or recent government policy. Be careful not to take sides or defame anyone. You could start with such lines as, “I can sympathise with first home buyers…” The idea is to show that you are human and have opinions. These will often allow the reader to instantly identify with you.

Update contentIt is important to keep your content fresh. The easiest way to do this is to run a blog. This is like a diary of your thoughts.

There are no rules as to the frequency, but monthly is a good start. Write maybe two paragraphs each time on a topical subject. It could be anything from the list already discussed. It can also be articles from your newsletter.

It doesn’t have to be a revolutionary new item each time, just an update. For example, you could publish an article titled, “How to get the best mortgage deal out of your bank” and then six months later add a new one called, “The new rules for getting the best mortgage deal out of your bank”.

SEO The last topic I wish to touch on is SEO. Internet users almost never search beyond the first page of search engine results for any given search query, so when your website does not appear on that first page, the chances of anyone finding your website through a search engine becomes next to nothing.

SEO is a very difficult thing to get right and as soon as you do, Google changes the rules on you! If you’re serious about getting high rankings, then you need to engage an SEO specialist. Such firms typically charge around $300-$500 a month to maintain your rankings, so you would need to build this into your annual marketing budget.

However, there are things you can do yourself that make a difference. This is a big topic in itself, but the best advice is to go to Youtube and type in, “How to get better search rankings 2014”. There are literally thousands of videos on this subject. Make sure you include 2014 as the rules change so often that you need to be up-to-date on current thinking.

The value of a web site is growing all the time, so it’s worth spending time getting it right. But if it’s simply an online brochure then it is a waste of time. ✚

Are you investing enough in your website to ensure it works for you, asks Paul Watkins?

INTEREST RATES

Chris Tennent-Brown

RBNZ on hold, global rates pressing lowerWhile the Reserve Bank of

New Zealand has been putting through four rapid-fire Official Cash Rate (OCR) increases this year, other major central banks have been generally steering

along a steady monetary policy course, or in the case of the European Central Bank (ECB), easing policy settings. This in part reflects the fact that most developed economies have not enjoyed the strong economic growth we have seen in New Zealand over the past year or so.

Europe has been particularly weak. In July the ECB took the unprecedented step of cutting its deposit rate to negative territory. In September, the Europe’s central bank cut the deposit rate even deeper into negative territory, and launched other measures to try and simulate the European economy. An upshot of these developments offshore is that global interest rates are incredibly low. For example, the German 10-year government bund is now at an all-time low, yielding less than 1%. New Zealand’s equivalent 10-year Government bond yields over 4%, a much higher return, although low by our own historical standards.

Although our economic growth has been strong over the past year, recently there has been a softening in the tone of some domestic data. In particular, the sharp decline in global dairy prices means dairy farmer’s incomes won’t be as strong next season as they have been in the season just gone. We have also seen a continued easing in business confidence. While the level of business confidence is still consistent with healthy levels of expansion, the downward trend of late is of some concern. The particularly sharp decline in confidence in the agriculture sector reflects the drop in global dairy prices. The RBNZ has indicated it will now take time out to assess the effects of the 100bps of OCR increases it has put through this year, as well as the other developments here and abroad. We expect the RBNZ will now keep the OCR at 3.5% until March next year.

The RBNZ is expected to keep the OCR at 3.5% until March next year.

024

"Since March, despite the RBNZ’s

rate hikes, fixed-term mortgage rates have been

held down."

What does it mean for future mortgage rates? So why does all this matter for local borrowers? Firstly, floating rate mortgages move fairly much in lock-step with each RBNZ move, and have lifted 100bps, or 1% so far over 2014. Accordingly, the RBNZ’s signal to pause likely means a period of stability for floating mortgage rates. But secondly, for fixed term mortgages, particularly the 2-5 year terms, these global developments have been an important influence (on top of the RBNZ’s influence via the Official Cash Rate). Over the year ahead we expect that developments in the economies and financial markets of the US and Europe will be a key influence on where New Zealand term mortgage rates settle.

Despite the signs of local growth starting to slow to a more sustainable pace, and the RBNZ’s signal to pause, we still expect the RBNZ will lift the OCR to 4.5% by December 2015. That’s another 1% or four 0.25% hikes above the current level.

We expect other central banks will join the RBNZ in lifting rates next year too, adding to the upward pressure on rates. Kiwi mortgage increases will be greatest for rates of up to 2 years maturity: these terms will steadily reflect the effect of the rising OCR. In contrast, longer-term rates have less to move as their time periods mean that for some time they have been factoring in the tightening cycle.

