TMM - The NZ Mortgage Mag Issue 1 2014 by TMM - The NZ Mortgage Mag

tmm The New Zealand Mortgage Mag

Looking at the year ahead, your key to

FIRST HOME BUYERS A WELCOME OPPORTUNITY

INTEREST RATES OUR LATEST THOUGHTS

PAUL WATKINS

SALES IDEAS FOR THIS YEAR

Issue

2014

CONTENTS UPFRONT

Looking at the year ahead, your key to

04 EDITORIAL

Buckle up – We’re in for an exciting year in the lending sector.

06 NEWS

Bluestone has funding for NZ, New aggregator possible, Specialist lending products coming and more.

10 PEOPLE ON THE MOVE

Westpac’s new broker boss, Loan Market swells its ranks and Mortgage Express keeps growing.

What are the risks and opportunities for mortgage advisers this year? Philip Macalister talks some key players and gets their take on issues which will impact you this year.

FEATURES 12 HOUSING COMMENTARY Housing sales soften a little, indicating the Reserve Bank’s lending restrictions may be working.

18 WELCOME HOME LOANS Your guide to how Welcome Home Loans work.

30 KIWISAVER

How to counter banks in KiwiSaver.

32 PERSONAL LENDING

Consumer finance can provide another option for clients, but watch out for extra rules.

COLUMNS 22 PAA

With lots of changes ahead this year the Professional Advisers Association provides some tips on how you can build your mortgage business.

24 SALES AND MARKETING

Paul Watkins provides some useful ideas to help you market to clients.

26 INTEREST RATES

Chris Tennent-Brown returns from Australia and gives his view on what’s happening to interest rates.

28 INSURANCE

Clients don’t want any old advice, they want great advice.

EDITOR’S LETTER

Buckle.Up

’m not as smart as the Queen and can look back over the previous 12 months and coin a clever phrase like Annus horribilis. It was undoubtedly a challenging year full of ups and downs. Looking ahead to the next 12 months there is, as we say in this issue’s lead story, one word which keeps cropping up. It’s going to be an exciting year. When we say exciting it means that there will be change and new opportunities. Perhaps the comment which will gladden many mortgage advisers’ hearts (and bank balances) is that attitudes to low equity loans is likely to start changing. One of the thoughts which kept recurring when putting this issue together is that in the previous up cycles in the housing market life was pretty simple for mortgage brokers. Now with there are so many changes happening to financial services and the lending sector, mortgage advisers have to continually rethink their business models and adjust things accordingly to take advantage of the circumstances. No doubt that in itself can be a challenge and a distraction. Even a frustration. This year we are looking at some new

Perhaps the comment which will gladden many mortgage advisers’ hearts (and bank balances) is that attitudes to low equity loans is likely to start changing. features in TMM which you will be hearing about soon. Some of these are around surveys to mortgage advisers on various topical subjects. Please, if you get a request (and you all should) could you take a moment to complete the surveys. We will continue with our series of features about other areas that mortgage advisers can consider adding to their business offering. A good example of this in this issue is our pieces on KiwiSaver and Welcome Home Loans. This supports the view we have that mortgage advisers have to offer more than just sending prime loan applications off to the three big banks which support mortgage advisers. We’re all ready for an exciting year and are keen to get on with it. We hope you are too.

Philip Macalister Publisher

MANAGING EDITOR AND PUBLISHER: Philip Macalister SENIOR WRITER: Susan Edmunds SUB EDITOR: Phil Campbell CONTRIBUTORS: Paul Watkins Bruce Cortesi Chris Tennent-Brown Steve Wright Jonathan Flaws GRAPHIC DESIGN: Jonathan Harding ADVERTISING SALES: Sarah Smith Freephone: 0800 345 675 sales@goodreturns.co.nz SUBSCRIPTIONS: Dianne Gordon Phone 0800 345 675 HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 editor@mortgagerates.co.nz

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: editor@mortgagerates.co.nz

NEWS

Bluestone secures funding for NZ Australian-based lender Bluestone sets up to relaunch in New Zealand.

on-bank mortgage lender Bluestone Group has secured a capital injection from a UK-based private equity fund and plans to use this to help relaunch in New Zealand. LDC, which is part of Lloyds Banking Group, had made a "substantial investment" in the company. The funding allows Bluestone to push ahead with its two-pronged strategy: to secure funding to revive the non-conforming lending business it operated before the global financial crisis; and to continue to develop its

asset management business, which involves acquiring distressed debt portfolios and then servicing those loans. Bluestone is looking for a warehouse funding facility from a New Zealand bank for the next six to 12 months to resume lending here. Its strategy will be to grow its non-conforming residential and commercial mortgages business, along with reverse mortgages. Bluestone's operations in New Zealand peaked in 2007 with 30 staff in Auckland and Wellington. It was lending up to $250 million annually of residential and commercial

mortgages. Executive chairman Alistair Jeffery said he saw no reason why Bluestone couldn't increase its lending in New Zealand back to those 2007 levels or even higher, "given population growth and [the fact] property prices have risen." It would not be targeting the high loan to value ratio (LVR) loans. Bluestone lent up to 95% LVR before 2008 but had mostly focused on lower LVR mortgages, and its average LVR was around 75 per cent. â&#x153;&#x161;

PAA adds business training

AA members can look forward to more choice and a broader range of business-focused training with the appointment of a dedicated Learning and Development Manager, Angi Mann. While helping advisers manage the impact of regulatory changes will continue to be a foundation offering of the association, Mann will focus on delivering training that helps advisers drive business. "Regulation has necessarily been a key focus over the past few years. However, it is now timely to complement this with more choice in the business training available for members. Weâ&#x20AC;&#x2122;ll be getting into the detail that matters to adviser business with structured CPD training," Mann says. "I'm talking about accessible training that delivers quick wins and long term benefits - and importantly which is highly relevant to what advisers need in their business.â&#x20AC;? Over the past two years, Mann has run a number of training events for members and joins the PAA in a larger capacity. She has more than 20 years experience in the financial industry, in roles across mortgages, investment and insurance. "But perhaps just as important, Angi knows many PAA advisers and has a strong understanding of what our members need and what they will get the most value from."

NEWS

SBS adds another group SBS says it now has all the broker groups on board following the decision to accredit TNP.

BS says it now has all the broker groups on board following the decision to accredit TNP. Matt Isbister, who is spearheading the bank’s push into the broker market says it has arrangements with NZFSG, Mortgage Link and Newpark, Mortgage Express, Mike Pero Mortgages and Prosper. It is also working on a new agreement with AMP/Roost.

A New aggregator

MM understands another Australian group is looking to cross the Tasman and set up in New Zealand. While details aren’t known at the moment the group is likely to form a relationship with real estate firm REMAX.

Specialist lending products next

ESIMAC Home Loans is planning to launch its next round of products in mid-March, general manager Adrienne Church says. “Our new products are all around solutions based Lending and will be available to all RESIMAC Home Loans accredited brokers and advisers.” She says these products will assist a range of different borrower segments including, first home buyers, investors and upgraders. “Through our wide shop front of products we will always endeavour to have the right product for the borrower including lending alternatives to niche segments of the market such as the self-employed and the credit impaired.”

NEWS

Property investors hot market With the housing market in a buoyant mood it is like surprise to find that property investors are feeling pretty upbeat about this year.

survey run by NZ Property Investor Magazine and Landlords.co.nz shows that most investors expect house prices to rise during the year. They are positive about rent levels, albeit not to the same level as with house prices and importantly vacancy rates have been pretty low over the past year. Their debt levels appear to be manageable

and judging by comments about their plans for this year many say a key goal is to further reduce debt. Indeed more than half of investors who answered the survey had been using the historically low interest rates to pay off debt. One of the strongest responses in the survey was to the question about what will house prices do in the next six months. Overall 65%

said they would rise and another 30% said they would stay the same. The remaining people opted for a fall in prices. Property investors’ biggest competitors are their peers – it’s not foreign buyers; nor is it first home buyers. Other investors came in at 54% and first home buyers and offshore buyers were rated first by 13% and 18% of respondents respectively. Just under 15% said there was no buying competition. With positive news on the house price and rent front we then asked investors about their buying intentions. Twice as many people had bought another investment property in the past six months as had sold. Added to that there was strong interest from investors towards buying another property. Seven percent said they would buy in the next month, another 8% opted to buy within three months and another 11.5% suggested their next deal would be done in six months time. When it comes to help with finance the number of investors who are using a mortgage broker is climbing slowly and is now at 35%. ✚

Diary of events 2014 Basics of ➊ mortgage lending When:

NZFSG ➋ Mini- conferences When:

This course covers both the theory and the practical aspects of home lending and is designed to provide a detailed overview of the skills and functional activities essential to those intending to practice as advisers in the mortgage industry. You will gain a good grounding in how to provide mortgage adviser services to clients using multiple home lending product providers. The course includes case studies, group exercises and a knowledge test. This is an introductory course for those who have, or who are about to join the Mortgage Advice Industry & insurance or other financial advisers who wish to add home lending to their service offering. It is also a great “refresher” for those with lending experience.

