The Nz Mortgage Magazine (TMM) issue 7 2014

Issue

201407

DIVIDED MARKET

REGIONS START TO APPEAL

NICE GUYS CAN SUCCEED

TOP SIX TIPS

HOW SECURE ARE THEY?

PROPERTY TITLES

Industry leaders discuss the latest hot topics

12 HOUSING COMMENTARY Susan Edmunds tells us that the property market is developing in two halves (Auckland and Christchurch vs. the regions) and looks at the implications of this for the industry.

24 MY BUSINESS: AJAY KUMAR Phil Campbell chats to award winning Auckland-based mortgage adviser Ajay Kumar from Global Financial Services.

14 INDUSTRY REGULATION Participants at TMM’s second Round Table consider the implications of new regulations, including the responsible lending code and the five-property rule.

04 EDITORIAL Self-regulate before it’s too late.

05 NEWS Property investment portfolios swell, a new mortgage group enters the market, and more.

10 PEOPLE ON THE MOVE New appointments at Mortgage Express, NZHL, and RESIMAC.

CONTENTS

UPFRONT

24

22 PAA NEWS Michelle Harrison brings us the low down on the new five-day course for mortgage advisers run by the PAA.

26 SALES AND MARKETING Paul Watkins considers whether nice guys can make it in the mortgage industry.

28 INTEREST RATES ASB’s Chris Tennent-Brown brings you the latest interest rate information and looks at the possible effects of the US and European markets on NZ mortgage rates.

30 LEGAL Our resident legal expert Jonathan Flaws looks at how secure your register of title is – or isn’t.

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

14 Nine leading figures in the industry discuss the big issues facing mortgage advisers with TMM publisher, Philip Macalister. AJAY KUMAR

COLUMNSFEATURES

" Another key message from the

Round Table discussions was to

expect change in the industry as busi-

nesses adapted to a lower than anticipat-ed credit growth and a property market

that was essentially split into two

distinct markets."

Self-regulate before it’s too late

This edition focuses on TMM’s second annual Round Table discus-sion, where representatives from lenders, brokers and groups debated the latest hot industry topics.

One of the issues raised was the low barrier to entry for mortgage advisers – and the need for the industry to jointly self-regulate adviser standards before potentially unwieldy or draconian regulations are imposed on the industry, in much the same way as it was for financial advisers.

To pinch the words of American publisher and author, William Feather: “If we don’t discipline ourselves, the world will do it for us.” Some participants believe that there is only a small window of opportunity to do this.

Effective adviser training is one of the tools available to do just that, and Michelle Harrison looks at the PAA’s new five-day adviser training course in her article Turning knowledge into competence on P 20.

Another key message from the Round Table discussions was to expect change in the industry as businesses adapted to a lower than anticipated credit growth and a property market that was essentially split into two distinct markets – with Auckland and Christchurch trends largely moving in the opposite direction to the rest of New Zealand.

You will find the nuts and bolts of Round Table debate, which also includes some of the

implications of Westpac’s move to reintroduce trail commission, on P14 and more detail on the latest property market trends in Susan Edmunds’ Housing Commentary on P12.

Putting the needs of your customer first was another issue that came up in the Round Table discussion. It’s also one of cornerstones of a successful adviser business, as Ajay Kumar highlights while chatting to Phil Campbell in My Business on P24.

Our regular columnists also provide food for thought. Paul Watkins considers whether nice guys can be successful in the mortgage industry and outlines six useful steps for advisers to follow on P26. We look just how bulletproof the guarantee of title is in NZ with Jonathan Flaw’s article on P30 and consider the pros and cons of combining an insurance cocktail of mortgage repayment cover and income cover with Steve Wright on P32.

Sharon DavisEditor

PUBLISHER:Philip Macalister

EDITOR: Sharon Davis

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

PROPERTY INVESTMENT PORTFOLIOS SWELL

NEWS

People who own investment properties have significantly increased the size of their portfolios in the past four years.

A recent survey revealed that the proportion of large and full-time property investors has grown significantly since 2010. Back then,

14% of investors owned seven or more properties and this is now up to 26% according to the recent annual ANZ/NZ Property Investors Federation survey.

The growth has largely come from those owning the majority of their properties in Auckland and Canterbury.

In 2010 9% of Canterbury property investors were large investors and now it is 32%. The change in Auckland is more modest, but still significant, rising from 9% to 23%.

One of the upcoming issues for these investors is plans by the Reserve Bank to categorise investors with five or more residential properties as commercial borrowers.

While the banks have been reticent to

explain what this means for these borrowers it is expected to mean higher interest rates.

A third of investors think the changes will have an impact on their investment strategy. Two-thirds of those with four or more properties already believe the changes will mean they are less likely to buy more property, while 36% of this group said they would be more likely to sell an existing property.

Overall property investors are sitting on manageable debt levels. The average debt level was 54.1%. Just 6% of investors had debt levels of 90% or higher and 22% are sitting between 75 and 89%.

The survey suggests that while debt levels haven’t changed much there has been a trend to pay off principal.

With these debt levels it is little surprise that the Reserve Bank’s LVR lending restrictions have had little impact on property investors.

While investors aren’t overly bullish there has been an increase in the percentage who are looking to buy more property in the next six months. The proportion intending to buy has risen from 17% in 2010 to 23% in 2014.

Most investors expect rents to grow by 0% to 5% in the next year and the biggest regional growth is expected in Canterbury, Taranaki, Auckland and Rotorua.

Investors expect rents to grow more over the longer term, with an average increase of 4% annually for the next five years.

Investors have a greater expectation for property value growth than they do for rental growth. On average investors expect property values to grow by 4.8% in the next year and by an average of 8.1% annually over the next five years.

The large majority of landlords adopt a buy and hold investment approach. ✚

INFLUENTIAL ADVISERS PAIR UP TO FORM NEW GROUP

Jenny Campbell, former general manager of NZMBA and the PAA, David Hart former CEO of Loan Market, and established mortgage adviser, Dave

Windler, have joined forces to establish a new broker brand and aggregator group which launches this month

They have taken over Windler’s existing

brand, The Mortgage Supply Co, which will be used for branded mortgage advisers. Campbell, the new group CEO, says: “We’ll be starting with two new branded offices in New Zealand, one in Auckland, and one in Tauranga.

“We also felt there was a need for a new mortgage aggregator for advisers who want to use their own brand but join a group of like-minded independent professionals.”

They will launch with 20 advisers on board, but Campbell expects this to have grown to 100 in a years’ time.

“We’ve not been actively recruiting, but our industry leaks like a sieve and I’ve had advisers calling to find out what we’re up to,” she says.

We’re looking for established advisers who know what they are doing and want to partner with people they know and trust and we’re looking to create a small group with a lovely family feel – people who respect each other, help each other out, and enjoy spending time together and having fun too, Campbell says.

The Mortgage Supply Co is actively looking for ways to drive additional revenue for advisers and are in the process of setting up strategic alliances with risk groups. “We believe the ability to offer a risk solution is important,” Campbell says.

They also partnered with a mortgage-specific CRM provider “with really great tools to help advisers grow their business, lodge application on line, etcetera. Our philosophy is to be completely transparent and we have a ‘no handcuff’ contract with advisers. If they choose to leave the group we guarantee full and immediate access to data, and they have complete ownership of their clients.”

The Mortgage Supply Co also plans to raise the profile of the group with the general public and the media and position themselves as the “go-to group". We’ll also be working with regulators to ensure that advisers are not constrained too much and that the industry is sustainable, Campbell says. ✚

New mortgage brand and aggregator group to launch this month.

Recognition for the volume of home loans from advisers.

ANZ launched a new bonus incentive offer to its adviser network, effective October 1. Although the details are not

officially confirmed by ANZ, TMM has heard from advisers that the bank is offering a new bonus commission of 0.8%, plus an additional 0.15% for volume, with a 27-month clawback.

According to ANZ the offer recognises the volume of new home loans they receive from mortgage brokers, rather than being a response to what competitors are doing in the market.

“ANZ has had an upfront bonus commission offer in market for the past year,” a spokesper-son for ANZ says. “This has proven popular with brokers and we have increased our share of adviser business.

“An upfront model is good for customers as it ensures we can consistently offer market leading pricing for both new and existing lending. This continues our committed and consistent approach to the broker channel.”

Edge Mortgages director Glen McLeod, said: “It’s movement, and it’s in place until March [2015].” He believes ANZ is playing a “wait and see” game to assess the impact Westpac’s introduction of trail has on volume. McLeod said he has let ANZ know that he would prefer trail commission.

Ajay Kumar from Global Financial Services welcomed the new bonus from ANZ and felt that it was in response to Westpac’s initiative. He did however add that a good deal from the bank was more important than commission as the customer’s needs should be placed first. ✚ - Glen McLeod -

BNZ TO RETURN TO BROKER MARKET

BNZ, which infamously used to promote the position that it doesn’t deal with mortgage brokers, is looking to change that.

BNZ chief executive Anthony Healy says the bank doesn’t have a platform for mortgage advisers to use, but acknowledges it gets business from this channel, particularly in Christchurch.

“We don’t work with home loan brokers at the moment,” he told TMM when announcing the bank’s results for the 12 months to September 30.

He said the bank was “definitely” looking at third-party distribution.

“Watch this space,” he says. “We are looking for the right answer to that question (of dealing with brokers)."

BNZ lifted cash earnings 2.4% to $807 million, compared to the previous year. The result was

largely driven by improved revenue and bad and doubtful debt charges.

Average lending volumes increased by 4% from $60.6 billion to $63 billion compared to the prior year. The business lending portfolio experienced steady growth. Mortgage lending was up 3.5% during the year.

“Housing volumes grew by $600 million over the second half following a subdued first half influenced by the Reserve Bank’s high loan to value ratio lending limits and intense market competition.

“The LVR restrictions disrupted volumes (when they were introduced)."

He says BNZ’s new lending products such as Home Advantage and the “shred” campaign had contributed to the growth.

Home Advantage, which links a customer’s variable home loan rate to its credit card rate, had seen significant growth with half of the customers coming from other banks.

The shred campaign is designed to help New Zealanders shred up to $156,000 in interest off a standard 30-year $300,000 home loan, with BNZ’s tailored home loan product which allows customers to make small increases in repayments every year.