Our peak OCR forecast of 4.5% implies the variable mortgage rate will reach around 7.75% (reflecting a fairly direct transmission of the 1% of expected OCR hikes). We expect short-term

fixed rates to eventually settle near 7% and the 5-year rate to settle around 0.5% higher, near 7.5% - 7.8%.

Since March, despite the RBNZ’s rate hikes, fixed-term mortgage rates have been held down (and have at times dipped), as global interest rates declined. Bank competition has also been fierce and margins have been tightened to lower some of the fixed rates on offer. Both of these influences contributed to relatively low 1- to 3-year fixed rate specials at times over recent months. It has actually been possible for borrowers to sometimes access fixed-term rates that were lower than when the RBNZ began raising rates back in March.

It is impossible to predict the exact mix and timing of bank competition, and strong downward pressure on local wholesale rates stemming from offshore interest rate markets. But the RBNZ’s signal to pause, and the low global rates are helping keep the six-month rate and some targeted ‘specials’ on offer under 6%, significantly below the floating rates at the time of writing. Borrowers should monitor these developments, and discuss the options with their mortgage providers if they are looking to fix.

Identifying the best strategyWithout the benefit of 20/20 hindsight, the best choice to make as a borrower right now will involve assessing the likely path for interest rates, the various risks to that outlook, and personal preferences for certainty and flexibility.

Despite all these variables, there are still a number of things that we can identify.

Firstly, the 6-month rate is the cheapest rate right now, and is below the floating rates. So borrowers can create some certainty, and obtain a lower rate than floating by fixing for short terms. In fact, many of the carded rates at the main banks out to around 36 months are lower than floating rates at the time of writing.

Secondly, all fixed rates are still 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 use our forecasts to calculate the expected cost of other strategies such as rolling six-month or 1-year terms for the next 5 years, and compare the interest rate expense to the interest rate of the fixed terms available today for longer terms. Based on our forecasts, rolling these shorter terms is still a cheaper strategy than locking in the longer terms such as the 4-year to 5-year rates. But this really hinges on our view that the RBNZ’s next phase of its tightening cycle will be far more drawn out than the phase just completed, and the

Home Loan Rates %%

Source: ASB

September 2013current

2-year ahead

1-year ahead

6

7

8

9

6

7

8

9

55Variable Rate 1-year rate 3-year rate 5-year rate

Home Loan Rates% %

1-year rate

3-year

2-year

Variable Rate

5-year

7 7

6 6

Source: ASB5 5Jan-13 Apr-13 / Jul-13 / Oct-13 / Jan-14 / Apr-14 / Jul-14

OCR will peak at 4.5%. It’s also important to note these calculations are based on carded rates – the availability of specials skews the calculations, and are important for borrowers’ decisions.

We stress that if the RBNZ hikes more aggressively than we expect (i.e. more hikes early on in the next part of the cycle and/or lifts the OCR higher than 4.5%), then these shorter-term rates will lift more than we are forecasting, making the strategy of fixing for short terms 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 June forecasts, rather than our 4.5% peak). We would expect the variable rate to eventually lift to around 8.25%, and fixed-term rates to be up around 8% too, rather than the 7-7.6% peak levels we are currently forecasting.

With this in mind, 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. And the cost of some added certainty is actually not high, based on current mortgage rates. This can be illustrated with an example:

➜ The carded floating rate is between 6.59% - 6.75% at the main banks at the time of writing. If the RBNZ lifts the OCR again in March 2015 (as we are forecasting), the floating rate will likely stay around current levels until then.

➜ A borrower can fix a 1-year mortgage around 6%, and a 3-year mortgage for between 6.2 and 6.7% at the time of writing. In other words, a borrower can lock in a fixed-term rate that is lower than the floating rate now, and even lower than what we expect floating rates to cost in a year’s time.

As always, there are risks to the assumptions behind our forecasts. And this means New Zealand interest rates could be higher or lower than our forecasts. But with the economy growing well, and the RBNZ’s tightening cycle underway, we think it is safe to assume the RBNZ will resume lifting the OCR early next year, and it is prudent to plan for more mortgage rate increases from today’s level over the year ahead.