NZFSG has decided to hold two mini conferences next year after the PAA decided against having an annual conference. These half-day conferences will he held in Auckland, Wellington and Christchurch.

March 5-6

When: Auckland

More info: lauren.driffill@paa.co.nz or call 09 600 5174

February 27

When: Auckland

More info: Call 0508 722 205

Loan Market ➌ 20th anniversary When: August 7 - 8

When: Hamilton Island

Loan Market is holding its 20th anniversary conference in at Hamilton Island next year. It is a combined Australian and New Zealand conference and promises to be big. The conference returns to where the business started and will have inspirational speakers, and presentations from fellow brokers.

More info: events@loanmarket.com.au

➍OCR announcements The Reserve Bank makes an announcement of the OCR every six weeks and and has quarterly Monetary Policy Statements (MPS). The next announcement is on March 13 and is the one when economists are picking the first OCR increase.

Other dates are: April 24 - OCR only June 12 - OCR and MPS July 24 - OCR only September 11 - OCR and MPS October 30 - OCR only December 11 - OCR and MPS

PEOPLE

PEOPLE ON THE MOVE Westpac appoints new broker unit boss

Westpac appointed a director of third party banking who will take over running the bank's broker unit which was formerly headed by David Gopperth. Kylie KnealeKylie Kneale is the new director of third party banking. She has a strong track record in strategic sales and marketing along with an extensive career in financial services, transforming business relationships with premium national and international businesses. Kneale has been based in Melbourne where she has recently been managing National Australia Bank for Visa. Prior to that she held roles at Visa New Zealand managing the Westpac, ASB and GE portfolios also in her role as head of salesforce effectiveness implementing Westpac's Local Business strategy. As director of third party banking she will

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report the Head of Products, Shane Howell. She will be responsible for third party relationships and will lead Westpac's efforts in developing and delivering Westpacâ&#x20AC;&#x2122;s strategy and financial outcomes for relationships currently managed through the broker/adviser channels across the New Zealand market. She will be relocating back to New Zealand and takes up the role from March 17.

Mortgage Express continues its growth

Kylie Kneale

First up, Nikki Mence is now a mortgage adviser with the group. Prior to that she was the companyâ&#x20AC;&#x2122;s business operations manager and before that worked for Finware. In total she has spent 15 years in financial services, including working in the banking sector and owning her own income management business in the United Kingdom

Mortgage Expressâ&#x20AC;&#x2122;s third new adviser is Peter Lewis. He is a former manager at Westpac. Lewis is based in Blenheim and is also available for clients in the Renwick, Picton and Kaikoura regions.

Loan Market swells its ranks

Peter Lewis from where she hails, extensive experience as a mortgage adviser here in New Zealand, as well as several years in a training and software solutions role also in the mortgage industry. With a background in training and mentoring Mortgage Express advisers, Mence says she understands the business from the inside-out. She will work with clients based in the Auckland area. The second new adviser is John Laird. He has been in financial services for 40 years and has previous experience as a property financial consultant and a banker with both local and international retail banks. He lives on Waiheke Island and works from there as well as an office in the Auckland CBD.

Loan Market has added eight people to its ranks in the past two months. Irene Zheng is been a long time, well-established adviser, and one of the top producers in the migrant market. She has been an adviser for five years and prior to this was an employee of the ASB Bank. Zheng is looking to establish herself in the new Pakuranga Ray White office opening in February that will be dual branded. Loan Market look forward to Zheng hitting its 10 top in settlement club in no time at all. Zane Torkington has recently joined the industry after a successful career in event management. Torkington has joined the experienced Stuart Matheson who is mentoring him through his early period as an adviser. Tony Pope joins the Loan Market team in the New Plymouth region, he is an experienced adviser who has recently relocated from Auckland to New Plymouth and felt the excellent new brand image of Loan Market was

David Hart the ideal way to kick start his business in this new region for him. Georgina Kiss is new to the industry having recently gone through the PAA induction course. She is based in Wellington and is looking forward to growing her business through the new Loan Market brand. Jerome De Silva has returned to Loan Market after a couple of years at New Build. Deepak Ratti has also joined the group. He has more than 26 years of lending experience, which include eight years overseas in Asia and 18 years in New Zealand. He is based in Remuera. A new-comer to the group is Keith Wu. He has an extensive sales background in IT. He will be attending the PAA Mortgage induction course later this month and is looking forward to starting his career under the guidance of David Hart and his team in Tauranga. The other new broker is Deepesh Chaudhary. He has joined the successful team of Gopal Sreenivasan in the West Auckland office. â&#x153;&#x161;

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HOUSING COMMENTARY By Susan Edmunds

SOFTSALESTREND

CONTINUES Is the mortgage market entering another period of a decline in turnover? While agreeing turnover seems to have levelled, in line with many cycles over 20 years, periods of growth have been followed by stretches of decline.

f you’re in the market for a property worth less than $500,000, chances are you’re seeing far fewer buyers at open homes and nowhere near as many bids in the auction rooms, compared with the same time last year. House prices continue to creep up throughout the country but turnover, particularly in the cheaper end of the market, has slowed sharply. The finger is being pointed at loan-to-value restrictions, in force since October.

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Banks must now lend no more than one in 10 of their new loans to borrowers with a deposit of less than 20%. Unless they can access a Welcome Home Loan or pull a significant amount of money out of their KiwiSaver accounts, many first-home buyers have been forced to sit on their hands. But whether the turnover drop is permanent – and whether prices follow – remains to be seen. Westpac chief economist Dominick Stephens has been predicting a slowdown in

the market for some time. Without a doubt, the latest data from the Real Estate Institute proves that he is correct, he says. In December, there were 5688 residential sales, down 1.1% on the same time in 2012 and a drop of 18.3% compared with November. Real Estate Institute chief executive Helen O’Sullivan said: “The softer trend in sales noted in November, 2013, continued into December.” She said the shorter selling month meant a drop from November was to be expected, but the 10-average fall was only 13.6%.

" Two months is not a trend on its own. It’ll be a couple of months before we know the answer to that.” - Helen O’Sullivan-

“While a small number of regions bucked the trend, other parts of the country recorded significantly greater falls in volume than the national figure,” she said. Stephens said that was a clear signal of the direction of the market. “This puts beyond doubt the idea that we’re seeing a slowdown,” Stephens said. “Broadly, prices are still rising but sales are falling, especially in the lower price category.” The national median price increased $2000 compared with November to $427,000, a new record median high. Auckland’s dropped $20,000. But O’Sullivan said some regions might have reported higher median sales prices because fewer sales were taking place in the lower price bands. While the total number of sales was down 1.1% compared with December 2012, the number of sales below $400,000 fell by 14.4%. This follows a fall in sales below $400,000 of 19.6% between November 2012 and November 2013. Stephens said it was clearly a result of the Reserve Bank’s new rules, although mortgage rates that were creeping ever higher would also disproportionately affect the buyers of lower-priced homes. Property commentator Alistair Helm agreed turnover seemed to have plateaued. He said there had been many cycles over the past 20 years of periods of growth followed by periods of decline, and it seemed that the market was entering another period of dropping turnover. But the 80,000-odd houses changing hands per year was still well down on the 120,000 that were sold during 2003 and 2004. “I had expected we might get to 90,000 before levelling off,” Helm said. Stephens said there was new evidence sellers were deciding against putting their properties on the market. “There’s a chain effect. If you can’t sell your lower-priced home, you’re not going to move

up, or if you’re not sure you’re going to be able to extend your mortgage, you’re not going to put your house on the market. That uncertainty seems to be weighing on people’s minds.” The number of properties being listed for sale dropped dramatically in December, according to listing website Realestate.co.nz. It website reported 8010 new listings in the month, down 6% from 2012 and a drop of 40% compared with November 2013. It was the lowest number of new listings in seven years. At the same time, its asking prices eased to a level last reported in June 2013. The national seasonally-adjusted truncated mean asking price dropped 5.7% from November to $451,448. Barfoot and Thompson reported a similar drop in listings. Managing director Peter Thompson said a lack of choice was again becoming a big problem for buyers. There were just 631 new listings with his agency in December, and it ended the month with fewer than 3000 on its books. QV’s research director Jonno Ingerson said the change in sales numbers had been very noticeable when the LVR rules kicked in – and listings had followed. He said the limits were likely to affect the market for the first half of the year. “The impact of the speed limits is likely to differ across the country,” Ingerson said. “Auckland values are expected to keep increasing throughout the year as both internal and external migration boosts the population while the supply of housing remains tight. This strong demand and low supply is likely to keep pushing values up, although the rate of increase will probably be less than the previous year.” But Helm said for those who did list, the punt should be worthwhile. “There’s no doubt the market definitely favours sellers because there’s more demand than there is stock. Prices are not going to grow as fast but they’re not going to go backwards.” Ingerson said the LVR restrictions would have more of an impact in areas outside Auckland and Christchurch, where the supply-demand imbalance was not so stark. But Helm said there was a “Fonterra effect” happening in reverse – instead of higher milk prices feeding confidence into the cities from the regions, house price confidence was filtering out to the provinces. Compared with December, 2012, Taranaki recorded the largest increase in median price in December, up 18.5%, followed by Canterbury/Westland with 12.5% and Auckland at 12.1%. Helm said: “There’s every indication that the regions are having a knock-on effect in price, all of them have been showing significant steady growth month-on-month for the past three or four months. Regions are beginning to see the wave effect from cities.” ✚