Healy expects overall credit growth in the market to be “broadly similar” over the next 12 months to what was recorded in the past year. ✚

- Anthony Healy -

ANZ INTRODUCES NEW BONUS INCENTIVE

07

Co-operative Bank introduced an interest only home loan option in October, available for new and existing residential mortgages

with standard floating or fixed-term interest rates. The new offering is likely to appeal to property investors and other people requiring short-term relief from making full home loan repayments.

“There was a noticeable gap in our

repertoire, not having an interest only loan,” Co-operative Bank CEO Bruce McLachlan said.

"More than 20% of mortgages in the market are interest only, and this was keeping us out of the investor market.

“The investor market is vey strong at the moment, particularly in Auckland, and this was a gap that we needed to close to be seen as a credible funder." ✚

NEW INTEREST -ONLY OFFERING

Co-operative Bank introduces interest only home loans as a foot into the investor market.

NEWS

- Bruce McLachlan -

08

The PAA and IFA recently announced plans for greater collaboration including a combined National Adviser Conference in June next year.

The two adviser associations are looking at ways to operate more effectively and efficiently, but say a merger of the two groups is not something they are working on.

PAA chief executive Rod Severn said it made sense to work together and add value for members. “Combining resources means we can offer better experiences for both groups. We can attract better speakers, and use better venues which is to the benefit of all advisers.”

Joint industry lobbying and shared professional develop-ment days are among the options being explored.

Severn said pooling resources “offers the benefit of scale. We both want to raise the professional bar so there is synergy between the two organisations in that respect.”

The combined annual conference will be held in Auckland over two days from 11 June. Severn expects between 600 to 700 advisers, across both groups, to attend.

“Prior to that well be running combined professional development days in late February and early March. There will be multiple streams looking after the interests of each discipline or adviser group.” Severn expects the details of these professional days to be finalised in a couple of weeks. ✚

PAA AND IFA AIM TO

WORK CLOSERA combined conference and more effective lobbying are some of the benefits expected from working together.

- Rod Severn -

09

PEOPLE

PEOPLE ON THE MOVE

Kenny Addison

Tony Champion

Mark Greenslade

Lalit BajajPradip Chakraborty

William Hua

NZHL appointmentKenny Addison has been appointed to New Zealand Home Loans (NZHL) newly established position of GM of Business Development. He will be working closely with NZHL’s network of 74 franchises nationwide to drive growth.

Addison most recently worked with the ASB Group in New Zealand where he held roles within ASB’s Wealth & Insurance and Global Transaction Banking divisions. He moved to New Zealand in 2007, settling in Auckland’s North Shore. His experience in managing key relationships within the insurance and banking sector was a real plus point for NZHL.

New appointments at Mortgage ExpressTony Champion is no stranger to the financial services industry. He has spent more than 20 years working with ANZ in New Zealand and the Pacific Islands, the last 10 years as branch manager.

After leaving ANZ, Champion spent time working with NZ Home Loans, HSBC, TSB and National Bank, and has for the last six years worked as a financial adviser, arranging both

residential and commercial finance and risk cover. He has joined Mortgage Express servicing

the East Auckland suburbs of Howick, Pakuranga and Flat Bush, providing advice and assistance with all forms of residential and commercial finance.

Lalit Bajaj has joined Mortgage Express’ team of Auckland mortgage advisers. With a career in the financial services industry spans more than 15 years Lalit has worked as an investment banker, financial planner and insurance agency manager for various companies in India and New Zealand. Since 2009, he has been a self-employed mortgage and insurance adviser.

Lalit provides advice on home loans, business loans and refinancing of the existing loans on better terms, focussing on the Central and West Auckland region.

Mark Greenslade has joined Mortgage Express’ Auckland team as a mortgage adviser. He began his career in financial services in 1988, working for ANZ. During his time with the bank, Greenslade worked at a variety of roles including business broking manager and home loan credit manager. In 2007 he joined the mortgage broking industry.

A background in banking created an understanding of the “other side” of the loan process, which works to his advantage.

Serving Auckland’s North Shore primarily, Greenslade provides advice and assistance with home loans, investment property, first homebuyers, low equity loans, development finance and specialist property finance.

Originally from India, Auckland-based mortgage and Insurance adviser Pradip Chakraborty has joined the Mortgage Express team. His banking and mortgage career spans over 20 years. Along with owning and managing his own mortgage broking business for more than four years in Auckland, Chakraborty has 20 year’s experience in the industry, including work for a leader in global outsourcing as a Customer Solution Representative at a major financial services service centre, which helped him master the end to end function of financial services and banking.

William Hua has also joined the Auckland team as a mortgage adviser. He has a sound financial background, which includes more than 10 years’ experience in real estate development, financing and investment, along with time spent in share

010

Maurice Hawkins

Temitope Egbelakin

Tammy Stitt

trading and property management.Originally from China, Hua arrived in

New Zealand over a decade ago. Since then, he has worked in the travel and trading industries and completed contract work for a large financial services group.

As an Auckland resident, William has a keen understanding of the local property market, with a particular emphasis on North and Central Auckland.

“As a first generation migrant, I understand just how challenging it can be buying a property in a new country.” William can assist with a range of financial services including Home Loans, Bridging Loans, Reverse Mortgage, Construction Loans, as well as Class Advice on Kiwisaver.

Also new to the Mortgage Express Auckland team is Maurice Hawkins. His career highlights include 19 years at Fisher and Paykel, where he worked his way up to just short of directorship.

A former business owner for close on 18 years, Hawkins also spent a considerable period consulting for Fuji Xerox. Through his own background and experience, Maurice understands the finance process from his clients’ perspective.

Based in Auckland, he provides a range of financial services, including mortgage advice, debt consolidation, home loans, refinancing, bridging finance, construction loans, personal loans, and insurance cover.

Originally from Nigeria, Africa, Temitope Egbelakin, or Temi as she is known, has 15 years’ experience in engineering and property construction, at both an industry and a tertiary education level. Working as a lecturer with New Zealand universities since 2007, Egbelakin’s background in engineering and construction provides her with the necessary skills to solve complex issues.

New lending manager at RESIMACTammy Stitt has joined RESIMAC Home Loans as Lending Manager. With more than 19 years experience in the banking and finance industry, predominantly with ANZ, she has a diverse background that includes leadership, risk management, project management and securitisation. This includes several years in the specialist home loan market with a focus on providing lending solutions to self-employed and credit-impaired clients.

While with ANZ Stitt managed the Nationwide Home Loans targeting the near-prime home loan market. Key aspects of her responsibility were portfolio management, staff management of the underwriting and customer service teams and reviewing credit policy guidelines. ✚

011

Investors looking for value in New Zealand residential property could do well if they turn their eyes to the regions, commentators say.

The country’s property market has clearly split in to a story of two halves. While Auckland and Canterbury have been rocketing

ahead over recent years, with double-digit annual price inflation, most other regions have reported growth of less than 5%. Some are still reporting prices below their 2007 peaks.

The Real Estate Institute reported a national median house price of $420,000 in September. It was up $20,000 on the same time in 2013, but

68% of that gain was in Auckland. Canterbury/Westland contributed another 20% to the increase and the Waikato and Bay of Plenty was responsible for another 5%.

Auckland’s median price rose $45,000 to $615,000 between September 2013 and the same month in 2014. By contrast, Hawke’s Bay’s median price dropped by $10,000 and Manawatu/Wanganui was down by slightly more than $7000.

Property commentator Rodney Dickens said the national market was in an “in-between” period. “We’re at the tail end of the Auckland boom, it’s still got a bit to go but I wouldn’t be looking to follow that,” Dickens said.

Investors who chose where to buy based on what had performed well over recent years could be caught out, he said. “Auckland fits into that. It’s done most of its really good performance.”

Over time, the regions would start to look more appealing to investors, he said.

“Some haven’t done at all well, and some are even going backwards. Rotorua, Wanganui, parts of Northland, they still face downside risk for a while… then over [coming] years something will happen that will drive some regional areas and make them more attractive.

“They haven’t had capital gains, or have had small losses, the rental yields are a bit higher and when we see the next fall in interest rates, they could do better than Auckland and the major centres.”

He said one example was Whangarei, which tended to underperform during downturns and outperform when the market ticked up.

Dickens said: “It’s currently as good a relative value as it’s ever been. It still faces downside

The NZ property market is booming in some areas, but depressed in others. Will they catch up in the wake of Auckland and Christchurch success?

012

HOUSING COMMENTARY

By Susan Edmunds

Property market split in two halves

risk to prices and it’s in the context of a national market that is not fantastic value but it is poised and has got potential in the next upturn to outperform. You’re starting from a lot more affordable and higher-yield.”

Investors would have time to do their research – the next upturn was not likely until interest rates dropped again in 2016 or 2017. “There’s value starting to be created in this market and it will be a while before it’s realised. We’re in a twilight zone,” he said.

Quotable Value said its valuers had seen more action in some parts of the country since the election result last month but others were cooling. Its data showed the Auckland market up 10.3% compared with a year earlier.

Spokeswoman Andrea Rush said: “Auckland, Christchurch and Dunedin saw home values increase, while Tauranga remained flat over the past three months. Wellington values continued the downward trend of recent months and Hamilton values were also slightly down over the past three months.”

Massey University’s latest housing affordability report bore out the difference between the regions. While Manawatu/Wanganui, Taranaki and Northland became more affordable over the year to September, Auckland became 14.4% less affordable, on the basis of comparing the average weekly earnings with the median dwelling price and mortgage interest rate.

Auckland real estate agency Barfoot and Thompson reported its average house price

hit a record $738,876 in September. Just over 17% of the homes sold by the agency went for more than $1-million.

Real estate institute chief executive Helen O’Sullivan said some regions were starting to pick up and deliver value. “Waikato, particularly the northern parts of Hamilton are definitely in that category.” Northland was another, she said.

Investors should consider the regions on a case-by-case basis. Things to consider included current rental yields and the prospects for the area.

“On the other hand, if you’re cashed up, you would certainly have an advantage in the regions at the moment, the strong feedback is that it’s really hard for them, volumes have been hammered in the regions by the LVR restrictions. If you’re in a position to buy with more than a 20% deposit, you could find yourself with reasonable choice, ” said O’Sullivan.