Final thoughtsMore interest rate increases should be expected over the next two years. Borrowers can at present lock in some certainty and pay a lower rate than current floating rates. Floating rates should be fairly steady while the RBNZ remain on hold, but are still set to rise the most out of all the mortgage rates over the next year or so. One of the characteristics of floating mortgages that borrowers have enjoyed has been the flexibility of repayments that floating offers. Splitting the mortgage into different terms, or a mix of fixed and floating mortgages can be a good strategy for keeping a bit of flexibility while locking in some interest rate certainty.

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. ✚

10-year average

025

026

MY BUSINESS

By Phil Campbell

How did you enter the mortgage brokerage business?

My two sisters-in-law, Lorna and Traci-lee, started a brokerage company called Talk Mortgages which was based in the Bay of Plenty, and in 2003 they took me on board as a commissioned-based broker. Then, five years ago, Talk Mortgages was disbanded and ten like-minded brokers got together and Prosper was born. Lorna and Traci-lee afforded me the opportunity to become an individual business owner and shareholder. Prosper has gone from strength to strength in the past couple of years

and we now have offices throughout New Zealand with several more like-minded brokers operating out of these. We deal in mortgages, life insurance as well as home, car and contents insurance. I, along with my two-sisters-in-law, run an office out of Prosper on Old Taupo Road, Rotorua.

If from a banking, finance or real estate background, what special qualities were entailed?

When I first became a broker it was fairly easy. I had to get accredited by various lenders and off I went. You did have to have a genuine

A Rotorua mortgage brokering firm is branching out. Helping people into new homes is invigorating, says Felecia Hewson.

PROSPER/INGFelecia Hewson

I feel that recently first

home buyers have become more

confident that they may still able to

purchase a property.

027

passion for people, as dealing with purchasing property can be stressful and daunting to your average person. Being able to take all that under control, and building the trust that you are here for them, is key to being a good broker. Mortgage brokers have become heavily regulated over the past couple of years, which meant going back to school. This actually has been good for our industry.

Client satisfaction is paramount. How important do you regard the relationship between client and bank?

I think that whenever you first meet a client it is very important to get a feel from them as to what they want from a bank, if they are happy with their own bank there is nothing wrong with that, as long as that bank is offering what the client needs. Most brokers will then work with that bank on behalf of the client, just helping step them through the lending process, gathering all their information and liaising with the bank on their behalf. It really takes the pressure and stress off the client.

Are there instances where your instinct notes a client may not be all he or she seems and you refuse to recommend that client to the bank?

It is hard to hide anything about who you are as an individual. We get authorisation from the client to do a credit check on them and we get their bank statements, and bank statements tell a story. If there are regular payments to finance companies, or maybe mum and dad, they will show up, and if they have adverse credit, well, then all these things can be sorted. There are lenders that lend to people who may have had a few problems in life, and we would guide the application to these lenders.

How have young families, in particular those on the verge of first home purchases, responded to recently invoked government loan threshold criteria?

I feel that recently first home buyers have become more confident that they may still able to purchase a property. The Welcome Home loan is available with only a 10% deposit required and this 10% can come from Kiwisaver, gifted from a parent, selling of an asset or savings. Housing NZ is also giving $1000 for every year you have been in Kiwisaver up to $5000 to go towards this deposit. Obviously, you need to put in here that conditions apply. Ha, ha. We are also finding that parents are helping out as much as they can by allowing their property to be used as third party security.

Market conditions in Rotorua have been static for some years. With a new mayor and South American festival environment, do you sense a welcome buoyancy in the Rotorua market?

I think the Rotorua market is up and down, it is very different from the Auckland market and I don't feel we have had the same kind of recovery that they have.

How do mortgage brokers help struggling families?

I can always help set up a budget to guide them, also talk to them about consolidating debt that may be on a high interest rate and putting it onto their mortgage, it would be more favourable to try and pay this added mortgage debt over a shorter time, but they can always readdress this when and if there circumstances improve, keeping in contact and reviewing their situation regularly really helps out here.

Successful mortgage brokerage depends on client/broker/banker relationship. Which element is most important?

No one is more important than the other. Having a great relationship with your clients both initially and going forward over the years is paramount to being a successful broker, and likewise with my relationship with the banker, we all work together.

Is an entrepreneurial mindset required? That is actually a hard question. I think that

the Prosper group has to have an entrepreneurial mindset as the objective is to grow the brand and grow the business, which Prosper has done quite successfully. But for me personally, I have support staff who work behind the scenes for me and are absolutely my back bone. However, I like to be the

front person, I enjoy my client relation – it’s the best part of the job. Our relationship is ongoing over the years and the trust and friendships I have built with my clients is humbling to say the least. Could I let go of that? No way. So to grow my own business whereby I am sitting at the top and have brokers around me doing the best part of the job isn't for me.