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An exciting year ahead One word keeps cropping up when we asked people about the prospects for mortgage broking in the next 12 months and that was exciting. Philip Macalister finds out why there is excitement and highlights issues that advisers need to think about.

LEAD STORY

ast year a deep gloom fell over the mortgage advisory industry when the Reserve Bank implemented its punitive lending restrictions on the market. Now we are almost six months into this policy and everyone has come to grips with what it means the gloom is lifting. Because it was so dark at the end of last year it seems the brightness for the next 12 months has been amplified. While the positive comments aren’t universal, they do come through strongly. There are a couple of givens for 2014. The most obvious is that interest rates are going to rise. The first set of increases may come though next month, and like the Canterbury earthquake, the aftershocks will continue for some time. The good news is that in a regime of rising interest rates it is likely that more people will seek advice around their lending. “There’s going to be a bit of nervousness out there and that’s going to crystallise people asking for advice,” Mortgage Link adviser Charlie Reid says. Likewise ANZ Head of Mortgage Adviser Distribution Baden Martin says one of the opportunities this year is to talk to existing clients. “I would suggest there’s an opportunity to customers on existing databases.” With the OCR beginning to rise in the not too distant future there will be opportunities to do refixing and restructuring of loans, particularly as there is such a large amount of lending on floating rates, he says. This changing market environment gets economists starting to ask what approach will the Reserve Bank take to its lending restrictions once interest rates start rising. While there is an expectation in some quarters that the central bank may back off on its restrictions that is unlikely to happen. Reserve Bank governor Graeme Wheeler has made it clear the policy will be given plenty of time to see whether it is working or not. However, the lending restrictions have some fluidity to them. Since they were introduced there have been changes, such as exempting construction loans, and other changes are possible as further consultation is continuing. This is creating new opportunities in the market place. One of the first of these was the decision last year to exempt construction loans from the restrictions. Martin says as soon as that happened the banks looked at what they did in this space to ensure they could benefit from the changes. “Whenever there is a carve-out, or an exemption, banks will look at it as an

While only one of the big banks which deals with brokers, Westpac, offers Welcome Home Loans, Reid expects other lenders may pick up the product. ANZ says it has looked at Welcome Home Loans, but “we’re certainly not close going to market with something.”

SIX MONTHS LATER

❝ We’re very

close to coming through six months of lending restrictions. There will be more opportunity for mortgage advisers in 2014 than in the last six months. ❞ -Baden Martinopportunity to write more business.” The Reserve Bank continues to consult over the speed bumps and may well make more exemptions to the rules, he says. The other area where there is a real opportunity for mortgage advisers is Welcome Home Loans, which are also outside of the restrictions. It is a product which hadn’t generally been widely used by brokers in the past; however, with the Reserve Bank’s lending restrictions it has become important in many areas for first home buyers. “It’s a good product,” Reid says. “If brokers don’t embrace it they are cutting off a big section of first home buyers.” He says there is more work in doing a Welcome Home Loan (see feature on page 18).

There is no doubt that the lending restrictions have caused a seismic shift in the shape of the lending market. First Home Buyers have disappeared altogether. One of the best illustrations of this part of the change is told by Professional Advisers Association mortgage adviser of the year Grant McFlinn. McFlinn is an Auckland-based Mike Pero Mortgages adviser who specialises in the first home buyer market. After 14 busy years of meetings most week nights in clients’ living rooms McFlinn was keen to slow his business down. “I’ve been wanting to turn the tap off for nine months,” he says. It happened alright, but not how he expected it to. The slowdown came from the Reserve Bank’s restrictions. In some ways, McFlinn is quite pleased as he wanted to put his feet up a little and catch his breath before the “inevitable” next busy period. While he is recharging his batteries now, his rest period maybe short. Martin, who works for New Zealand’s biggest bank which is aggressively chasing business, reckons changes aren’t too far away. He says the first six months of the restrictions are crucial in bedding in the changes as it is a period for lenders to work through all the offers they had in the market and also a time to make sure they could operate within the rules which specify only 10% of new lending can for loans above the 80% LVR mark. Figures from the Reserve Bank show that currently banks are only lending around half of what they could do in this low equity space. The six month mark is also important as the Reserve Bank is measuring the trading banks on a rolling six monthly basis. Although Martin doesn’t express it in such strong terms as this, it is like the first six months is a trial period and once it is over banks’ attitude to low equity loans will change significantly. He says that before the restrictions loans around a quarter of the loans originated through the third party channel were above the 80% LVR mark. With the changes introduced in October that figure fell significantly. Going forward it is likely to pick up again

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An economists

Westpac chief economist Dominick Stephens

f there is one thing we can be sure of this year it is rising interest rates. The Reserve Bank has made it clear the official cash rate will increase and with that will come higher interest rates on home loans. No one knows when the OCR will start its lift-off, but most are picking the next announcement which is scheduled for March 13. Westpac chief economist Dominick Stephens is forecasting that the OCR will rise 125 basis points over the year from its historic low of 2.50%. In this cycle he is expecting it to peak at 5.50%. One message which has been repeated by a number of people is that once the market moves from its rather benign interest rate environment of the past few years more people will start seeking advice on how to structure their lending – this should be good for brokers. However Stephens points out that the housing market is expected to slow down this year. That may mean there is less new business for brokers and the focus will go onto refinancing loans. One of the big questions is what is the best option for borrowers – fixed or floating? From March, 2012, to September last year Westpac advocated fixing was the best

option then moved its view to a neutral position. “There are no obvious opportunities to beat the market today,” Stephens says. “There is no obvious place on the (yield) curve where one part is better than the other.” Rather a borrower’s own financial situation and goals is more important than trying to beat the market. The one thing to watch out for this year when interest rates get ahead of the market. Stephens says historically these rates have tended to overshoot the market in a rising cycle. “The market gets quite excited and carried away,” he says. “If that happens we would recommend floating.” He also says bank margins between wholesale and retail rates may shrink over the next year or two as retail rates may not rise as fast as wholesale ones. Stephens’ message on when the Reserve Bank ends its lending restrictions is simple. Don’t hold your breath. The central bank has said the two criteria for ending the policy is either proof it is not working or is no longer needed. It has also indicated that it will take some time to establish the policy’s effectiveness. Stephens says that won’t happen this year. Besides, interest rate rises the other known factor this year is general election. Stephens says if there is a change of government the pressure on interest rates will ease, partly because a Labour-led government will introduce a capital gains tax. There will be an immediate downturn in the housing market, he says. However, in the long term a CGT will give New Zealand “a longrun improvement in its standard of living.” “A CGT would go a long way to rebalancing and re-orientating the economy.” However, history shows that encumbent administrations tend to be successful in getting re-elected when the economy is strong.

and banks will resume lending in this space. He warns, though, that “we can’t write everybody in that space.” The focus will be on quality business and the requirements to get an application approve will be “more stringent” than for loans below 80%.