Some parts of the country had stock that had been on the market for a long time with not a lot of demand for rental property. “It depends on the region.”

Value had largely been realised in Auckland but parts of the city still had potential. “Papakura, Manurewa, Pukekohe, Flat Bush, there’s prospects for growth and upside there.”

O’Sullivan said she expected to see increasing numbers of satellite centres around the outskirts of Auckland, as was common in big cities internationally.

Property commentator Alistair Helm said things had already started to turn. He said data showed Auckland’s property market was cooling. “Monthly sales as reported by Barfoot and Thompson, who representing close to 40% of all Auckland sales provide a robust view of the market.

“Their data shows sales in the nine months so far of 2014 below the 2013 level for eight of those nine months, with the differential if anything growing wider in the past three months with September down 13% as compared with a year ago.”

New listings – a pointer to market confidence – were down in all but two months of 2014 compared to the year before, he said.

“Sales are down, new listings are not flowing on to the market as sellers lack confidence; this is lessening any pressure in the market from buyers who are subdued and as a consequence the pressure of constrained inventory has lessened and this has signalled a plateauing of property sales price. In short, the heat has come out of the Auckland property market.”

Helm said there was potential in such bigger regional centres as Whangarei, Rotorua and Dunedin. “The larger centres are always valuable but haven’t seen the capital appreciation others have had.” ✚

013

REINZ SALES: DOWNThe 5911 sales in September was a

drop of 12% on the year before.

OCR: UPThe Reserve Bank has signalled it will put OCR increases on hold

for the time being.

INTEREST RATES: UPBanks are still offering

competitive rates below 6% out to two years.

IMMIGRATION: UPNet migration is at record highs as fewer people leave and more

arrive in New Zealand.

BUILDING CONSENTS: UP

The trend for the number of new dwellings has more than

doubled since 2011 but the rate of growth is slowing.

MORTGAGE APPROVALS: DOWN

Mortgage approval numbers are down more than 15% compared with

the same 13-week period in 2013.

RENTS: UPMany landlords are planning to put rents up to cover increasing

costs, but most Auckland landlords expect the rise to be only 5% or less.

“We’re at the tail end of the Auckland

boom, it’s still got a bit to go but I

wouldn’t be looking to follow that.” Rodney Dickens

Some of New Zealand’s top lending and home loan experts discuss the latest issues affecting the mortgage industry with TMM publisher Philip Macalister.

014

Round Table - Debating the latest industry issues

Karen Mooney

Bruce McLachlan

Jeff Royale

Joel Oliver

Kylie Kneale

David Windler

Karen Mooney: I’m a broker but I’m also on the board of the PAA, and originally from the NZMBA side. I think the mortgage industry has been evolving for the last 15 years. We have had to go through a lot of changes over the last years, but it’s exciting.

Jeff Royale, iLender. As an online mortgage business the new regulations affect us. I’ve noticed a big difference in how lenders interpret the anti-money laundering regulations. Some are quite happy with certified docs being emailed, while one or two banks still insist on original copies.

New Zealand is probably one of the very few places left where people in the insurance and mortgage space pretty much pay three or four hundred bucks to whichever government department it is, and you can set yourself up as a mortgage broker. That’s long overdue for a change.

I think the perception is at long last getting through that a mortgage does not have to come from a bank. It can come from another source. It’s a great tool for advisers to use.

Kylie Kneale, head of third-party banking for Westpac: A lot of great practices are focussed on seeing the industry self-manage and self-regulate. My concern is that if we don’t lift ourselves as an industry, we’ll have it imposed on us – and I don’t believe that’s the most effective way. I see a big opportunity – in technology – to make it easier to do business and the other opportunity is banks working in partnership with mortgage advisers, rather than competing. When a third of your customers choose independent mortgage advice you’ve got to listen. I believe there are some big opportunities out there for everyone to lift their game and do something different.

Bruce McLachlan, Co-operative Bank: Last year we had that big market disruption in terms of Reserve Bank regulation. There’s probably more regulation on its way. So I agree that the market’s changed and I think it’s changed for good. It’s not going to return to how it was and we’re in for a pretty tough few years.

Joel Oliver, managing director of SuperCity Mortgages and Insurance: I previously worked for a bank for 14 years and created the brokerage a year ago, so relatively fresh to the industry, with a team of eight brokers.

David Windler, Mortgage Supply Company: The main thing is for brokers to think strategically about their business. It’s time for individuals to get their heads out of files and start to become business people – those who do that successfully with thrive in the future.

If we’re to replicate other markets, and particularly if you look at Australia, advisers have amalgamated, they’ve joined groups. They’ve actually got an interface with the consumer that the consumer is aware of and that stimulates the choice to deal with an adviser in the first place.

Our industry is still too fragmented and if I was to be slightly facetious, it’s that next step that will see banks being more wary of adviser-driven business. The moment we actually become a united force will be the moment that we’ll really get listened to as advisers.

015

Round Table - Debating the latest industry issues

Each participant was asked to provide some opening thoughts, from their perspective, on the

mortgage sector.

Geoff Bawden Julia Winterbottom

Adrienne Church

Geoff Bawden, Prosper Group: I actually believe we’re entering a phase where every facet of what we do is about to get shaken, and not everybody is going to come out of the other end. I don’t think size matters but there are a lot of other ingredients that do. If you look at my space, which is the aggregation area, there’s unprecedented activity and movement right now. Everybody is clamouring for position, clamouring to get the best people on board.

There’re a couple of new dealer groups starting and existing ones that are fighting to retain what they’ve got, and we’re no exception. We’re out there looking for the right people to close some gaps as well. So challenging times, I think.

Julia Winterbottom, business development manager for Avanti Finance: Avanti Finance has been in the mortgage advisory side of the business for about eight years. We’re committed to growing our relationships with mortgage advisers. We see it as a key opportunity to grow our business.

Adrienne Church, general manager at RESIMAC: It is challenging times but change creates opportunity. I think change in regulation, change in technology, is key. Change in the groups – that again creates opportunity.

At RESIMAC we did our first securitisation deal this week. That just gives competition, it gives choice, it gives something for the consumer; something for the adviser. It’s all very healthy for the industry.

TMM: Exploring the theme of change a bit more: You’ve said that things going to be quite different, could you

expand on that?Bruce: I think the industry was founded

in a period of high credit growth. The way the banks and the advisory force structured themselves was underpinned by a really strong market. We went through a big event around 2008, but what we’ve seen is everyone come back thinking that we’re going to go back to high credit growth, and we’re not.

Credit growth in household mortgages is falling and I think a lot of people are gearing up for it still growing. The ultimate test of this is forecasts for the three of the major banks in New Zealand as they start a new financial year. I’m guessing that if I added up what they’ve all got in their plans for next year for credit growth, market share, balance growth and mortgages… it will probably be about two-and-a-half times the real system growth. So it’s not going to happen!

There’re going to be a lot of changes. But fundamentally, everyone is still trying to manage their businesses for an environment that doesn’t actually exist. The environment now is more likely to be credit growth of 3-4 %. Has everyone adjusted their businesses for that? No. They haven’t. That’s even before you talk about regulations. It’s fundamentally different market.

Kylie: I think you’ve raised some great points around businesses needing to structure for the new reality. You’re going to see more

of a push for things like operational efficiency to help minimise the costs. Because there’s not the natural growth, it’s going to be more important to retain customers.

We’re already seeing the cooling of things like the cashbacks, which is a good thing. I think you’re absolutely right, it’s about how you gear your business for the new reality and everything is pointing to better servicing, more advice to customers.

Geoff: I hope we are seeing the cooling of that cash thing, but I’m not actually convinced. I saw 4K yesterday for a pretty basic mortgage and I don’t see that mortgage being profitable for the lender in the foreseeable future.

To retain it, the existing lender [who was really only re-fixing] came back with 2.5K. It’s out of hand, it’s silly.

David: I’ve found that the consumer has put more pressure on advisers to price extremely competitively. That makes it difficult for good advisers to play the middle line and not overly shop or squeeze, deals. You walk a tightrope between the client’s expectation and your lender relationships because lenders have made a rod for their own back [with cashbacks]. It’s become harder and harder not to keep going back around pricing, because clients’ expectations have changed.

TMM: How do you change this attitude?

Geoff: Our industry has, over the last eight years at least, been a transactional industry. There are a number of people who are brokers today who have never known it to be anything else and you’ve got to change that mindset from being transactional back to ‘I’m a relationship manager supporting business partners’ to look after the client.

Adrienne: I think that leads into another point, with Westpac bringing back trails. The expectation of a paying trail is that you service your client; you look after your client. You work with us, and that’s to retain the customer, and you’ll get a referral source from that. That’s what should be happening.

❝Credit growth in household mortgages is

falling and I think a lot of people are

gearing up for it still growing.❞

- Bruce McLachlan -

016

Geoff: Absolutely. Not just that, I think our industry has had a huge turnover of people and there’s a huge number of people that have been in third-party distribution for less than seven or eight years and they’ve never known anything other than a transactional model.

Kylie: I think there’s a couple of things. The barriers to entry are low. Even if you compare it to real estate agents, for example, we’re way below that. So that’s where the PAA has been great to help the banks. We’ve got taxi drivers, truck drivers, party organisers, and gym instructors coming into the industry. So how do you put in some standards and self-regulate and actually get that working and get dealer groups to support that model because bums on seats has been how they’ve grown their business?

TMM: It would be interesting to bring Joel in here. He’s got a new business and he’s got quite a few guys in the business. How hard was it for you to set up?

Joel: Surprisingly easy. I couldn’t believe how simple it was to become a mortgage broker. I mean you tick a few boxes, you go online, you pay some money and away you go. Then the competitiveness, the aggregators … for some of them their job is just to get as many people on board as quick as they can.

David: I think Joel’s bang on the money. It’s incredibly easy to enter the industry. When you look at real estate now it’s a five-week course, I think it costs about five grand.

Adrienne: But we all have to take some responsibility for the quality. I’ve had a couple of deals that have had fraud in them; they’ve had misrepresentation in them. I will dis-accredit that adviser. I will tell the PAA and I’ll tell that group. You can’t stand for that behaviour because it’s unacceptable.