What makes a successful mortgage broker?

All of the things I have just said, remembering that you are helping people into their new home which can be life changing, finding a solution if it is a bit sticky is crucial, having to say “no” is heartbreaking and not something I have to do often; creating trust with my client, listening, keeping up with what's available in the market, and more importantly not being in it for the money. I have had instances, and one very recently, where the client has banked with a lender who chooses not to use brokers. In this instance she was an elderly lady and I knew that changing banks at her stage of life would be too upsetting for her, so I helped her obtain finance through her own bank – it was all done for love. All my clients get the same treatment and commitment that I would offer to my trolley collector, right through to my high end CEO who owns several properties.

What is the most crucial element to a successful deal?

Being able to afford it! When there are no surprises to the client or bank; that everything that you have done and explained will happen as you have said.

Have you had any dissatisfied clients, or are they uniformly happy with their lot?

I don't think I have had any dissatisfied clients and if I did then I would think I would be in the wrong business. You need to have a passion for your clients. It is through them that you build a successful business. My clients are my biggest referrers.

Interests outside work? Is there life outside brokering? My interests

really are about my darling husband and great kids, weekends are spent laughing and catching up with each other. I like to put on my head phones, put a lead on my gorgeous sausage dog and go for a walk. My husband's passion are his classic car collection which means I have to be interested in these. This does mean we get to go away to car shows a lot and this is a great down time for me. ✚

PROSPER/ING

028028

Bank Home Loans - June 14

Reserve Bank figures show total home loans increased $2.3 billion (1.2%) to $192.9 billion in the quarter ended 30 June 2014. There were 76,536 home loan approvals valued at $14.4 billion reported. The number of approvals was down slightly on the March quarter but the value was up. Approvals are still significantly lower than in the corresponding periods twelve months ago.

Home loans for the Top 5 banks grew $2.3 billion up from $2.1 billion in the March quarter.

Market Share Total $ Billion Qtr Change Annual Change

Jun-13 Jun-14 Jun-13 Jun-14 $Billion % $Billion %

ANZ 31.9% 32.1% 55.701 59.212 0.704 1.20% 3.511 6.3%

ASB 23.1% 22.7% 40.284 41.817 0.29 0.70% 1.533 3.8%

Westpac 21.2% 21.3% 36.98 39.175 0.609 1.58% 2.195 5.9%

BNZ 16.8% 16.4% 29.33 30.305 0.485 1.63% 0.975 3.3%

Kiwibank 7.1% 7.5% 12.471 13.727 0.223 1.65% 1.256 10.1%

100% 100% 174.766 184.236 2.311 1.27% 9.470 5.4%

Home Loan Approvals Jun-13 Mar-14 Jun-14 Qtr Change % Annual Change %

No. 90,587 76,938 76,536 -402 -0.5% -14,051 -15.5%

Value 16.273 12.921 14.368 1.447 11.2% -1.905 -11.7%

BNZ had a stellar quarter recording its highest quarterly growth in the seven years we have statistics for. It grew by $485 million (1.63%) which is equivalent to the

previous three quarters combined and more than double the March quarter.

Westpac and Kiwibank also boxed above their weight in this quarter albeit to a slightly lesser degree than last quarter .

ANZ had a steady three months with share of new business slightly below its overall market position for the second consecutive quarter. Its loan book grew by $704 million in the June quarter (1.2%) which was higher than the $631 million for March quarter but still well down on the record $1.3 billion in the December quarter.

That leaves ASB. ASB’s loan book grew by only $290 million (0.7%) in the June quarter, this is 66% lower than the $852 million growth

recorded for the June quarter in 2013. ASB would have needed $532 million growth in the quarter to equate to its current 23% share of the total home loan business of the top five banks.

The following graph shows how the share of new business was divided between the top five banks in the June and March quarters in relation to their overall stake of the total lending.

Margie Macalister

GDS

029

Residential mortgage loans ($m).