REGULATION Financial adviser regulation is one of the big issues but it has been limited to the Authorised Financial Adviser space. When it comes to mortgage brokers Reid is quite candid. “To be perfectly honest, we have been let off relatively lightly,” Reid says. Likewise lawyer David Ireland, who chairs the Code Committee, says mortgage advice isn’t an area which has come under the regulatory spotlight. If a mortgage adviser had become an AFA then the changes implemented to the code of professional conduct would have been “self inflicted as they would have voluntarily jumped into it.” One thing that Reid would like to see is more training and professional development for mortgage advisers. Martin agrees there is little regulatory pressure on this sector; however the speed bump rules are creating more work in the mortgage market. One of the key messages the Reserve Bank has pushed is that banks have to not only stick within the 10% limit but they have to abide by the spirit of the restrictions. The penalty for any breaches can be extreme as a bank losing its banking licence. Martin says that has force banks to be much more stringent in checking where deposits come from when a loan application is submitted as there are rules around banning the use of other credit options such as second mortgages. He says “various people may find ways to circumvent the spirit and intent of the process.” Banks are worried about this and have already started implementing verification checks.

SEGMENTATION A trend that mortgage advisers are likely to hear more about this year is banks segmenting their broker database based on such various performance measures as volume and drawdown rates.

❝ Currently, all

three of the big banks which deal with intermediaries offer bonus commission to get business on their books. This approach to pricing and incentives just breeds 'rate junkies', ❞

“I don’t want to disclose too much about our strategy.” While the banks are busy with their changes there is also a noticeable pick up in the non-bank sector. RESIMAC New Zealand general manager Adrienne Church is pretty excited about the year ahead. “I’m not all doom and gloom like others,” she says. The firm has made good progress since it set up in New Zealand and has recently added staff and is trialling new, specialist lending products with its “platinum” group of advisers. It’s no surprise, but Church says mortgage

advisers need to “continue to diversify.” They have to support other players in the market, other than the big Australianowned banks. While there has been gloom over the sector the prospects for 2014 are summed up well by Martin: “We’re very close to coming through six months of lending restrictions. There will be more opportunity for mortgage advisers in 2014 than in the last six months. Banks have all managed to comfortably meet the RBNZ requirements and there’s an opportunity to write more business above 80%.” ✚

-Charlie ReidInsurance companies currently do this with their third part distribution and it is something which happens in Australia. One of the banks across the Tasman which embraces this approach is St Georges and a former executive with that bank, Shane Howell, is now overseeing Westpac’s broker unit in New Zealand. Reid thinks there is a place for segmentation. “I have no doubt it will happen.” Over at ANZ Martin takes a different view. It has taken a channel agnostic approach to dealing with applications under the lending restrictions. Going forward the focus will be on “the quality of the customer rather than the origination source.” Reid he would also like to see banks address their broker remuneration model and reintroduce trial commission. He is highly critical of their pricing approach which includes heavy discounting, contribution to legal and other incentives. Currently, all three of the big banks which deal with intermediaries offer bonus commission to get business on their books. This approach to pricing and incentives just breeds “rate junkies”, Reid says. He is “the eternal optimist” and thinks there is potential for trial commission to return as part of the broker remuneration model. When asked about remuneration structures Martin said: “”I’m not going to disclose if we have any plans for change.”

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WELCOME HOME LOANS By Susan Edmunds

Welcome Home Loan offer way around rules Loan-to-value restrictions are crimping first-home buyer activity but the Government-backed scheme offers an option.

he news has not been good for first-home buyers or the brokers who cater to them over recent months. Since the Reserve Bank’s new loan-to-value restrictions came into force last October, sales turnover in the lower price brackets has fallen markedly. Mortgage brokers have reported enquiries drying up. Surveys of real estate agents have reported far fewer first-time buyers even bothering to turn up to open homes. And landlords have reported increased demand for rental properties as would-be buyers are forced to save longer to get their deposit together. But while things are tough for borrowers who don’t qualify for a mortgage from the

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mainstream banks under the new rules, more and more brokers are finding they can help those with a small deposit get into their first homes by using Welcome Home Loans. Even advisers who have never had much call to deal with the system are now having to get to grips with it – and quickly. Although Welcome Home Loans have been available for some years, more people became eligible for them when the rules were tweaked at the end of last year. The change coincided with the introduction of the LVR rules. It used to be that a Welcome Home Loan would cover 100% of the cost of property in the lowest price brackets. Now, the value that Welcome Home Loans will cover has increased but a 10% deposit is always required. A single borrower can now have an income

of up to $80,000 a year and a couple can earn up to $120,000 between them to qualify for a loan. In Auckland, a Welcome Home Loan can be used to purchase a property worth up to $485,000, in Wellington and Queenstown $425,000, and in Christchurch properties can be bought for up to $400,000. In some of the pricier provinces around the country, such as Kapiti, Bay of Plenty, Hamilton and the Hutt Valley, Welcome Home Loans can be used to buy properties up to $350,000. The rest of New Zealand has a cap of $300,000. Borrowers’ deposit can come from their KiwiSaver accounts, as a gift from a relative, money already given to a real estate agent, or from bank savings. It cannot be borrowed from somewhere else, such as through a personal loan or on a credit card.

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WELCOME HOME LOANS

Criteria for a Welcome Home Loan are similar to a standard bank loan but instead of going through a single lender’s checks, it must be approved first by the lender and then by Housing New Zealand. NZCU Baywide’s lending manager, Julie Baxter, said there are definitive parameters relating to employment and credit history as well as the household income and property value restrictions “While the loan is approved under Baywide’s lending policy, the low equity fee payable is required to be approved by Housing New Zealand.” Housing New Zealand said it did not set any parameters for commission for brokers who help buyers into Welcome Home Loans. Broker Glen McLeod said he received $500 per loan from Westpac. Kiwibank does not use brokers for its Welcome Home Loans. NZCU Baywide said it would pay a nominal referral fee. The scheme is designed for first-home buyers. Borrowers who have previously owned property but are now in the same position as a first-timer, such as those who have gone through a divorce, may still qualify. Mortgage Supply Co broker David Windler said demand was increasing for Welcome Home Loans. The new criteria meant that more borrowers in Auckland would qualify for them than had in the past. Between July 2003 and June 2013, only 542 Aucklanders qualified and only 18 of those in Central Auckland. “Before Christmas, we were doing relatively few Welcome Home Loans but with the rule changes it’s brought more people and more properties into the fold in Auckland. We’ve started to do a few more recently. It’s a reasonable proposition now.” He said the 20% required most of the time under the LVR rules was a lot to save in the Auckland market, but most couples would be at or near the 10% needed for a Welcome Home Loan. He said the fact Housing New Zealand had to sign off on a loan was an extra step in the application process that brokers had to make their clients aware of. “I think in essence Welcome Home Loans are straightforward but Auckland-based brokers will be less familiar with them. The basic qualifying rules are simple enough but advisers will need to be aware that the loan basically needs to be approved twice. The lenders are the first line of credit and look to work with the broker on the second approval from Housing New Zealand, where the approval process is longer and tougher. Look out for bad account conduct, it can be a stopper.”

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❝ The basic qualifying

rules are simple enough but advisers will need to be aware that the loan basically needs to be approved twice. ❞ -David Windler-

Windler said Welcome Home Loans would only deliver the other 90% of the purchase price when the deal had gone unconditional. “It can be a problem if you need to move quickly.” He recommended borrowers who wanted to use a Welcome Home Loan leave a good period between the deal going unconditional and the settlement date. “It’s important that advisers school buyers up if it seems the Welcome Home Loan is going to be the avenue to go through. The rules are there in black and white, you’ve just got to follow them.” Another mortgage adviser, Karen Mooney, said the criteria for a Welcome Home Loan were no longer stricter than those for other mortgages above 80%. She said all the banks were now being very particular about all their lending to borrowers with small deposits, so the Welcome Home scheme was not noticeably strict in comparison. She said the loan scheme was particularly

popular for buyers in regional New Zealand, where the price caps were not an issue. Recently, she had found that she could get a better deal for buyers by placing them with a Welcome Home Loan than squeezing them into a mainstream deal. Between July 2003 and Jun 2013, there were more than 2400 Welcome Home Loans issued in the Southern region, and more than 1600 in the Nelson/ Marlborough area. Clients who had pre-approvals for mortgages of more than 80% found the big banks were increasing their interest rates for low-deposit buyers and also charging significant low-equity premiums that could put another 60 basis points on to the advertised rates. By contrast, a Welcome Home Loan would come with the bank’s listed rates and a 1% flat fee. “From an adviser perspective, it was more attractive for those people who fitted.” But she said she would still talk to clients about whether there were other options available to them, such as borrowing some of

WHO?

First-time buyers with an income of up to $80,000 or $120,000 as a couple. Borrowers must be New Zealand citizens or permanent residents.

WHAT?

Any owner-occupied property. Welcome Home Loans cannot be used to purchase an investment property. Some lenders allow the loans to be used for new builds.