David: What’s happened historically, though, is that when banks have taken accreditation away from an adviser, for whatever reason, they haven’t communicated that within the industry…

Adrienne: Well, you’re not allowed to. It’s difficult, but you can tell who you have the agreements with so you can tell the body, you can tell the group.

Kylie: I think we are getting much better at communication because we do it in other parts of the bank. All our fraud teams work together and I think at least with ANZ and ourselves we’re a lot tighter. We’ve exited four advisers for fraud and misrepresentation in the last six weeks so that process is starting to work. I think it’s coming into line with other industries.

TMM: The whole regulation thing is interesting ‘cause we’ve got the review of the Financial Adviser’s Act coming up and

I think it would be fair to say that a lot of people, and some of them in quite high places, don’t actually think it works with all the different designations – the AFAs and RFAs and QFEs. You’re actually going to see a lot of change there, and maybe you’re going to see change where RFA’s and mortgage advisors have to move more to an AFA type standard. What do you think of that, is that the way we should go?

Jeff: Absolutely. Geoff: I’m not convinced to be honest.

Directionally, I’m absolutely in favour of regulation and compliance. But it’s very easy to go over the top and impose stuff that ends up just costing a fortune, and quite frankly does nothing.

TMM: I spent some time with Rob Everett at the FMA the other day and one of the things he said was that the David Ross and DIMS thing was just a total over reaction and they’ve forced all this extra requirement on AFAs now. We keep hearing that RFAs and mortgage advisers are going to a have to self-regulate or it will be done to them. If stories about fraud and stuff start to get out, that’s going to happen.

Jeff: You can never regulate against fraud.TMM: No, but the industry has

to show that it’s got it under control and I think there’s only a small window of opportunity to

actually get it sorted.Bruce: How can you call the industry

advisers if there’s no ultimate standard? I mean it makes a mockery of it to me, to call an industry advisers when anyone can go in and do it; no prerequisites or standards.

TMM: Isn’t this like what Westpac is trying to do and bring back trails and it’s a fee for service…

Bruce: This is the biggest test on whether the industry is [about] advisers or not, because if they all go to Westpac to get trail commission where’s the advice in that? They’ve chased the commission.

Geoff: I don’t agree with that Bruce, not at all.

Bruce: You have to acknowledge that’s a risk. If the industry suddenly changes from giving their business to ASB, to Westpac, because of a commission structure. You have to ask.

Geoff: I absolutely disagree. We have spent eight years educating our people that passive income and client management is what creates value in their business. If someone comes into the market offering a trail income, we’re going to embrace it.

Bruce: Yes exactly. You’ve misinterpreted what I’m saying. I’m not saying that you’re not going to embrace it. Everyone has known that everyone wants trails, and for good reason. But if, overnight, you see a big move - I think that is going to raise broader questions around the motivations behind the advice. It is going to put big question around what the industry is actually there to do.

Kylie: What do you see the industry is there to do?

Bruce: Don’t worry about what I think, it’s

Industry leaders met in Auckland recently to discuss issues affecting the mortgage industry.

017

how the industry sells and positions itself. It positions itself as independent and advisory. If the independence and advice can be changed by changes in a commission structure – and all the volume moves from there to there – does that, or does that not, question the notion of independence and advice?

David: I don’t know if they’re mutually exclusive, Bruce. I think the majority of the time we meet clients who are what I would call non-branded. They actually don’t overly care where we place the business as long as solution fits their circumstances. They don’t have a favourite colour.

If there’s a synergy between placing some business with Westpac in order to receive trail and be remunerated to sit down with a client in 12 months’ time and give them an annual review, which is part of our advice process. That’s common sense.

I think the main thrust of the Westpac initiative has got absolutely bugger all to do with remuneration. The remuneration is a side issue. The overall treatment of advisers as business partners is the main driver here, and

the remuneration just happens to fit with that. If we focus too much on trail income we’re actually missing the point.

Karen: When we had trails our businesses were built on client retention and giving true advice. It was all in the best interests of the client. Our market was exposed to severe environments and our commission base was changed quite dramatically (unlike Australia). Since then we’ve had a lot more transactional types of brokers coming in – but I don’t believe that a whole lot of brokers are going to suddenly go to Westpac for this.

I think what it’s going to do is change the behaviour and that’s brilliant. It’s about what’s in the best interests of the clients; it’s not about where you get the highest commission. If you look at any good brokers out there, and there are plenty of them, you look at their stats and where their business is going each month. It doesn’t all go to one lender because of the higher commission.

TMM: Kylie, with your commission structure – is the remuneration much different or

is it just the way it’s structured? How does it change the quantum of what advisers get?

Kylie: It’s about recognising ongoing servicing. We’re paying trail on existing business where it hits that two-year mark. We’re not paying so high up front, and it means that we’re not as exposed to churn. What we’re seeing is our breakeven is significantly better under this model.

While some people say it’s not sustainable paying trail ongoing, it actually de-risks a lot of your business and recognises the value and the ongoing servicing when those loans are more profitable as well. It all just makes sense – a win for both parties.

We are absolutely aware we’ll lose a lot of advisers out the bottom, but we had over 900 advisers accredited and 300 would provide 90% to 95% of our volume. I’d rather look after those good advisers than have all that rubbish behaviour happen in the industry, which just makes it untenable for everybody.

TMM: So Bruce I have to ask you. Would you pay trails?

Geoff Bawden, Adrienne Church and Julia Winterbottom at the Round Table discussions.

018

❝ Directionally, I’m absolutely in favour of regulation and com-

pliance. But it’s very easy to go over the top and impose stuff that ends up just costing

a fortune. ❞ - Geoff Bawden -

Bruce: Our business is tiny, so let’s just put that on the table. I think much of the industry does do the right thing by clients because we’re paying less commission than virtually everyone else and we’re getting, to be frank, more than enough at the moment from the broker side. I think that’s a credit to the industry. Not just because they’re giving us business; it just shows that they are doing the right thing by clients in those circumstances.

Everything goes around, if you’ve been around for a while, trails come, trails go – and there was sound reason why trails were put in originally to motivate behaviour around retaining clients and servicing clients over the long term, but there was also sound reasons why they went.

Geoff: Absolutely.Bruce: I think Westpac has obviously done

a really thorough review and what they’ve introduced is way wider than commissions as they’ve highlighted. I think the whole industry will go there quite quickly. No one is going to give Westpac more than three, or six, months on their own in this space because, as I said, if you add up all of their plans for the next year I can tell you now it will probably be two, two-and-a-half times what the system is capable of. So if Westpac gets an advantage, the industry will change like that.

Geoff: I think the point that you made, which was absolutely relevant, is that brokers had trail and they lost it. Frankly they have to have a good look at themselves. They failed to exert their role as a business partner and a client manager. 2001 saw the introduction of trails. I think it was a very young, very immature industry then. A lot of the brokers around didn’t really recognise that, ‘Hey it’s not just a bonus payment, I’ve got to do something for this’.

Kylie: You’ve got to have technology to be able to service the client and that wasn’t there before either. Data is becoming more and more important. Being able to get that data out to advisers and back in is going to become more important, and having strong CRM. If you look at Australia, 98% of all our third parties are now grouped in Australia, their loans are submitted electronically which saves a lot of re-work. You’ve got to see those things come in to support this model; it won’t work on its own.

Joel: As you were saying with the cashbacks, the banks have made mortgages in my opinion a pure commodity. With the introduction of Deed of Acknowledgements, you have to pay this back, so I believe trail will get past that.

TMM: Will the Deed of Acknowledgements get actioned?

Kylie: Yes, it’s actually implemented … it’s hard, it’s admin intensive at the moment.

❝ While some people say it’s not sustainable paying

trail ongoing, it actually de-risks a lot of your business

and recognises the value and the

ongoing servicing.❞ - Kylie Kneale-

Bruce: You know why though? The only reason the cash has been introduced is because margins have been really good. Rather than drop the headline rates banks chose to pass the margin back through a different form. So if a loan is repaid early there’s a big write-off for the bank, which happens in a future year. These will disappear and I think; it’s linked to the margin on the mortgages. As margins tighten up these will disappear. If margins stay good, they’ll stay here.

Karen: We’ve all said that the cash is kind of trailing off and suddenly I’ve noticed that I’ve been offered stuff for clients that I haven’t asked for and it’s gone up again. I think sometimes it’s that particular month; they’re not getting a lot of volume, they’re trying to buy the business and this year has been an absolute year of it.

Kylie: Yeah, you’ve got three big banks all in the last month of their financial year trying to hit target, so that’s why you’ll see it at the moment. I think from October 1…

Karen: That’s not broker driven.Kylie: No. What concerns me is it does

distort the market and if we don’t get it under control [and I know banks have led this], then you go: Well how transparent is the pricing? What else is going on here? Then you start getting regulators having a good look at it as well.

Geoff: Do you think there’s going to be an education process because you’ve got client expectations that the lender is going to drop their pants for them? We’ve had clients that we had really good relationships with, built up over a long period of time, who have just said: If you don’t get me that I’m out of here.

Jeff: It’s even worse than that. David: I’ve got clients that don’t want

to change banks, but with the interest rate margin offered by another of $5000 a year and $2000 cash in your back pocket – not everyone can turn down that offer.

Karen: This year, more than ever, I have noticed the same thing where a long-term client will come in and you’re thinking you’re doing a re-fix and they’re saying: I’ve seen this advertiser and I want you to go to the market and I want this and I want that. The pressure is on as advisers this year on that space.

Bruce: We had a ‘no, not a me too’ strategy so we were last to that cash, but we found it was ridiculous. We actually found we would demonstrate we’ll give you that value through your rates and they say, ‘No, no, we don’t want the rate, we want the cash’.

Kylie: You’ll have to see lenders like BNZ will either come back into the market for third party or do something different, because at the moment there is probably a thought there that they’re not paying commission to advisers, which leaves another marketing budget for them. So that could be another dynamic if they came back into the advisory market.

TMM: Both Kiwibank and BNZ, I believe, are starting to get a little bit active in market. What do they need to do in the market to get traction?

Karen: Just start, they’ve just got to start and get back in.

TMM: So you’d like to see them there?