Jun-14 % Jun-13 % Jun-12 %Floating 61,365 31% 88,547 48% 107,855 62%

Capped - - -

< 1 year 63,912 33% 50,344 27% 36,418 21%

1 < 2 year 42,274 22% 34,535 19% 23,129 13%

2 < 3 year 20,266 10.4% 7,798 4.2% 5,701 3.3%

3 < 4 year 4,510 2.3% 1,639 0.9% 994 0.6%

4 < 5 year 2,326 1.2% 2,451 1.3% 462 0.3%

5 + 30 0.02% 30 0.02% 11 0.01%

Total fixed 133,318 68% 96,797 52% 66,716 38%

Unallocated 366 0.19% 81 0.04% 233 0.1%

Total all 195,048 100% 185,426 100% 174,804 100%

High LVR lending out of vogueAll of the growth in home loan lending is in the low LVR range which grew by $14.5 billion in the year to June 14 while high LVR lending dropped by $5 billion. BNZ remains the most conservative with only 12% of its loan book in the high LVR range. ASB sits at the other end of the scale with 21% high LVR lending just ahead of Westpac on 20%.

Fix meThe proportion of lending on floating rate continues to decline rapidly dropping from 36% to 31% from March 14 to June 14. Lenders are opting to fix for short terms however, with 48% of fixed borrowing on terms of less than 12 months and 95% less than three years. The below table shows the massive turnaround from floating to fixed in the last two years.

Small end of townThe small five banks in our research recorded overall growth of 5.6% in the year to June slightly up on the 5.4% achieved by the big 5ive. The Co-operative Bank recorded the highest growth at 12% followed by HSBC on 9%. TSB had the lowest growth at just 1.8% and created a new high LVR category with $3 million of its loan book in the >100% range!High LVR lending amongst the small banks ranges from 21% for SBS down to only 1% for HSBC. ✚

A mortgage is a charge over land given to secure repayment of a debt.

By Jonathan Flaws

LEGAL

Fortunately, most people are able to manage their affairs so the debt is repaid and the land is never used to provide a fund from which the mortgagee can be repaid.

But the power of sale underpins every mortgage. It lies buried underground waiting to be brought to the surface and given life if default occurs and the property is required to be used to help repay the debt. And when it comes alive it has one simple purpose – to turn land into money to repay the mortgagee.

The mortgagee is not the owner of the land but is given the power by statute and the mortgage to sell the land and deliver clear

title to the purchaser. The power cannot be exercised lightly and before life can be given to it there must be a default and the borrower given notice of the default and time to remedy it. Only if the default is not remedied can the power surface.

MORTGAGEE’S DUTY OF CAREA mortgagee is given a free hand to determine how and when to sell the land subject to a mortgage. The principal duty that the mortgagee owes to the mortgagor, guarantor and subsequent mortgagees is a duty to take “reasonable care to obtain the best price reasonably obtainable as at the time of sale”.

The presence of two “reasonable” tests in one sentence emphasises that the mortgagee does not need to go out of its way to get the best possible price, just ensure that it does what any other reasonable mortgagee would do to get the best it can at the time of sale.

It emphasises that the mortgagee’s interest in selling the land to recover the debt is the prime purpose of the sale. So long as the mortgagee acts objectively when doing this, having regard to all of the circumstances at the time of sale, the

Peerless

030

❝ Mortgagees in New Zealand

do not necessarily take possession of the property

prior to the sale. ❞

mortgagee has honoured its duty.One of the relevant circumstances is

that the mortgagee is not the owner of the property and has very little knowledge about the property and its attributes.

The mortgagee’s objective is to act like a reasonable mortgagee to sell the property to get money to repay the debt. This is fundamentally different objective to the owner whose interest is to sell the property and get the best return he/she can.

As a result, most mortgagees will sell by auction. But they need not do so and provided they can satisfy their duty of care, they are free to sell by whatever means they consider appropriate for the property and the circumstances prevailing at the time of sale.

This may include marketing and entering into contracts for sale by private treaty before the default notice has expired. This is permitted by the Property Law Act provided the sale is conditional upon the default notice expiring without remedy and the mortgagee acquiring the power of sale.

FORM OF SALE AGREEMENTMost agreements for sale and purchase of land in New Zealand are written up on the ADLS Inc. /REINZ forms – either for sale by private treaty or by auction or tender. The benefit of using widely used and accepted forms is that there is no need to read all of the fine print each and every time.

To date, mortgagee sales have been different. There has been no standard form of auctions terms and conditions and although most lawyers acting for mortgagees tend to ensure that the conditions cover the same matters, they are all expressed in a different way.

This is about to change and the ADLS Inc. has prepared forms for mortgagee auctions that now link in with the standard provisions of the other agreements for the sale of land. But a mortgagee sale is still a mortgagee sale and the new forms are still designed to enable the mortgagee to sell and get its debt repaid. Consequently, a purchaser from a mortgagee still assumes greater risk than if it had purchased than from the owner of the land.