HOW MUCH?

their deposits from a family member. “I ask whether there is access to family funds because if you can get to 80% or below, you’re offered the kitchen sink. From an adviser perspective, it’s about them and what’s best for them. A Welcome Home Loan is an option but it’s not the only one” Mooney said Welcome Home Loans officially required a borrower to have been with the same employer for 12 months but that rule could sometimes be relaxed if the person could show they had worked in the same industry for a significant period. Broker Glen McLeod, of Edge Mortgages, said he received regular calls about Welcome Home Loans, but where there was an opportunity to get the deal done without using one, he would take it to avoid things such as the restriction on the home being used as a rental property. “That will get them into a better position. With the Welcome Home Loans, there are lots of limitations and rules. I try to give them that

freedom from the get-go.” McLeod said the Welcome Home Loan process was relatively straightforward. “One of the things that doesn’t come with it is a budget for people, letting them know they can afford it or what areas to look at. That comes from the adviser.” He said even with the new criteria, it was still hard to get into a property in Auckland. “It’s a great product to have available but it does have its restrictions.” Mooney expects Welcome Home Loans to be a significant part of the market this year. She said while the banks were expected to relax a little on their lowdeposit lending, they would want to give their loans to the highest income earners. Those who fit the criteria of a Welcome Home Loan were usually those on everyday incomes, she said, who would not be the banks’ first choice. “They may not fit that higher level where banks are wanting to fill their boots.” ✚

Depends on region. Maximum amount is house cap less 10% deposit. ➔ Auckland – $485,000 ➔ Wellington City and Queenstown Lakes – $425,000 ➔ Christchurch City and Selwyn District – $400,000 ➔ Thames/Coromandel, Hamilton City, Western Bay of Plenty, Tauranga City, Kapiti Coast, Porirua City, Hutt City, Upper Hutt, Tasman/ Nelson and Waimakariri – $350,000 ➔ Rest of New Zealand – $300,000.

ANY FEES?

Borrowers have to pay a 1% lender’s mortgage insurance premium and the lender may also apply a loan application fee.

LENDERS

Welcome Home Loans are offered by: NZCU Baywide, Heartland, Fletcher Challenge Employees Credit Union, Kiwibank, Nelson Building Society, Southland Building Society, TSB Bank and Westpac.

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What are you worth to your clients?

With lots of changes ahead this year the Professional Advisers Association provides some tips on how you can build your mortgage business.

t’s not that long ago that around 40% of mortgages in New Zealand were originated through the adviser channel – in fact it was only seven years ago. There’s been a lot of water under the bridge since then –the GFC, changes to bank commission structures and of course a very different regulatory environment. But the waters are calming. True, we will continue to experience changes in regulation and as a result, face new challenges. But for existing mortgage advisers, this is now simply part of doing business and it’s time to bring the value you offer front and centre. The question for consumers is: why wouldn’t you use a quality mortgage adviser? One that takes a 360 degree view of your financial

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position, needs and goals; and then puts in the work to find the best, tailored option? Add to this, someone who helps you make healthy financial decisions on an ongoing basis – like reducing debt; responsibly leveraging assets to grow personal wealth etc. All at no additional cost to you. Why leave these decisions in the hands of a lender who will always – by the nature of their employment - be biased to one suite of products and one way of finding a solution? ASB - as an example - is attempting to answer this question for consumers by increasing the size of its adviser operations. Recently reported by Good Returns, ASB’s General Manager of Branch Banking, Grant Gilbert says that as banks are increasing

their advice offerings, it’s no longer always necessary for customers to seek mortgage advice. The ASB, Gilbert says, will soon have 50 to 60 staff providing advice via videophones when there are no advisers available in the branch. With ASB – and likely others – signalling a drive to further capture the advice market, now is the time to increase awareness of the value that mortgage advisers deliver. Every client is an opportunity to spread the word – nothing new there. But perhaps this year is the time to be more overt about that value in your client communication? What are some of the key strengths of your offering which can’t be matched when going direct? Food for thought includes:

"For these clients, advisers can add significant value: helping to assess the cost of over 80 per cent lending versus waiting until additional savings can be accumulated." UNBIASED ADVICE It’s important to never discount the Kiwi DIY mentality. The ability to go online and research options has resulted in a growing number of ‘deal-savvy’ borrowers, which is - of course - a good thing. With this knowledge and shop-around mindset, many borrowers are comfortable in directly negotiating a sharper rate with their bank. But is that deal the best option for their needs? Or does the rate and the consumer offer (T.V or $1,000 cash back) become the focal point for the negotiation? How well do your clients understand the value of unbiased advice? How can you highlight the value of a thorough market review of options rather than singular negotiation with one provider?

KNOWLEDGE AND EXPERTISE Regardless of whether a client is buying their first property or has been through the process a handful of times, negotiating interest rates and structuring a mortgage to meet short and long term goals is not something they do every day. Borrowers are information hungry. Imparting quality knowledge as it applies to their personal circumstances is perhaps the fastest way to establish a strong relationship and get clients talking up a storm about what they have learned at the next BBQ. What value are you placing on the knowledge that you share with clients? Are you making the most of the opportunities to communicate the benefits your experience delivers?

LONG TERM RELATIONSHIP How many borrowers end up speaking to the same bank representative when it comes to re-fixing or taking out new lending? There is considerable value for a client in working

with someone who has –over time – built a comprehensive understanding of their life style, goals and money management needs. How can you communicate the benefit of establishing a long term relationship with a trusted adviser – a partnership as someone moves from milestone to milestone?

SHOWCASE YOUR VALUE If you’re looking for specific ways to communicate the value you offer, the following three market conditions are a good place to start.

LVR RESTRICTIONS For certain segments of the market, the LVR restrictions brought in by the RBNZ late last year have added additional complexity to their borrowing prospects. For these clients, advisers can add significant value: helping to assess the cost of over 80 per cent lending versus waiting until additional savings can be accumulated; navigating the intricacies of guarantor-secured lending; assisting with the Welcome Home Loan option and using KiwiSaver for a deposit. But perhaps most importantly, it’s an opportunity to showcase the value of the relationship– working alongside clients over time, giving them confidence to keep tracking towards their goals in realistic steps.

INTEREST RATES With the RBNZ signalling increases in the OCR this year, interest rates will be an even greater focus for consumers. The danger in that of course is that the interest rate is not always an accurate representation of the true cost of a home loan. What many consumers may not understand fully when signing on the dotted line is that rate is only part of the picture; fees and the way a mortgage is structured can make a considerable difference to the total cost. As commentary heats up, this is a key message for consumers and an opportunity to showcase the skills of an adviser in accurately assessing the total cost of a borrower’s lending options.

DEBT REDUCTION If all the reports are correct, we’re in for a strong economic environment this year. Will some of your clients be in a better position – or simply feel more able – to do a home loan health check and implement some debt reduction strategies? How can you proactively help clients reduce their debt and in the process highlight the value of your service? The benefit to consumers of working with an adviser is clear. This year - with a stronger economy and steady business environment – it’s time to grow the adviser presence in the New Zealand mortgage market. ✚ PAA Professional Advisers Association.

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SALES & MARKETING LEGAL By Paul Watkins

NO ONE

SPENDSIN FEBRUARY

Working alone is not easy. Try contacting every client in February, the traditional non spending month, to firm your networking for the year ahead.

t’s often hard to motivate yourself to kick off the year. Many like to ease themselves into it by starting in late January so they get the Anniversary weekend (if you are in the north) and then Waitangi Day, which means two short weeks. If you work alone or in a small team, but are self-employed, getting into the year is not always easy. How do you kick yourself into gear? Here are a few ideas that are known to work for brokers I have met. Start by contact EVERY client and contact in February to tell them you are back on deck. A simple newsletter can do that. Don’t screen the list, make it to everyone you can think of.

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Brokers who do this tell me they get a few replies, but more importantly, it breaks the ice for the first phone call to that client. It also signals to you that you are back in business for 2014. Then diary to re-contact them bi-monthly with newsletters. Nothing beats regular contact. Give yourself daily goals. Small ones. They could be such things as phone 10 clients or secure two appointments or send 20 lead letters and so on. Broking is a contact sport. This means activity. And the more activity, the more sales. This then extends to such weekly goals as lunch with a potential Centre of Influence.

Form a ‘Tight 5’. I have written about this before, and not only does it lead to business, but it helps enormously in maintaining motivation because the five members of the group are all in the same boat. Meet your Tight 5 each month for lunch or a coffee to swap ideas and leads. So this week phone one potential Tight 5 member, and the two of you find a third and so on. At the very least, find someone who also works alone and meet for coffee regularly. Work is work, play is play, don’t feel guilty. For a few years, I worked from home and when I made myself a coffee and sat outside to read the paper, I felt guilty. But I soon understood that it is simply appreciating the difference.