Karen: Yeah I think it’s in the best interests of the consumer that all the players are in there.

Group: Absolutely.Geoff: I don’t know that it matters, quite

frankly. It’s nice to have everyone in the pot but I’ve always had a pretty philosophical attitude and if there’s certain elements that I can’t deal with that’s okay, we’ll deal with the others.

Adrienne: A lot of brokers are dealing with BNZ though.

Geoff: If they come back, good on them. From my perspective [I’ve been around a while] I might not be that receptive to wanting to deal with them, but there will be brokers that will.

Kylie: I think transparency is important though. When you’re playing, as those two are at the moment, it means when we try to do things, like education and the PAA stuff, we can’t even get them to the table because they’re not officially in there; but you have big firms working with them. So some of that makes it hard; so again from an industry point of view too, either they’re in or they’re out.

TMM: Talking about other lenders in the market, is there enough broker support for the non-bank channels and what do we need to do to grow that?

Adrienne: Do you want me to answer that? No there’s not! The problem is there’s a bit of reputational damage that we have to overcome. You had GE come and leave,

019

020

you had Challenger, you had Origin, you had Rabo. So quite a few older brokers have had some experiences. It takes a while to get that reputation and trust back. We’ve had great support from the brokers but you’ve got your 80/20 rule. We’ve got the ones that we get a lot of business from. They get it they work with the consumers. We don’t do cashbacks, but it’s having a point of difference, something that the banks can’t do – a niche.

TMM: How important is trail in your business model?

Adrienne: It’s important for us ‘cause that’s our model to reward brokers, but also to avoid churn and keep the borrower on the book. It’s not only limited to trail we also give brokers access to customers online accounts so they can manage them, do the re-fixes; so they have visibility and access to all of that.

Kylie: I think there’s a huge opportunity to work together a bit more between a main lender and a second-tier or non-bank lender. A Westpac customer got into difficulty recently. Rather than just exit them out on the street they brought in a mortgage adviser. The adviser works with the branch manager, restructures the deal, sends them off to a non-bank lender and then works on a plan with them to get them back into a main bank one when it suits. So it’s about that relationship and creating a better customer experience and I think that’s what you’ll see more of. Let’s get out and educate advisers on how we work together because many of our products don’t compete so it’s how do you use both.

Jeff: I think advice is key to non-bank lending. There’s an education process, both from the public and from the advisory channel. You mention non-bank and most people’s reaction initially is distrust and cost.

Adrienne: Especially in New Zealand, they relate us to finance companies. We’re not a finance company, we’re a securitised non-bank funder, so that’s an education process. So we have a lot of ‘did you know’ about RESIMAC. But that comes down to you guys because you’re the ones in front of them who can actually tell them.

Karen: It’s interesting, though, going back years we used to sell a lot of Origin, and that’s a non-bank lender. Even though there was a lot of competition in the market, they had some points of difference in their product. It was quite specific and it wasn’t hard to line up those products and sell it – because it was in the best interest and it wasn’t anything to do with pricing.

Julia: We’re a finance company and that puts fear in the minds of a lot of people when they hear finance company. As Kylie said, we’ve very much about maintaining a client’s main bank relationship for the majority of the time – we provide that short- to medium-term solution if there isn’t something available from their main lender. We’re gradually increasing the brokers that use us, but the distrust … don’t fully understand your products, ‘I can’t sell that to a client’, the interest rate. Those sort of things are regularly barriers.

David: We’ve probably got more tools in the kitbag than ever and with changes coming in around adviser volume, accuracy of application, conversions of applications sent to drawdown… it’s only going to be the very highest volume brokers that are going to be able to keep all of the lenders happy all of the time. I can see there will be a real split in the adviser community and I think it will tie back in with trail. You’re going to see the good migrate to certain ways of making things work and the transaction will drift to a different way.

I can see certain advisers not dealing with certain lenders because they’re trying to achieve targets and volumes with those that they choose to work with.

Kylie: You’ll see it the other way too, though. I think you’ll get lenders going to a mortgage adviser purely as an acquisition channel or are they also helping with retention? If they see advisers as an acquisition channel and that’s it, then they’ll have commission models that will reflect it. If they’ve got different things in mind and see it as an extension of their business, then they’ll adopt models that suit that as well.

TMM: Someone mentioned third-party distribution in New Zealand is growing. We’re about 30% now. Will we get to something like Australia or the UK?

Bruce: I don’t think there’s any evidence it’s growing. I don’t think there’s any evidence that the actual rough percentage has changed in the last 10 years and it is fundamentally structurally different from Australia and the US.

The base service level that New Zealanders get from their banking system is infinitely better than Australia. If I was taking out a mortgage over there and I rang them and asked when can I see an adviser, I’d get an appointment in a week’s time. In New Zealand, I could ring up all four major banks and have a mortgage manager here in 30 minutes. So the fundamental service structure is just totally different. New Zealand has driven a higher cost, higher service model – which is one of the reasons I think the banks have protected their share.

Geoff: I am trying to keep quiet but I can’t. The only reason market share for third party distribution is not growing in New Zealand is because we’re not promoting it. If we go back to 2001/2002, even 2003, third-party distribution market share was floundering somewhere around 20 – 25%. We embarked on a fairly ambitious campaign and we’re pretty confident that we raised market share to 43%. My personal opinion is that it’s probably somewhere around 25 – 30% currently – and I believe the major reason for that is because we’ve lost profile. There’re a number of reasons for that, one being that the industry became absolutely consumed with compliance.

David: In the 10 years that I’ve been in the

Jeff Royale and Joel Oliver get down to some serious discussion.

020

industry, nobody (as an industry or group) has stood up long enough, and loud enough, to reach the consumer. There’s an inherent belief in the mind of consumer that if they want a mortgage the first stop is to go to the bank, unless someone that they know intervenes.TMM: So whose role is it to promote third party distribution to the public?

Geoff: We’ve all got a role.David: It’s a collaborative role.Kylie: I think you have to get some

brands front up first.Karen: It’s such a small industry we

should all be working together.David: If overnight you could magically

brand every single mortgage adviser and mortgage advice business under one brand overnight and take it to the marketplace the world would be different, our world would be different. TMM: Like the PAA?

David: Any brand you choose. It doesn’t matter what it looks like, what colours it uses, but if there is one unified proposition to the consumer marketplace that’s big enough to actually rank aside the spend that goes on from any major bank…

Kylie Kneale, Karen Mooney and Bruce McLachlan debate the issues.

Geoff: That’s why the industry body, in my opinion, needs to take the lead because what you do in the industry body creates a presence, you get everybody to hook off that; they’re affiliated to the industry body.

TMM: Are you saying bring back the campaign?

Geoff: I don’t think it would hurt for the stakeholders in the industry to get together and say we want to create some profile, let’s work together. If the end result is you end up with a massive campaign, well…

TMM: Would the banks support something like that?

David: The mortgage market is probably the single biggest industry in New Zealand.

I know it depends on what lens you want to put on it. One of the reasons banks are in this market is that generates well over a couple of hundred billion dollars. If you look at the profit that flows from that a year it is massive. You see it in the accounts of all the banks; it’s four-and-a-half billion a year. That’s not all for mortgages, but you can work out the mortgage share of it. Then you have to say what is the role of brokers within that? You’re dealing with the single biggest profit pull of probably any industry in New Zealand. It’s bigger than dairy. So if you look at it from a small business prospective, you’ll get a small business outcome. If you look at it from a profit pool perspective you’d completely flip your lens and say what is our role? What part of that profit are we going after? If you think of it as a small business you’ll play around on little things that, to be frank, will not make a lot of difference. And to be honest for a lot of the banks that will suit them. They’d be fine, keep the brokers in their place and we’ll give them a bit of business. ✚

❝ I think there’s a huge opportunity to work together a bit more between a main lender and a

second-tier or non-bank lender. ❞

- Kylie Kneale-

021

❝No one is going to give

Westpac more than three, or six, months

on their own in this space.❞ - Bruce McLachlan -

LEGALPAA

The new PAA course, designed to improve standards within the financial industry, will benefit consumers writes Michelle Harrison.

By Michelle Harrison

Participants on the first five-day Lending for Advisers course hard at work.

022

Turning knowledge into competence

Building competence rather than simply absorbing knowledge was the key objective at the PAA Mortgage Lending for New Advisers course run for the first

time in the week of September 29.Attended by 12 new entrants to the

profession – a mix of those completely new to financial advice and those who have worked in related fields, such as property – the course was the result of the industry collectively striving for higher standards of advice for consumers

“A more comprehensive approach to training for new mortgage advisers was identified early this year as a key priority,” PAA’s learning and development manager, Angi Mann, says. “The new course is focused on developing competence through extended in-class practical experience. Class time is 2.5 times that of the previous course and we go through a large number of real life scenarios.”

With a long history of running the previous two-day courses, after facilitating the five-day training for the first time, John Melton says that

as well as better preparing the new advisers, those extra three days will likely save the participants many hours in developing their skills on the job.

“That’s the real value of face-to-face. Dealing with real customers is not cut and dried like the assessment – it isn’t as clearly defined and precise as that. Going through the practicalities in-class helps new entrants apply knowledge to a variety of client scenarios they will encounter.”

Big startThe course kicks off with a big first day, covering key elements of the Mortgage Stream of the National Certificate, including: industry participants and their roles and responsibilities, legislation, RBNZ, OCR and fiscal policy and much more.

“It’s a huge amount of information to take in but a key objective of day one is to not only educate participants about how the industry works, but to show them how important their role is in overseeing the whole transaction for clients,” Melton says.

Professional“That’s where someone demonstrates they are a professional – it’s in adding value above that which the client would get when going direct to a lender, by making sure clients are across everything they need to be. So as much as this section of the course is about learning for their own knowledge, the competence piece is in helping new advisers understand how to apply that knowledge to enrich the customer experience.”

Course participant Will Zhu also described the beginning of the week as “big days”, but days that he felt instilled confidence: “The first two days are a little bit tough! But John is really good at presenting and explaining all the terminology clearly.”

“The group discussions really helped build confidence, and if you had a question it could be answered straight away. I also feel I can explain the terminology really clearly in my own words because I understand it so well.”