CAVEAT EMPTORTo begin with, the terms and conditions of a mortgagee sale will invariably remove all of the standard representations and warranties that you find in a normal sale by the owner of property. It is the ultimate caveat emptor sale – what you see and what you don’t see is what you get.

A mortgagee only wants to be repaid and does not wish to incur additional obligations as a result of the sale. Apart from ensuring that the rates, water rates and other proper outgoings are paid and up to date, the mortgagee gives no warranties. A buyer takes the property as they find it. Obviously, this lack of warranties will have an effect on the sale price as

purchasers will need to factor in the unknown and the unseen. Which means that so long as the unknown risks don’t materialise, a purchaser may be able to buy at a better price.

RISKS INHERENT IN A MORTGAGEE SALEPossessionMortgagees in New Zealand do not necessarily take possession of the property prior to the sale and most mortgagees sell on the basis that the property is sold subject to “holding over” by the mortgagor and subject to tenancies (if any). The tenancies may, or may not, be binding on the mortgagee. If the owner has not moved out by the settlement date, then the risk and responsibility of taking action to remove the mortgagor is passed to the purchaser.

This may not always be the case so it pays to check the status of possession and access with the mortgagee and the agent acting for it.

Inclusions in the saleA mortgage is a charge over the land and rarely includes charges over the chattels. A standard agreement for sale and purchase specifies the chattels that are also sold – such as blinds, drapes, fitted carpets, dishwashers, etc.

The mortgagee does not have a charge over these items and therefore cannot sell them. It is important to be clear as to what is being purchased. You will need to factor into your price the cost of replacing any items that are required but are likely to be removed.

Risk and insuranceUnder a normal sale, risk remains with the vendor until settlement. The contract for sale from a mortgagee is likely to define the “risk date” as the date following the auction. This means that the property is at the risk of the purchaser from that date.

Lack of warrantiesPerhaps the most significant item is that the vendor mortgagee cannot give any warranties about the property.

For example, under a standard agreement

the vendor warrants that it has not received any requisitions from the Councils nor has it carried out any unpermitted work on the property or built anything without the relevant building consent. You will have no rights to requisition for any title matter and if the fences are not on the boundary or if there are any encroachments on to or from the property then this is at the purchaser’s risk.

Intervening eventThen to cap it all off, the vendor mortgagee can cancel the sale if any intervening event occurs that makes it difficult, or impossible, for it to sell. For example caveats or notices of other interests in the property may prevent the sale. The standard provision allows the vendor mortgagee to postpone the sale and have time to sort these issues out. But if they can’t be sorted out then the sale can be cancelled and the purchaser has no rights to compensation, other than the return of any moneys paid.

Insuring against purchaser risksIf you weigh up all of the above, a purchase from a mortgagee seems like a dangerous exercise that may not be compensated for by obtaining the property at a good price.

But it’s like any commercial risk, if you weigh it up against the reward there will always be a point at which the reward outweighs the risk – or at least is a sufficient incentive to allow you to proceed despite the risk. And like any commercial risk, there may be ways in which you can manage or reduce the risk.

In the case of a purchase from a mortgagee, there is now the ability to manage some of these risks with insurance. The policy is called a legal indemnity insurance policy and it is underwritten by Lloyds of London. The policy has recently been made available in New Zealand by DUAL New Zealand Limited.

It is available for any conveyancing transaction but is particularly significant when the transaction is a purchase from a mortgagee where the warranties have been reduced or removed. It covers the risks associated with unpermitted work, lack of adequate zoning, encroachments and boundary issues as well as adverse information on public records not being identified.

In short, it provides a viable commercial solution to manage some of the risks of purchasing from a mortgagee. It will be available through solicitors who can access it via their professional indemnity insurance brokers. You can get more information about this by contacting DUAL New Zealand direct.

If you or any of your clients intend to move through the door that opens when a mortgagee sells, you would do so more safely with a legal indemnity policy tucked under your arm. ✚

031

INSURANCE

By Steve Wright

KEEP AN EYE ON SPECIFIC EXCLUSIONS

Exclusions are the evil twin of benefits. Exclusions are instances when, despite the benefits provided, no claim is payable.