LEGAL

❝Change the

setting now and again. It’s a proven fact that rock bands are more creative in different settings. Elton John recorded the Yellow Brick Road album in a French castle and he credits the surroundings to his creativity.❞ Work for two hours then break for half an hour. Set up a schedule and not only does the guilt go but the productivity rises. Give yourself a scorecard. I know a few who do this. They mark themselves out of 5 each day for productivity and meeting sales targets. Don’t lie about your score as you are the only one who will ever see them. Another who I know has a planning calendar on his wall and two marker pens. One is black and each day he puts a cross on that day if he gets an appointment. Then he marks a red cross if he gets sale that day. He showed me his first year’s calendar and as the year progressed the red increased too. He found it very visually motivating. Change the setting now and again. It’s a proven fact that rock bands are more creative in different settings. Elton John recorded the Yellow Brick Road album in a French castle and he credits the surroundings to his creativity. Incidentally, I met a music lecturer recently who is doing his PhD on this exact subject, as he said all the world’s great musicians have found this to be the case – so why not you! I used to do this. When I had a day where my brain just didn’t seem to want to kick into gear, I drove to a nearby bush-clad hill and set the laptop up on a picnic table at the top. The view and sunshine was inspirational. Get an outside viewpoint. This idea and the final point after this can make a huge difference. Getting an outside viewpoint means exactly that. Get someone from outside your business to look objectively at it. It’s amazing how you can’t see the wood for the trees at times. Your thinking becomes channelled and simply variations on things you have done before. Who could this be? It could be the Business Development Manager from a lender, a business or marketing

consultant, or a successful businessperson who you know and trust. Set aside a day for this and have the outsider take you through a structured approach to arriving at an action plan. Invariably, matters will emerge that you either hadn’t thought of or had been staring you in the face, but your focus on day to day activity had hidden them from view. The last idea is very powerful one. It’s called working the gap. This is how it works. You start the year with a sales target, then each month of week you cross off the amount you have earned to that point. So by way of a simple example, you want to earn $120,000. So after January and February you might have done $20,000. So the ‘gap’ is now $100,000 to reach your goals. Then by July you may have achieved $70,000, so the gap is now $50,000. This may not read like a plan at all. It’s just deducting your sales from your target. But not so. It works primarily because the target is forever getting smaller. Each month the amount is less so psychologically it is easier to reach. Saying, ‘How do I achieve $40,000 in sales’ compared with, ‘How do I reach $110,000?’ sounds easier. And the brokers who use this system tell me that when it gets down to $20,000 or so, the motivation to get to that is huge. Many things you do can be seriously DE-motivating, too. For example, you have a bad month where your outgoings exceed your income. I have met with brokers like this. They face a deficit for the month and then spend the next few weeks worrying about it. This in turn causes a drop in confidence and less motivation, which leads to less activity and less sales. Similarly, brokers who make call after call and don’t get an appointment, or run advertising and don’t get a single response, can feel rather depressed. How do you break out of this? Activity! Do stuff. Sheer activity is the answer. Make up a list of stuff you could do and then do it all! Pour it on more than before. For example, email your entire client base with a simple message about how interest rates may rise so to call you for a chat if it concerns them, send out a newsletter with lending, insurance and lifestyle articles, run a Facebook campaign, take a real estate agent to lunch, take two! Being busy like this not only produces results, but breaks you out of depression mode. 2014 is apparently going to see our ‘Rock Star Economy’ perform well. Spending is up for retail and new car sales are breaking records right now. So that means lots of consumer debt and housing price rises. One sure thing is that when Kiwis feel positive about the country, debt levels rise. And that’s where you come in with your expertise. Have a great 2014. ✚ Paul provides newsletter writing services for advisers and groups. Email: paul@paulwatkins.co.nz

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INTEREST RATES Chris Tennent-Brown

Fixed term one way to avoid hikes Buoyed by household and business perkiness, the RBNZ is confident growth in economy gaining momentum.

RBNZ rate hikes coming “soon” The Reserve Bank of New Zealand (RBNZ) has made it clear on numerous occasions that it expects to lift the Official Cash Rate (OCR) several times during 2014, but refrained from making the initial lift at its first meeting of the year on January 30. That provided borrowers on floating mortgages some reprieve from higher rates, but the reprieve probably won’t last long. We continue to expect the first OCR increase

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will come in March. Our view was reinforced with the RBNZ’s rather hawkish comments in its statement that accompanied the OCR decision. For borrowers, if a decision hasn’t been made already, it is definitely the time to consider strategies, as mortgage rate increases will happen when the RBNZ lifts the OCR.

RBNZ January OCR Review summary The RBNZ’s decision to hold the OCR at 2.5% was in line with the expectations of

most economists. The consensus opinion of economists, including ourselves, was that March would be a more likely meeting for the RBNZ to lift the OCR. And in the statement that accompanied January’s “on hold” decision, the RBNZ provided a clear signal that OCR increases are imminent: “In this environment, there is a need to return interest rates to more-normal levels. The Bank expects to start this adjustment soon.”

"The economy is on much firmer footing than it has been for several years... The RBNZ seems very determined to lift rates.” The RBNZ remains confident that growth in the NZ economy is gathering momentum, buoyed by rising household and business sentiment. In particular, the household sector continues to strengthen. The RBNZ noted the housing market is showing some early signs of moderation, which is what it wants to see. Future rate increases will help cool the market further, and the early signs suggest the recently-introduced high LVR lending restrictions are also having an impact on activity. Having digested the RBNZ’s latest statement, we maintain our long-held view that the RBNZ will hike the OCR by 0.25% in March, and gradually lift the OCR to 4% by the end of 2015.

Whatdoes doesititmean meanfor for What futuremortgage mortgagerates? rates? future The RBNZ’s on hold decision means that floating rates get another reprieve from the upward pressure of a rate hike. But once the RBNZ raises the OCR, the floating rate typically goes up fairly much in lock-step with each increase, all other things being equal. The only way for borrowers to avoid these increases is to move to a fixed term. So why wouldn’t you? Well for one reason, this isn’t the first time economists have warned rate hikes are just around the corner. The RBNZ has kept the OCR at 2.5% since March 2011, and more than once we have thought that hikes are not too far away. But right now the economy is on much firmer footing than it has been for several years, and the RBNZ seems very determined to lift rates. Nothing is 100% certain, but financial market pricing implies around 200bps or 2% of OCR increases over the next two years, and the RBNZ’s forecasts also imply a similar amount of tightening, taking the OCR to around 4.5%. We think the OCR peak may be slightly lower – around 4%. But even by our conservative forecasts, we expect the floating rate will be over 7% in two years’ time. Some fixed-term mortgage rates in New Zealand have already been lifting in

anticipation of a series of OCR increases from the RBNZ. For example, the 2-year fixed rate has lifted from around 5.5% to 6.3% over the past six months. The 5-year fixed rate has lifted by a similar amount, and is now around 7.2%. OCR increases will have the greatest impact on short-term rates. Long-term rates have already moved in anticipation of OCR increases, and are also influenced by developments in global interest rate markets, particularly the US Treasury market, where rates are gradually rising. If our forecasts prove correct, in two years’ time we would expect to see the OCR at 4% (up 1.5%), and floating rates at 7.25% (up the same 1.5%). For term rates, we would expect the 1 year fixed rate to lift to around 6.4% (up 0.9%), while the 5-year rate may only lift another 0.25% or so, to around 7.5%. It is important to note that these forecasts are based on many assumptions, and as history regularly shows, those assumptions don’t always pan out. Rates could be higher or lower than these forecasts. But one thing that does seem safe to assume is that with the economy now growing well, it’s very likely the lowest mortgage rates are behind us, and increases from today’s level should be planned for over the coming months and years.