After the big information days at the start of the week, the course moved onto the application process – gathering information

John Melton

from clients in order to make a fit for purpose recommendation, what different lenders look for, how to effectively present the loan application and how to present information to a client to ensure they are able to make an informed decision.

As someone who assesses and accredits advisers, Westpac national accreditation manager Carmen Moran attended the course, interested to see how it would prepare advisers for the reality of providing mortgage advice and the application process.

Focused"I was delighted to see the participants displaying true understanding of their new knowledge,” Moran says. “The first two days focused on legislation and compliance, so I was impressed when the class volunteered this learning when it came to doing the application on the third day.

"It was really good seeing them using new knowledge and understanding why they needed to do that and then using it in a practical way.”

The application process was also singled out as a highlight of the course for Melton, who says the standard of Diary Notes was easily the pick of the week for him. “They did a surprisingly good job of the diary note – and in most cases, with my lender’s hat on, I would have had enough information to decide. ‘Yes, I’m going to do that deal’.

“Helping new advisers develop competence in the application process was a key objective for the new course, so it’s pleasing to already see a positive result in the output of the training.

Pertinent“The important thing here is helping people new to mortgage advice understand the common threads – the pertinent things they want to know and think about and how to pick those out of a situation,” Melton says.

“We spent a lot of time talking about different client scenarios or characteristics and how lenders will approach things differently. In the real world, you just can’t take a

one size fits all approach.” The remainder of the week saw the

introduction of new content, in particular business lending, running a business and the next steps for new advisers getting ready to go out to market.

“On Thursday, we go through the principles of business lending, specialist lending, and running a business. To convey the importance of being mindful of their own business, we used real life scenarios – for example small business and property portfolio lending -and then related it back to them,” say Melton.

“By highlighting the impact of cash flow as opposed to profit on the lending scenario and then saying, ‘what about you guys’, we were able to get them thinking about their own financial and business situation. The lights come on; it’s a very powerful day,” he says.

RegisteredThe course wraps up with practical guidance on the next steps – getting a good CV together; how to become registered; the role of industry associations; CPD and how it works; marketing and client acquisition and other business management functions.

“The final session – Creating and Developing Your Business – is designed to set them up to take their first step into running their mortgage advice business. We make sure they know what’s next – what they have to do to get accredited, where they can find support etc –so they all know exactly what they are going to do on Monday,” Melton says.

He adds: “We were pleased with the feedback we’ve had to the first course – as with any training you quickly learn its effectiveness when it comes off the paper and into the conference room. We’ve looked at what worked well, what needs a tweak and are really looking forward to the next course.”

Already booked out, the next Mortgage Lending for New Advisers course will run in Auckland on November 3 and will also be held in Christchurch on November 10. For a complete course outline, visit the PAA website at www.paa.co.nz. ✚

❝ Helping new advisers develop

competence in the application process was a key objective

for the new course.❞

-John Melton-

TestimonialsAnqi Cheng: “There were a lot of topics and things to remember, and I felt the course was thorough in preparing you for doing the job.”

Sachin Gajaria: “I gained a lot of very important knowledge and understanding of the finer details which people can miss. I found the terminology explanations particularly helpful, especially what you can and cannot say legally, and how this relates to marketing your business. The role plays were wonderful in building confidence and great practice for when we are live in the market.”

Dilkush Surani: “All the activities were very helpful – particularly the role plays. I thought the five-day course was very good.

Olivia Fraser: “I think the most helpful part of the course was going through the fact finding criteria for putting together an application. It clearly outlined what lenders are looking for and how to gather that information from clients.”

023

John Melton

024

MY BUSINESS

By Phil Campbell

Strong relationships with banks have helped Global Finance Services win multiple awards. How has this Auckland institution achieved success? Dynamic Ajay Kumar explains.

Ajay Kumar

STAFF, CUSTOMERS NUMBER ONE FOR LEADING ADVISER

025

What does Global Financial Services [GFS] see as it greatest asset?

We view our customers and staff as two biggest assets. Customers have a wide variety of channels to choose from when it comes to taking a loan from a bank. Our team continuously strive to understand customers’ financial needs and to match it with the best possible loan solution available within the banks, which means we always meet or exceed our customer’s expectations. Therefore, today 70% of our business comes from existing customers.

In 2009 and 2010 and now this year, you won more awards than Peter Jackson’s movies have won Oscars. I notice those early awards relate to the Indian Business Awards. This must be a bonus for the Indian community. How have you handled their needs, and do you consider other ethnic services?

We have met their needs by implementing three key steps: 1. Employ staff who can speak local languages. 2. Negotiate hard on interest rates, cash contributions and waiver of account fees from the bank thus aiming to give the best possible deal on the loans to the customers. 3. Educate the customers on how to repay their loan as quickly as possible based on their repayment capacity and offering annual reviews to ensure they are on track to repay their loan as per the set plan. We also provide services to all other ethnic groups including Asian and Middle East segment.

You can now add the No 1 position in all of New Zealand with recognition from the ASB and Westpac for GFS business for the 2013/2014. It is some achievement winning the confidence of both banks. How did you do it?

Over the years, we have developed very close working relationship with all banks by giving quality and strong lending proposals and by making the banks understand the key requirements of the customers when taking a loan. The quality of the deals has instilled confidence among banks that we always place strong proposals with them. Further, we are able to negotiate the loans with the banks for the customers on superior terms and conditions, which allows us to place a high volume of loans with these banks.

The financial markets are undergoing change. Did you anticipate any further, possibly radical, changes following the general election?

No, New Zealand has been doing well and is expected to continue to do so for the next two to three years. As polls were closing, we did not expect a big shift in the financial policy matter from any of the political parties as that would send a negative signal to the investors and consumers.

With National now virtually a stand-alone government, has this added stability for the next three, or six, years - particularly as you offer a broad spectrum of financial and insurance services?

The election of the National government has provided continuity to the existing policies and programmes that are currently underway to make the New Zealand economy stronger. The announcement of likely changes to Kiwisaver to assist first home buyers and the promise of speeding the construction activity will further boost the confidence in the housing and building sector.

Of Opposition policies, though this is now academic, which party’s financial policy did you find you could work with?

We could work with Labour's policy of building 100,000 starter homes for Kiwi families which they called KiwiBuild as this would have boosted home ownership among first home buyers.

Ajay, how did you start out and where? I started Global Financial Services in 1999.

In the initial days I used to work from home in Auckland as at that time I was the only one working in the company.

Did you have a background in finance? I have formal qualifications in finance with

Fellow Member of Financial Services Institute of Australasia and Certified Associate of Indian Institute of Banking. I have also worked in the banking sector in India for 22 years and have 15 years’ experience in New Zealand banking and finance sector.

Your awards obviously embrace many, of not all, of the elements in brokerage – sound, appropriate advice, customer confidence and delivery. Of these, which is the most important?

It is impossible to pick one over the other as they all go hand-in-hand. It is our job to always give sound and appropriate financial advice to all our customers which instils confidence among customers and it is even more important to match the advice by delivering the most suitable financial solution to back up the advice.

Any particular mantra or slogan t hat guides your business?

Our company operates with the philosophy of always working in the interest of our customers; our mission is to always make our customers financially stronger and wiser by matching their financial needs with the most suitable financial solution.

Financial markets are notoriously capricious, no more so than in global financial crises; how have you and the mortgage broker profession coped, especially in acting on behalf of clients?

We have steered through the GFC by continuously focusing on fulfilling the financial requirements of customers such as educating the customers on how to manage their home loans based on their changing income situations, by approaching new lenders who were willing to give loans during GFC, and by increasing the focus on our personal risk insurance services to overcome the drop in lending volume. During the GFC, the mortgage broker profession took a big hit and a number of mortgage brokers exited the industry.

Should mortgage brokers make concessions for, say, elderly or retired folk, or are there tacit age barriers which signal a ‘no go’ area?

In our profession as mortgage brokers, we do not differentiate the elderly or retired customer segment from other customer segments. We simply follow banks’ lending guidelines and if the customer meets the banks’ lending criteria, we arrange their loan from the banks irrespective of their age or profession.

Bank profits have grown exponentially. Does this place pressure on such areas as mortgage brokerage to improve performance to increase profit margins for those banks?

Banks do not exert any direct or indirect pressure on mortgage brokers to increase their profitability. Banks profitability has increased over the last few years due to the surge in the lending activity and banks have appropriately compensated the mortgage brokers for the business they place with the banks.

Which is important: customer/client satisfaction or pleasing the banks?

Customer satisfaction is paramount and should never be compromised.

In genuine cases of hardship, which you must face from time to time, particularly in Auckland in which the real estate market “just growed” like Topsy what advice is given, or concessions made?

The only advice we give to people is that we tell them how much a bank will be willing to lend them and we ask them to ensure that they will be able to repay the mortgage without any pressure.

How small were your beginnings and what is your current strength?

In 1999, I started the company on my own and now we have a team of 12.

Any advice for the rest of New Zealand, which takes its lead [and draws its breath!] from the Auckland scene?

The Auckland market is buoyant due to the imbalance in supply and demand of houses. People should not invest in the housing sector based on speculation that house prices in Auckland will grow upwards forever and they should only take home loans they can afford. ✚

New Zea-land has been doing well and is expected to continue to do so for the next

two to three years.

026

LEGALSALES & MARKETING

By Paul Watkins

can nice guys make it in the

industry?

027

can nice guys make it in the

industry?

I took a call from a broker who asked: Can nice guys make in this industry? It had me stunned for a minute as no one had asked that before and I wasn’t sure exactly what

was meant. He explained that he had come from a job with a lender, where he always erred on the side of caution. Now, as a broker, it was different. If he didn’t do a deal, he didn’t get paid!

That’s true of any commission-based job, of course. His big concern was that he felt he was securing loans that the client really shouldn’t be taking out as they were stretching themselves too far. And when he added in life insurance, it was often a hard-fought effort to secure their acceptance.

This was followed by guilt. The first and obvious question was: Is he in the right job? Assuming that he is, then the second question is: Are these just excuses?

By coincidence a second broker asked to meet me for a coffee the next day. She wasn’t doing that flash and said she struggled to cold call, didn’t know what messages to follow up with existing clients and felt awkward asking for referrals. The same questions clearly applied. She also wondered if she was “too nice”. Clearly, a pattern was emerging.