Understanding any exclusions present in a policy is as important as understanding the benefits. There are two broad types, general exclusions and life assured specific exclusions (specific exclusions):➜ General exclusions are provided for in the policy and they apply automatically to every life assured under that policy. No special terms are issued in respect of general exclusions because they are already catered for in the policy wordings. General Exclusions apply forever, even if the condition arises after policy issue.➜ Specific exclusions only apply to that specific life assured and are agreed to by the life assured (by the acceptance of special terms issued by the insurer) as part of their application for cover. Specific exclusions are not provided for in the policy wordings they arise out of and are usually determined as a result of the underwriting process. Specific exclusions do not apply unless the condition is present at the time of policy issue.

While specific exclusions do usually get the attention they deserve from advisers, general exclusions typically do not. Appropriate general

exclusions will always be necessary to the long-term sustainability of insurance, but advisers cannot simply ignore them. This is particularly true of health insurance, where exclusions are many and often vary between providers.

Health Insurance comes with a long list of general exclusions, many of which are typically common across the range of providers in New Zealand, for example, acute medical treatment; experimental treatment, treatment for mental illness and HIV/Aids, and treatments which are not medically necessary.

Informing clientsThere is not much advisers can do about general exclusions that are common to all providers and accordingly, aside from informing the clients about them, there are few compliance or advice concerns. However, significant general exclusions are also imposed by some providers – but not others – and these create a potential compliance danger and advice issues for advisers, because alternatives do exist. In some cases, general exclusions may actually impose important obligations on advisers.

Unfortunately, neither of the three product rating services deal with exclusions in a particularly helpful way or even at all (which is surprising considering how very important

exclusions are) so advisers really should take care to understand the exclusions in the various health providers’ policies. The very medical condition of concern to your client may, in fact, not be covered.

General exclusions to watch out for: Advisers should be particularly aware of general exclusions that are not universally applied by all providers, for two main reasons. The first is because, in the absence of terms removing them, general exclusions will automatically apply to all clients and the second is because alternative providers, which do not include a general exclusion, may well be a better option for the client.

Life assuredIt is worth remembering that providers which do not have a particular general exclusion, can still apply a specific exclusion, but this only applies to the specific life assured, will not apply to future health conditions arising (locks good health in), and is only imposed if the client agrees (usually during application or once special terms are issued). A few examples of general exclusions that are not universally applied follows, but this isn’t an exhaustive list:

✚ Allergies: It seems to me that severe allergies are becoming more and more common, particularly in children, so this exclusion will be of

Is health insurance general exclusions a trap for the unsuspecting? Steve Wright tells us more.

032

particular concern to younger clients planning on having children. How much, if anything, will a provider pay towards treatments, specialists’ consultations, and tests?

✚ Congenital, hereditary or genetic condition: Most providers exclude congenital conditions, but how is “congenital condition” defined in the policy, if at all? Some providers do not define it, which means medical treatment for a condition present at birth, even if unknown, will be excluded forever. Some providers restrict the meaning of “congenital” by defining it in a more limited way.

✚ Familial predisposition or familial risk: The risks of suffering some medical conditions are increased if there is a predisposition to it in the family. This exclusion presumably means that conditions which “run in the family” are excluded, even if your client does not have the condition or is unaware of the risk, at application time;

✚ Non-Pharmac drugs: While several providers now cover some non-Pharmac funded drugs, many providers still only provide limited cover or impose conditions and restrictions. All other cases are however excluded. This leaves clients potentially vulnerable to the very high costs associated with non-funded drugs, depending on the condition they suffer or where the treatment is received;

✚ Pre-existing conditions: More on this below;

✚ Preventative treatment: Costs of preventative screening tests, where no symptoms are present, are usually excluded, although some providers do now offer modest amounts to help offset the costs of preventative screening done privately;

✚ Also look for general exclusions for breast reconstruction/reduction, weight loss or bariatric surgery, sleeping disorders, Cystic Fibrosis and Renal dialysis, among others.

Advisers should carefully examine exclusions

in the various providers’ policies to identify areas of concern to them or their clients.

What happens when standard-rates, without special terms, is not good enough?

Some providers exclude pre-existing conditions. A “pre-existing condition” is any medical condition that exists before the insurance cover is issued. It is usually defined in the policy wordings very broadly and without limit to include every medical condition, including conditions for which medical advice or treatment should have been sought but wasn’t!