Identifying the best strategy Only with the benefit of hindsight can we be sure what the best mortgage strategy is. But based on our forecasts, there are a number of things that we can identify. Firstly, floating rates are not the cheapest rates right now (the 6-month rate is) so borrowers can create some certainty, and obtain a lower rate than floating by fixing for 6 months. Secondly, all fixed rates are below their long-run (10-year) average. So by this simple measure, the fixed terms are reasonable value, as shown in the charts. But what about the longer terms? Do any stand out as being the best value? We can also calculate the cost of other strategies such as rolling 1-year terms for the next two or even the next five years, and compare the interest rate expense with the interest rate of the fixed terms available today for two to five years. Based on our forecasts, rolling short terms is the cheapest strategy. This partly hinges on our view that the RBNZ will be very gradual in its OCR increases, and the OCR will peak at 4%. If the RBNZ hikes more aggressively than we expect, or lifts the OCR higher than 4%, then these shorter-term rates will lift more than we are forecasting, making this strategy less fruitful, and more expensive than the longerterm rates on offer today. To illustrate, we can estimate what would happen to mortgages if the RBNZ lifts the OCR to 4.5% (in line with RBNZ forecasts and market

% 11

Home Loan Rates

10 5 year rate

3 year rate

1 year rate

6 Source: ASB

Jan 07

% 11

VARIABLE RATE

Jul 08

Jan 10

Jul 11

Jan 13

% 11

Home Loan Rates High (past 10 years)

Source: ASB

10 -year average

7 Jan 2014

6 Low (past 10 years)

Variable Rate

1-year Rate

3-year Rate

5-year Rate

pricing, rather than our 4% peak). By the end of next year, we would expect the variable rate to be around 7.75%, and fixed-term rates would also be higher – ranging between 7% for the short-terms and 7.5% to 8% for the rates around 4-5 years. So 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. While we spend a lot of time generating our forecasts, there are always risks to an outlook or prediction – some positive and some negative. That’s the nature of forecasting financial markets, and in this case, making predictions about mortgage rates over the next five years. 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. ✚ Chris Tennent-Brown is an economist at ASB Bank.

027

INSURANCE By Steve Wright

Want to grow this year? A

couple of weeks ago I was discussing the New Year with an adviser who told me she was hoping to do more insurance business. When I asked her how she was going to do this she told me she hadn’t really thought about it. I made some suggestions and her reply was; “If I find the time”. Charles Roberts Buxton said… “You will never find time for anything. If you want time you must make it." The obvious point is if you want to sell more insurance you must make it happen. The real question is “how?” I am a firm believer in the value of advice, not good advice. Great advice. Today clients can get their insurance from the internet, banks and directly from some insurance companies, so why should they deal with you? What is in it for the client? What is it that you offer that these others can’t? What is your value proposition?

028

❝ To be a great

adviser you must also be able to give great advice. Great advice requires knowledge, skill and imagination. ❞ Before I go on, let me say that I also believe the vast majority of clients do not go looking for insurance, it is a product that must be sold - you must go out and get new clients or sell more to existing clients. Selling skills on your part are thus very important. Incidentally, everything is a sales process.

Clients don’t want any old advice, they want great advice, Steve Wright says.

From selling the need to meet you and engage your services, to accepting their risks, the solutions to minimise or transfer those risk, right through to the application and underwriting process and the need to keep paying premiums month after month, selling never ends. Excellent service is also critical but it doesn’t guarantee clients will stick with you since usually they expect nothing less anyway. In my view the one thing clients cannot get when they try to do it themselves, or they deal with someone who can’t offer them a full range of product options, is great advice. . Over their lifetimes, clients will need lots of insurance and the premiums they will pay will not be insignificant – clients will want value and I believe great advice is what will give them value. Unfortunately, many people don’t realise the value of great advice when it comes to insurance, often they believe all that matters is paying the lowest premium.

INSURANCE

Many people are paying premiums for products that at best are not optimal and at worst, not going to protect them at all. Paying a low premium for something that does not do what you need it to in a time of crisis is very expensive. Unsurprisingly, the value of great advice also has to be sold. So what is great advice and how can you become a great adviser? I believe being a great adviser means you have the right people skills and attitude, you must care about doing the best for the client and be trusted, but this alone is not advice. To be a great adviser you must also be able to give great advice. Great advice requires knowledge, skill and imagination. When it comes to insurance, great advice is required regarding the client’s risks, the financial consequences of those risks and the solutions available to avoid, transfer or minimise the financial consequences, of risk. Most of the time at least part of the solution will be to minimise the financial

consequences by transferring them to insurance companies because we cannot avoid all risk. The question then arises which product and which insurance company? It’s usually easy to identify the type of product: you recommend life cover for death risk, income cover for disability and medical cover to cover medical costs for example, but this is not enough. Knowing which insurer’s life, income or medical cover, will do the job best for the particular client is the real trick and essential to great advice. Knowledge of what is on offer in the insurance market is critical – you cannot give great advice if you only offer one provider’s product or you don’t know what is available elsewhere. Putting your head up and having a good, honest, unbiased look around and investing some time and effort in product training will do a number of good things for you. Firstly it will make your professional life

much more interesting, secondly it will enable you to be a great adviser and grow your business. Clients are more likely to deal with and recommend great advisers, to their friends and colleagues. Thirdly, knowing the products well will give you a great deal of confidence, confidence which rubs off on clients making them feel comfortable with you and your recommendations. As your knowledge and experience grows, skill and imagination also grows, better equipping you to create solutions even for clients with sticky situations, further fuelling your ability to provide great advice. Great advisers never stop learning. Skill and imagination usually take time to acquire but you can go out and get a lot of knowledge during the year – you just have to make the time! ✚ Steve Wright is general manager products at Partners Life.

029

KIWISAVER By Susan Edmunds

Investor education could be a threat to advisers’ client bases Requirement for default providers to educate their KiwiSaver clients could be a chance for them to cross-sell mortgages products.

t’s a situation many financial advisers dread: A client pops into the bank to discuss their credit card with a teller who then tried to sell them insurance. They ring to inquire about a bank account and are asked what they plan to do about a fixedterm home loan that’s about to expire. Many advisers have tried to get around the banks’ drive to cross-sell products to customers by offering more and more services, or by teaming up with other advisers to whom they can refer clients. But there are predictions that new KiwiSaver rules could create another opportunity for banks to nab advisers’ clients, unless those advisers start to pay more attention to the superannuation savings scheme. From June, the next crop of default KiwiSaver schemes will be handed another opportunity to regularly contact their 465,000-strong database when the Government requires them to offer investor education. Default schemes are conservative funds, which investors are allocated to at random when they sign up for KiwiSaver. Defaults are set for a seven-year term. The first seven years expires this June. When the Government asked for applications from those who would like to be default schemes in the next term, it asked them to demonstrate how they would provide education to their investors.

It is likely the next crop of default schemes will include those offered by some of the mainstream banks. ASB was a default provider in the first seven years, as was ANZ’s wealth arm, OnePath. Westpac has lobbied hard to become a default scheme and the Government has indicated it is willing to have up to 10 for the next sevenyear term. Commerce Minister Craig Foss said the move to require investor education from the default schemes was designed to encourage people who were in the default KiwiSaver schemes to actively choose an investment product according to their own circumstances. He said the additional member education criterion built on the Government’s work to improve New Zealanders’ financial literacy and create informed savers and investors. Some providers might look to independent

advisers to help provide that advice element, but industry pundits said the bank default schemes would likely use it as a chance to remind clients that they could be a one-stop shop for them. Henry Tongue, chief executive of Generate Investment Management, said the providers would likely use the education requirement as an opportunity to expand their reach and to offer more products to their KiwiSaver clients. “The result could see default provider advisers calling all their members and offering

advice on where to put their KiwiSaver, and potentially offering to review their mortgage and insurances while they are at it,” Tongue said. That concern is partly what has driven registered financial adviser Matt Phillips into KiwiSaver. Until recently, his focus was only on insurance and mortgages through his firm, Top Half Financial Services. But he decided KiwiSaver had become too big to ignore. He said banks were becoming so good at cross-selling, that at any chance they got, they would try to offer clients another product or service. “Every avenue you give them, they’ll cross-sell. You’re better to say it’s all taken care of than start giving the client split alliances because the banks will definitely cross-sell.” The huge knowledge gap among KiwiSavers about their investments was an opportunity, he said. It has been reported that a third of KiwiSaver members do not know which scheme they are in, or whether it was a good fit for their goals. He saw it as part of his job as a financial adviser to help people to understand things such as risk profiling and to help them to determine what the best investments were for them. “Our clients aren’t dumb but heaps of people don’t know anything about KiwiSaver. If you give them enough information, it’s much better that the clients buy off you.” Generate offers a support platform for registered financial advisers working with KiwiSaver. They offer class advice and then refer their clients to the Generate team for any personalised advice that crosses into the realm of the authorised financial adviser. Philips is now working with Generate and said it was not hard to have the KiwiSaver conversation with clients. But paperwork made the process of signing up lengthier. “It’s not giving them advice that takes the time, but getting the right documentation, especially for AML, where you have to have copies of utility bills and everything.” Ring-fencing of clients was becoming a much more important consideration for all advisers, Glen McLeod, of Edge Mortgages, said. His firm is now also offering insurance and investment advice and also works with other risk advisers who want to be able to offer home loans to their clients. “Banks will always take any opportunity they can to grab clients in any way, shape or form.” He said advisers who did not ring-fence their clients were leaving themselves exposed for client poaching. Banks would want to sell five main products to their clients – credit cards, accounts, home loans, insurance and investments. McLeod said advisers who could cover off more of those products, and cater to