After quite a long chat, I concluded that they weren’t excuses, but a combination of not knowing what messages to give clients and a lack of motivation. The reason for these was a misunderstanding of the true motivations of their clients and how to apply these when supplying their respective services.

Before going into these client motivations, a good first option is to not work alone. Both brokers mentioned above worked from home. Join an office of like-minded people. You may have to forgo a little bit of commission but the results will more than make up for it. Being around others who share the same frustrations can work wonders.

A key to overcoming the “I’m too nice” syndrome is to look closely at these human motivations, otherwise known as empathy. Put yourself in your client’s shoes. There are many human emotions, but here are six that are important in offering such a service as yours. Dealing with guiltThe first is guilt. Sometimes called buyer-remorse, this is the sick feeling you experience after committing to something, such as a large purchase or big decision. As the

❝ Trust is the hottest trend in marketing, with

companies trying a variety of means

to achieve this in the eyes of their

customers. ❞seller, you may also feel this. In the case of a mortgage, knowing you have committed the client to what looks to be a crippling series of payments, you need to have a mutual confirmation process. This consists of congratulating them at the time of acceptance and then within 24 hours after the event.

Send them a pot-plant for the new house or a gift basket with a congratulations card. It will make you feel as good sending it as they will feel receiving it. Following this up with regular newsletters (ideally monthly), this will also make you feel more connected to them.

Build trustThe second is trust. Trust is the hottest trend in marketing, with companies trying various ways to build trust in the eyes of their customers.

Remember that trust is a two way street. The more they trust you, the more empathy you will have with them and the more conscientious you will be about doing a good job for them. This makes you feel good about what you are able to do for them.

How do you achieve trust? In many ways, but the easiest is constant communication. Throughout the process of securing a loan or arranging insurance, keep the client informed. Email them daily if necessary, even if there is no news. They will be feeling very anxious so show that you are continuing to act in their best interests. Then keep in touch monthly once it’s a done deal (email is the easiest) to show that you were not just a hit-and-run merchant. This also encourages referrals.

Add valueThe third is the quest for value. No one cares what they pay, so long as they get value.

In your case, your value to the client is how you conduct the process. Is it professional, did you keep them informed at every step; did you offer alternatives that you saw, but they may not have; did you save them money on interest; did you get exactly what they wanted? This is the value you add.

During and after the process, communication is the biggie again. Reiterate your value to them, which not only literally does that in their eyes, but reinforces to yourself how valuable you are to the client. You will feel better and more proud about your own services if you do this.

BelongingThe fourth is belonging. Humans are social animals. The spectacular rise in social media proves this. We like to get approval for our actions from our peers and we tend to follow the crowd and not try to stand out too much. This is why referrals happen. We like someone to recommend something or somebody as this makes us feel better.

When you talk to clients, tell them about trends in mortgages and insurance, what you have done recently for others (no names of course) and other items that make them – and you – feel more at ease.

Be promptThe fifth is instant gratification. We want things now! Don’t talk to clients in terms of day, use hours. So don’t say you expect to hear within three days, say within 72 hours. It sounds more urgent. And never miss a self-imposed deadline. If you say you will do it tomorrow, then do it tomorrow.

Milestones can help longer delayed timeframes. For example, if you know things may take two weeks, then break it down so the client doesn’t get annoyed. You could say that by Friday… then by the following Tuesday… This way the client focuses on the next stage and not the full time of the service.

Help to save timeThe sixth is time. We are busy. I often wonder how, despite inventions like the microwave, dishwasher and other time0saving devices, we feel like we have less time than ever before.

Offer to do things for the client. If they are not sure about an existing policy’s conditions, tell them you can find out for them (with their approval). Keeping them up to date on developments daily, also shows that you are treating their case with urgency and they don’t have to think about it.

Reading these, you will wonder how they lead to self-motivation. They read more like sales techniques, and that’s exactly what they are. Remember belonging, the fourth tip?

The happier your client base, the more notes of thanks you will receive, the more referrals will come your way and the more you will enjoy being a “nice guy”. So regardless of your disposition, this industry can be great for you. ✚

Brokerage need not necessarily be a hard ball industry. Paul watkins looks at how nice guys can succeed as mortgage brokers.

INTEREST RATES

Chris Tennent-Brown

While the Reserve Bank of New Zealand (RBNZ) put through four rapid-fire Official Cash Rate (OCR) increases earlier this

year, other major central banks have generally steered along a more steady monetary policy course, or in the case of the European Central Bank (ECB), even eased 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, Europe’s central bank cut the deposit rate even deeper into negative territory, and launched other measures to simulate the economy.

In contrast the US economic recovery continues to impress. The US unemployment rate has fallen to 5.9%. The last time it was

this low was back in July 2008, before the Lehman Brothers bankruptcy and the global financial crisis.

More US jobs have been created in the US recovery than were lost in the downturn - payroll employment in May 2014 finally exceeded the previous peak in January 2008. The Federal Reserve's monetary policy objective is “to foster maximum employment and price stability.” The Fed is still some way off that objective, but each month of decent US data reinforces the view that the Fed will begin the process of normalising interest rates within a year.

An upshot of the developments offshore is that global interest rates remain incredibly low. For example, the German 10-year government bund yield is less than 1%, and set an all-time low recently. New Zealand’s equivalent 10-year Government bond yields over 4%, a much higher return, although low by our own historical standards.

New Zealand’s economic growth has been strong over the past year. But recently there has

been a softening in the tone of some domestic data. In particular, the sharp decline in global dairy prices means dairy farmers’ incomes will be much lower this season than the record level reached in the season just gone.

We have also seen a continued easing in business confidence. The particularly sharp decline in confidence in the agriculture sector reflects the drop in global dairy prices. While the level of business confidence is still consistent with healthy levels of expansion, the downward trend warrants monitoring. We may see some stability or even a pick-up in confidence now that the uncertainty of the general election is behind us. The recent decline in the NZD should also boost confidence for exporters.

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 hold the OCR at 3.5% until March next year.

RATES OUTLOOK LARGELY UNCHANGED

Global developments

expected to have some

impact on local mortgage

rates.

028

Home Loan Rates %%

Source: ASB

October 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 Jul-13 Jan-14 Jul-14 Jan-15

WHAT DOES IT MEAN FOR FUTURE MORTGAGE RATES? So why does all this matter to 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 two-to-five year terms, 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 March 2016. 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 term rates.

Mortgage rate increases will be greatest for rates of up to two 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 next 1% of expected OCR hikes). We expect short-term fixed rates to eventually settle near 7% and the five-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 one- to three-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 STRATEGYThe 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. That’s a lot to consider, but despite all

10-year average

the variables, there are still a number of things that we can identify.

Firstly, the six-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 strategies such as rolling six-month or one-year terms for the next five 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 four-year to five-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 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 to consider.

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, or the RBNZ’s more recent forecasts). With a 5% OCR, 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: The carded floating rate is between 6.59% - 6.75%

at the main banks at the time of writing. A borrower can fix for out to three years for under 6.7%. Borrowers can lock in a fixed-term rate that is lower than the floating rate now, and even lower than the floating rates we expect in a year’s time.

As always, there are risks to the assumptions behind our forecasts. New Zealand interest rates could be higher or lower than our forecasts. But with the economy growing well, 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 lock in some certainty and pay a lower rate than current floating rates. Floating rates should be fairly steady while the RBNZ remains 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. ✚

"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."

029

By Jonathan Flaws

LEGAL

The ownership of real estate is the foundation on which the wealth of our nation is built.

If you own a property you are considered to be wealthy or on the road to wealth because the

home belongs to you and, in time, should be mortgage free.

The following table (Top Right) from the 2013 Census shows the proportion of the population that own homes – including through a family trust – and the proportion of homes that are mortgaged:

So on Census night 2013, 43% of the population were mortgage free. It is not clear from the quick stats if this is just the non-family trust owners. In 2006, a greater proportion of family trust owners were mortgage free.

In any event, a large proportion of the population have an unencumbered interest in making sure that their ownership of their home is bullet proof.

These owners do not want to lose their land because someone has a better claim to ownership than they do. They live in their home with assurance that the property is legally theirs.

For owners who have a mortgage, the interest is probably greater because if the property is not legally theirs then the mortgagee becomes unsecured and the loan may have to be repaid.

Assurance to the title to land is therefore a significant thing that underpins a great part of the wealth of this country.

Fortunately, we have a system of registration of title to land that is bullet proof. It’s called the Torrens System. The government guarantees that if our name is on the register as the owner of an interest in land then that land is legally ours and we cannot lose our ownership.

Not bullet proofAt least, that is what we have been led to believe. And in the vast majority of cases that is correct. However, it is not the bullet proof guarantee we would like. If another person is named on the register as the owner of the land in place of ours through a fraudulent transaction, and that person is a bona fide purchaser for value without notice of any fraud or wrongdoing, then our system says that person is the owner and also has the benefit of the government guarantee.

This government guarantee is referred to as indefeasibility of title. The concept that a bona fide purchaser for value without notice of fraud gets title is known as instant indefeasibility.

What you now have is two people who claim ownership of the land and two people who have a government guarantee that the land is legally theirs. Or do you?

Because only the person whose name is on the title is recognised as the legal owner, the

system has provided for compensation to the party whose name has been removed as a result of the operation of the registration system.

That seems to be a reasonable outcome but perhaps not the perfect outcome – at least for the person whose name has been removed from the title.

Now how, you may well ask, can it be possible to have your name taken off the title without your knowledge – surely it’s not possible? The interesting thing about the law is that when you least expect it, the seemingly impossible happens.

Case lawThe leading case on instant indefeasibility is the 1967 case of Frazer v Walker . Mr Frazer lost his land because his wife refinanced and forged his signature. The new mortgage went into default and the mortgagee sold to Mr Walker. How this happened without Mr Frazer’s knowledge is not explained, but it did.

The case went to the Privy Council and it held that instant indefeasibility applies in New Zealand under our Land Transfer Act and Mr Walker who purchased without knowledge that the mortgage was obtained by fraud was confirmed as the rightful owner. The property was legally his.