This general exclusion might be expected if there is automatic acceptance at application time, but what if this is included for policies where health is assessed (medically underwritten)? It seems to me the obvious danger is that:

● Clients and advisers will mistakenly believe the absence of special terms will mean pre-existing conditions are covered (when in fact they are not); and

● Providers which do not generally exclude pre-existing conditions and which might issue a specific exclusion, will be regarded as “harsh” (when in fact they are not).

When recommending providers whose products include a broad general exclusion of “pre-existing conditions”, advisers must make it clear to clients that none of their pre-existing conditions are covered!

At least one provider excludes pre-existing conditions unless they are disclosed and accepted as covered in writing by the provider. Aside from the negative impact on clients’ cover, what additional compliance and administrative burdens does this exclusion impose on advisers?

✚ ConditionsDoes the exclusion mean advisers

must scrutinise the issue of every policy and then negotiate which disclosed conditions are to be covered in writing? Does it mean every policy issued without special terms, accepting pre-existing conditions disclosed, must be questioned?

I think a general exclusion of pre-existing conditions, on policies where an applicant’s health is assessed, may very well create a duty on advisers to negotiate with the insurer for special terms to remove the application of the exclusion for less severe pre-existing conditions. After all, surely the right outcome for the client is that only pre-existing conditions worthy of exclusion are actually excluded? ✚

Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Product at Partners Life.

This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product.

" Advisers should carefully examine exclusions in the

various providers’ policies to identify areas of concern

to them or their clients. "

033

Market News

The study, supported by New Zealand’s Safe Home Equity Release Plans Association (SHERPA), found New Zealand’s reverse mortgage market comprised 5300

loans, with a total book of $444 million as at 31 December 2013, compared with 6878 loans valued at $430m at the end of 2008 and 6613 loans valued at $447m at the end of 2009.

Rob Dowler, executive director of SHERPA, says: “The market size is on a par with pre-GFC levels, while the size of each borrowing has increased the number of both borrowers and settlements is significantly down. This is largely due to fewer lenders offering the product for sale.

“However, things are beginning to change. At SHERPA we are fielding more interest in the

product from potential borrowers and lenders. As the drag on growth caused by uncertain and pressured global business environment begins to ease, we think the home equity release market will pick up along with the need for new business opportunities.”

Deloitte partner James Hickey says: “Total repayments, both full and partial, this year are 14% p.a. of outstanding loans, with the majority due to voluntary repayment and sale of property.

“This shows that a reverse mortgage is not a ‘set and forget’ product but it is actively used by its borrowers to primarily fund the first stage of their retirement.”

The study found that more than half of reverse mortgage borrowers in New Zealand were couples, borrowing on average $10,000

more than their single counterparts, with a number of new borrowers being early retirees between the age of 65 and 74.

The top use for a reverse mortgages was debt repayment, which is almost doubled year-on-year, followed by home improvement and travel, says Hickey. “These are positive responses and show that the product can really add value to retirees when used responsibly and supported by appropriate advice.”

North Island has the highest number of reverse mortgagees at 81%, with Auckland at 14% being the major location. This is up by 20% from 2010 when South Island had a 39% share, now down to 19%. Two thirds of the loans - 66% - are outside the major metropolitan areas, especially in the North Island.

By Sharon Davis

Flat reverse mortgage market leaves room for growth

Year-on-year Reverse Mortgage Statistics

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Outstanding Loans $365m $430m $447m $469m $474m $463m $444m

Number of Loans 6549 6878 6613 6484 6186 5728 5338

Average Loan Size $55,745 $62,516 $67,667 $72,366 $76,556 $80,781 $83,229

Settlements $106m $36m $16m $18m $14m $13m $8m

Facility (settlements) $201m $37m $16m $19m $14m $16m $13m

Additional Drawdowns $28m $18m $15m $13m $10m $8m $5m

Discharges $26m $36m $47m $42m $56m $63m $61m

Loan Use

Use 2012 2013

Debt Repayment 14% 22%

Home Improvement 20% 18%

Travel 11% 10%

Car 10% 7%

Aged care purposes 7% 5%

Gifts 3% 3%

Other/Unassigned 35% 35%

The reverse mortgage market has been stagnant

since the global financial crisis,

according to a study of the New Zealand reverse mortgage

market.

034

Tune into mortgagerates.co.nz for the latest update on home loan news and information. Each Monday morning you can listen to a broadcast from TMM editor Philip Macalister reviewing and commenting on the latest news.

Besides giving you a good snap shot on what is happening in the market there Philip provides you with his comments and observations about what's happening and who is doing what.

www.mortgagerates.co.nz