Henry Tongue

"The result could see default provider advisers calling all their members and offering advice on where to put their KiwiSaver, and potentially offering to review their mortgage and insurances" -Henry Tongue-

their clients and the highest level, would have the least trouble holding on to them. Peter Tetzlaff, of Milestone Financial Services, agreed it was a no-brainer for financial advisers to branch out into KiwiSaver advice. He said KiwiSaver was a natural entry point for broader discussions about savings, money management and achieving financial goals. “For most people, it would be an essential part of their long-term planning. You’re just throwing money away if you’re not part of KiwiSaver.” Tetzlaff said he talked about KiwiSaver in

the context of broader retirement saving planning. That package of advice consisted of a comprehensive one-on-one interview with clients about their dreams and goals, and a review of their financial circumstances, followed by a standard risk appetite assessment and more detailed profiling to determine the most appropriate type of investments to place them into. The same risk profiler that is used for any other investment client is used to get an understanding of the client’s attitude towards risk for KiwiSaver. Time until retirement also plays a large part in fund selection. No one has yet come to him looking solely for KiwiSaver advice, nor has anyone been willing to pay for advice on KiwiSaver alone. “We basically see it as part of the service package. We advise only existing insurance and investment clients on KiwiSaver,” Tetzlaff said. He said none of the components to a financial plan could be viewed in isolation. “It’s not just about the investments. You may have the perfect savings plan in place but if you become unable to work and don’t have the insurance in place then your long-term goals are in danger…The investments are just a tool to get there.” Tongue said savers would become much more engaged with their accounts over the next year or so, which would make it easier for advisers to start having KiwiSaver conversations with their clients. He said KiwiSaver savings had grown to the point where they were the second-biggest asset behind the house for many people. Increased disclosure requirements would also bring the topic of KiwiSaver fund performance and fees to the public’s attention in a very accessible way. He said: “No longer can providers and advisers hide behind the catch phrases of, ‘You can’t compare apples and oranges’, ‘There is no real difference between KiwiSaver schemes – you just need to be in it’, and the disingenuous, ‘You should choose this scheme because you can see your balance on an iPhone app’.” He said that regular disclosure requirements would make it obvious to KiwiSaver members if they were not getting a good return from their investments, or were paying more in fees. Advisers could then step in to guide interested customers into the right funds. “All this means that 2014 will be the start of a tsunami of financial advice on KiwiSaver, advice that Kiwis have been needing for some time now. The result could see seismic shifts in the type of funds Kiwis are investing in and who they are invested with. It could also see clients getting a significant value-add from their financial advisers; or potentially clients moving to larger institutions who provide an advice service.” ✚

PERSONAL LENDING By Susan Edmunds

Personal loans can pay off Consumer finance can provide another option for clients, but beware of the extra rules

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f you’re the kind of broker who often has clients ringing up, wanting to top up their mortgage for other spending, you may have found things have got a little tougher over recent months. But there is a way around banks’ tighter lending criteria. Brokers should start to offer personal loans and consumer finance deals as options for customers who are restricted by the new loan-to-value rules, one credit union says. Gavin Earle, of NZCU Baywide, said a big opportunity was available due to the LVR restrictions. Since October, banks have had to keep new low-deposit lending to no more than 10% of their new loan books. That has also put the squeeze on people who have LVRs of near 80% and previously would have been able to borrow a bit more with no problem. Earle said: “Home improvements, car upgrades, travel, that home-owners traditionally put on the mortgage can now be challenging for some clients and their brokers. There are actually significant financial benefits for the client in taking out a short-term personal loan for such expenditure rather than long-term mortgages – I think brokers could do more to educate their clients on this area.” He said it made sense that if people could not top up their home loans any further, they considered personal loans as an option. “This is where a good broker should be looking at all options and what is best for their client.” If a personal loan is offered over a short period, it can work out to be cheaper than a mortgage top up paid over the life of the home loan, even if the interest rate is higher. NZCU Baywide has formal arrangements with 20 brokers. Commissions are negotiated with the broker on a case-by-case basis. Henry Lynch, chief executive of the New Zealand Association of Credit Unions, said credit unions had a different business model to that of finance companies and banks, which would affect the amount that could be paid in broker commissions. “Credit unions are owned by their members.” Lynch said. “The broker has to get paid and it will come out of the surplus profit at the end of the year. The credit union has to know that it will get enough additional business (out of the relationship) ahead of what it already has to make it worth it.” Earle said he could see the benefits for his credit union in expanding its reach via

❝ In terms of us

offering personal loans through brokers, I see this as an opportunity to help new customers ❞ -Gavin Earle-

brokers. “In terms of us offering personal loans through brokers, I see this as an opportunity to help new customers. As a co-operative organisation owned by our customer-owners we have strong values that focus all we do on being in the best interests of the customer. Brokers are assured we will not over-commit their client and will support them in providing a great personal loan tailored to the individual.” The process of applying for a personal loan was similar to a home loan, he said. Proof of income and bank statements were required and a credit check was obtained. A deposit is not required for personal loans through NZCU Baywide. The interest rate is 13.95% as a base, with a margin added for risk. If there was no security, Earle said his organisation would lend up to $20,000 but if such security as a car was available for the loan, it came down to how much the borrower could afford to repay. Borrowers could combine the value of the car plus an unsecured loan component if they wanted to borrow more than 100% of the car’s value. Scott Dodd, managing director of Fico Finance, said his organisation was looking for more brokers to work with. He said the process of consumer lending was similar to home loans, but the approval process was much quicker because once the money was approved, it could be drawn down – unlike a home loan that then goes through legal processes. He said because consumer finance loans come under the Consumer Credit Contracts and Consumer Finance Act, it was another level of regulation for brokers and lenders to get to grips with.

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PERSONAL LENDING

The act is designed to protect consumers who are borrowing money and covers a range of transactions where money is being loaned for personal use. Lenders can’t impose oppressive requirements on borrowers, can’t enforce contracts in an oppressive way and have to disclose fees and make sure they are reasonable. Buyers can ask their lenders to cancel their contracts if they are suffering hardship. Dodds said: “Hopefully New Zealand does not go the way Australia regulators have gone where someone might want $5000, then two years later they claim hardship and say that the lender should not have loaned them the money and the court rules in their favour and winds back the transaction. A lot of consumer lending companies in Australia have shut up shop as it is just getting too hard to lend any money. You have to be an especially prudent lender when it comes to consumer lending.” Dodds said vehicles and boats were the only assets that were useful as security on consumer lending, aside from real property. Anything that was to be used as security would need to be checked. “They might have three or four cars, you need to check they exist, check they own them, check the warrant of fitness and registration,” Dodds said. “That’s on an ongoing basis if the loan is for a number of years. Most other security items either have next to zero realise value or can easily disappear when push comes to shove.” The security checks around personal loans had to be managed more proactively by brokers, he said. “When the odd loan turns bad and at a last resort you have to repossess

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❝ We’ve found

three or four who’ve been with us for years. When a loan comes up for refinance, they shop around for the clients – they want to help their clients, it’s worked out quite well.❞ -Scott Dodd-

any security you can be pretty much guaranteed that the condition of the security especially vehicles will be in poor condition with no WOF and no licence and always an empty tank. If for example a client buys a car from a car dealer for $10,000 it is only really worth about $7000 and if the loan goes bad

after a year you might only realise $2000 or $3000 once you have picked it up and sold it.” He said many mortgage brokers would see the value in branching out because it expanded the types of business they could get. But he said they would need to decide whether it was worth the time and effort it would take to work with consumer loans. “It’s hard to make money in that market, you’re only going to get an administration fee and if someone is borrowing $10,000, is there much less work than someone borrowing a home loan?” Dodds said he would like to find some more brokers to add to his network. Most of the broker business Fico does is for business lending or first mortgages. “Even good brokers, it can depend on whether they’ve got the deals you want.” He said he would rather be offered a deal where Fico would be the second mortgage behind a loan of $330,000 than a first mortgage on a $1 million house because the chance of recouping the money if something went wrong was much higher. If brokers wanted to strike up new relationships with providers of consumer finance, it was just a matter of contacting the organisations, the credit unions and Fico said. Dodds said building a relationship would take some time, but the brokers he knew and trusted were able to supply him with good deals. “We’ve found three or four who’ve been with us for years,” Dodds said. “When a loan comes up for refinance, they shop around for the clients – they want to help their clients, it’s worked out quite well.” ✚

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