Fast forward to 2001 and an elderly couple in Tauranga become victims of a fraudulent buy-back scheme. At a meeting to promote the scheme, the couple decided to participate and signed a blank piece of paper and later handed over the duplicate CT to the fraudster. The piece of paper turned into a transfer of land. When all was revealed they found that the property they lived in was owned by someone else and there was now a mortgage to ASB Bank.

Fast forward again to 2014 when, after a long time in court against several different opponents, the elderly couple get judgement against the Registrar-General of Land [the person representing the government compensation fund for land] giving them compensation to help pay off the mortgage.

Compensation In this case, Burmeister v Registrar-General of Land , they were awarded compensation from the government of $349,374.98. Unfortunately, this is not the approximately $641,000.00 still owing and required to be paid to release the mortgage and put them back on the position they were in before their name was taken off the title.

It is not clear from the cases but it seems that the elderly couple got their land back from the fraudster – but with a large mortgage to the fraudster’s mortgagee in place. They also received some compensation from the fraudsters but as they are now bankrupt the potential for full recovery is lost.

The ASB Bank was not at fault. It gave a mortgage to the registered owners of the property and it has the benefit of instant indefeasibility. It was a bona fide purchaser (mortgagee) for value without notice of the fraud. It is legally owner of the mortgage.

The judgement indicates that, to its credit,

YOURSYour signature on a property transaction is bullet proof –

or is it?

030

❝ However you look at it... there

are or will be gaps in the government guarantee of title and government compensation. ❞

the bank has not enforced the mortgage and has allowed the couple to remain in possession. It is essentially acting as a good corporate citizen and is not taking advantage of another’s misfortune.

The Registrar-General of Land is also not being unsympathetic. He has a statutory duty to act in accordance with the Land Transfer Act and to ensure that any compensation paid is only paid to those legally entitled to it. He also has to ensure that the amount paid is not in excess of the legal entitlement.

The reason the Burmeisters are only entitled to receive compensation for a part of what the property now owes to the mortgagee is that the compensation provisions of the Land Transfer Act contain a statutory cap on the amount payable. This cap is tagged to the value of the land and improvements at the time the owner was deprived of their interest in land.

In this case, this was when the mortgage arranged by the fraudster was registered and not when the case was finally determined. In addition, interest is payable on the amount, but that interest is at a statutory rate. In short the value of the land at the date of deprivation and interest in that value does not repay the mortgage.

DepletedThe operation of the government guarantee of title and its corresponding compensation has depleted these owners of the benefit of the wealth they had in their land. The current system is therefore not perfect.

Moves are afoot to change the current system and a consultation draft of a proposed new Land Transfer Act has been published. It is likely to move to the legislation list next year and could well soon become law. It includes changes to the government guarantee of title. Instant indefeasibility will be replaced by deferred indefeasibility.

Without going into the detail, the effect of deferred indefeasibility is that even if you are registered as owner on the title and even if you are a bona fide purchaser for value without notice, if a previous owner discovers they have lost their interest and can prove to a court that there will be a “manifest injustice” if they are not restored, the court will have the power to cancel your registered interest.

Under deferred defeasibility, the mortgagee could be forced to remove the mortgage if the court decided the Burmeisters had suffered a manifest injustice. This would mean that the mortgagee, not the owner would be seeking compensation.

Legal gapsOr more likely, not, in this case. One of the factors in the Burmeister case was the fact that they were not particularly quick to try to sort out the problems once they became aware of them – probably not surprising if they had naively signed a blank sheet of paper and handed over their title.

Most people who find the land is not legally theirs any more would be confused and there would be a delay while they come to terms with what has happened. Under the proposed system, a person has only six months from the time they become, or should have become, aware of the loss of their interest.

However you look at it, whether under the existing system of instant indefeasibility for the possible future system of deferred indefeasibility, there are or will be gaps in the government guarantee of title and

government compensation.Fortunately, there is a commercial solution to

this legal problem. It is called legal indemnity insurance. It is now available in New Zealand and is underwritten by Lloyds of London.

Covering the legal gaps is only one of the risks covered by this type of insurance. It also covers lack of building consents, breaches of covenants, inability to identify issues on the usual searches and enquiries when undertaking due diligence on a property.

Another type of policy is also available for trustees and executors of wills to cover against any unknown developments after the estate is paid out – such as unidentified beneficiaries surfacing or competing claims against the estate. These policies will be available through lawyers and anyone buying a property would be well advised to ask about them.

Conveyancing is not just about making sure the property will become legally yours, but making sure it stays that way. ✚

2006 2013 Movement

Home Ownership (including held in family trust) 66.9% 64.8% Down -2.1%

Home Ownership (not family trust) 54.5% 49.9% Down -4.6%Home Ownership (family trust) 12.3% 14.8% Up +2.5%

Home Ownership with mortgage 56.5% 56.4% Down -0.1%Home Ownership without mortgage 43.5% 43.6% Up +0.1%

INSURANCE

By Steve Wright

Insurance, ACC cover combo unlikely bedfellowsDoes combining income and mortgage repayment cover provide the best deal, asks Steve Wright.

032

Recommendations to take mortgage repayment cover and “top-up” with income cover have become popular with advisers lately.

The reason is that many mortgage repayment cover policies have no provision to offset other income received, of which the most likely is weekly compensation from ACC on disability.

This typically means that should a period of disability be caused by an accident and ACC pay a benefit, the ACC payment would not be offset from the mortgage repayment cover benefit, but paid in addition to the mortgage repayment cover.

Sounds like great advice, right? Client gets paid their mortgage repayment cover benefit and ACC.

But is this really the end of the matter? Perhaps not. Great advice requires critical analysis, essentially finding out the true extent of any actual benefit and identifying any downside. DISABILITYHow many clients will actually benefit from combining mortgage repayment cover and income cover? It is well known that around one third of disability is caused by an accident. So does this mean one third of clients would benefit? Well no, actually; this is only an average. If one analyses a little more, it becomes clear that occupation and gender can’t be ignored.

Disability caused by accident is much more prevalent for manual occupations than for white-collar mishaps and almost twice as likely for men compared to women. The true value of a combination of covers is thus greater for men in manual occupations, and lower for men and much lower for females in white-collar occupations.

As far as potential downside is concerned, the first problem might be that by effectively allowing the client to double dip (or claim two insurance benefits covering the same thing) we ultimately increase the cost of insurance for everyone.

INSURANCEWhile ACC is forced on all of us, it is still essentially insurance. Clients might feel they are entitled to double dip because they pay ACC levies and an insurance premium. It is

useful to remember, however, that insurance companies’ income protection premiums are lower as a result of ACC being offset because the insurer doesn’t need to pay those claims and claims cost is lower as a result.

If there was no ACC, income protection premiums would be significantly higher. In the same vein, if increasing numbers of accident disabilities result in mortgage repayment cover claims, which mean higher claims for insurers because ACC is not offset, premiums will inevitably need to rise.

Probably more important from an adviser’s point of view is the more personal question of: What does my client lose out on by combining income protection and mortgage repayment cover?

A comparison of mortgage repayment cover and income cover benefits quickly shows that, in many cases, mortgage repayment cover does not have many of the ancillary benefits that come with good income protection, the most important of which, in my view, is inflation indexing of claim benefits. Inflation is a massive risk to a fixed monthly benefit and has the power to render fixed monthly sums, that might have been adequate at the start of a claim, woefully inadequate over time, resulting in a failure of the policy to do what it was bought to do.

CONFINEMENTOther particularly valuable benefits not found in many mortgage repayment covers but present in good income covers are bed confinement, critical illness, and specific injury benefits. These policies often pay claim benefits without offsets and without requiring the client to endure the waiting period.

The specific injury benefit is one that needs some particular thought in this regard, precisely because good policies will pay income cover benefits for disability due to specific injury [accident] without offsetting ACC.

When one considers that a recent survey of disability claims in New Zealand showed that 43% of claimants return to work within six months and that at least some accident-based disabilities will still result in an income cover claim paid without ACC offset under the specific injury benefits, the actual claim benefits of combining mortgage repayment and income cover is probably lower than generally anticipated.

CONSEQUENCESThere are also often very valuable Total and Permanent Disability [TPD] benefits in income covers often not found in mortgage repayment covers. By definition, TPD has extremely severe financial consequences; getting significant additional benefits on TPD may well be crucially important to your client.

One might argue that because about 30% of disability is caused by an accident, around 30% of clients disabled may benefit from the double dipping, while far fewer clients will ever be TPD. This is a valid observation and may be good gaming advice but is it good insurance advice?

The financial consequences of being TPD are huge and I would argue that it’s more important to very adequately insure these big financial risks even if their incidence is relatively low, than to insure in a way that effectively enriches.

DIFFERENTFinally, and this is particularly important, a proper critical analysis of your recommendation should include a comparison of what different products and different insurers versions of the products will actually pay in different scenarios, and at different income levels, for both accident- and illness-related claims.

The calculation should take into account the amounts of cover different providers will allow, how they calculate benefits, what they will offset and how they apply those offsets, and any additional benefits payable. Don’t forget to deduct tax from the different options where applicable [remember ACC is taxed] because what the client actually takes home is what matters.

This will help to determine how much clients will actually get if they are disabled when comparing different product and provider solutions. Make sure that the great advice, that serves the client well if they are disabled because of an accident, doesn’t translate into dreadful advice for the roughly 70% of clients who are disabled because of an illness. ✚

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.

" Great advice requires critical

analysis, essentially finding out the

true extent of any actual benefit and

identifying any downside."

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Adviser awards 2014Mortgage Link and Newpark Broking Services acknowledged the outstand-ing advisers within the group at their annual conference in October. The five awards below were presented for lending or mortgage advisory business.

Andrew Macready [centre] won Newpark Broking Services’ quality award, presented by Paul Gill and Darren Gannon.

Newpark Broking Services acknowledgment for volume and service went to Emad Al-Zuaid, presented by Darren Gannon.

Crag Seton was acknowledged as Mortgage Link’s service winner, presented by Charlie Reed.

Dorothy Barns received Mortgage Link’s acknowledgement for dedication, presented by Charlie Reed.

Mortgage Link’s advisers recognised for volume: Brent Jaslarz and Michael Walters [largest volume in NZ for Mortgage Link] presented by Charlie Reed.

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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