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tmm The New Zealand Mortgage Mag

Issue

06

2013

TMM NEW LOOK AN FEEL D

10

mortgage industry leaders discuss the burning issues

RATE SHOCK

ARE YOUR CUSTOMERS READY?

LVR NUMBERS BEFORE THE SPEED BUMP

BUILDING SALES

WITH RESEARCH


CONTENTS

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UPFRONT 04 EDITORIAL

Troublesome LVR curbs offer prospects for some

10 of the leading figures in the mortgage industry discuss all the big issues facing advisers

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05 NEWS

Jenny Campbell’s parting thoughts, broker chases nonbank business, LVR restrictions will lead to compliants

06 People on the move

Find out who has got a new job

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features 20 MY BUSINESS

John Bolton tells Amanda Morrall about the secrets to Squirrel Mortgages

26 PERSONAL LENDING

Will non-bank lenders fill the LVR gap? Susan Edmunds finds out

28 PRODUCT FEATURE Offset Loans

30 BANK MARKET SHARE The latest numbers show which banks are winning the battle for market share

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columns

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16 PAA NEWS

Jenny Campbell provides her final update from the Professional Advisers Association

22 SALES AND MARKETING To help you grow your sales, do some research

24 INTEREST RATES

Where to for interest rates? ASB senior economist Jane Turner gives you her take on the market

32 LEGAL

Anyway the wind blows

32 INSURANCE

How to insure valuable assets - children

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EDITOR’S LETTER

Troublesome lvr curbs offer prospects for some

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n this issue of NZ Mortgage Magazine we present our first-ever Round Table. We have assembled a group of 10 people representing lenders, brokers, groups and the Professional Advisers Association. While in the space of 90 minutes we covered a lot of ground, by far the biggest issue at the moment is the impending LVR restrictions being imposed by the Reserve Bank. I liked one comment that the changes were macro tools and saying there is a huge number of questions concerning micro outcomes. At the time of writing those questions remain unanswered. For banks the LVR restrictions are draconian and verge on unworkable. They are draconian as they are so prescriptive and in the worst case a bank could lose its registration and be unable to operate if it breached not just the rules but the “spirit” of the restrictions. The Co-operative Bank chief executive Bruce McLaughlan reckons that the restrictions will be hard to manage for a small bank like his and nearly impossible for the big banks to manage. For brokers it presents an opportunity. One interesting thought was that the policy amounts to credit rationing. This is something mortgage advisers experienced when the global financial crisis broke and banks refused to lend on deals with less than 20% deposit in them. The non-bank residential lenders clearly see an opportunity, but none appear to be tubthumping the news. Most are likely to be low profile as they don’t want to attract the attention of the Reserve Bank and, as people like RESIMAC New Zealand director Adrienne Church note, they don’t want a book full of low equity loans. To sign off this editorial I pay tribute to

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MANAGING EDITOR AND PUBLISHER: Philip Macalister SENIOR WRITER: Susan Edmunds SUB EDITOR: Word Shine

The nonbank residential lenders clearly see an opportunity, but none appear to be tub-thumping the news. Jenny Campbell and all that she has done at the NZ Mortgage Brokers Association and the Professional Advisers Association. Jenny resigned her position as PAA general manager earlier this month (see story on page eight) and is looking at various new roles – including a return to broking. Jenny has been a solid rock for both associations and always had the best interests of the members at the centre of what she did. We wish Jenny well for the future.

CONTRIBUTORS: Amanda Morrall Paul Watkins Jenny Campbell Jane Turner Steve Wright Jonathan Flaws Margie Macalister 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

Philip Macalister Publisher


NEWS

What concerns property investors Interest rate volatility is just one of three major issues worrying property investors.

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roperty investors have three big worries at the moment, according to the latest ANZ Property Investor survey. It’s not an Election year but investors are intensely worried about government regulations and tax changes. The low point was four years ago when it was really only an issue for 13% of investors. This year it has increased 270% to be a concern for nearly half of all respondents (48%). While the survey didn’t drill into what these concerns are some are obvious.

A change of government would see capital gains tax introduced. It would most likely include some form of Warrant of Fitness for rental properties. All of these impact on the property investors. The two other issues to show significant increases as areas of concern are insurance premiums and interest rate volatility. The change to agreed value is a big issue for all property owners, not just investors. Secondly premiums have risen significantly while at the same time policy wording and

conditions have been tightened significantly. The third area of concern is interest rate volatility. It has sat in the mid-teens for a number of years as an area of concern but has now risen to be concern for close to a third of respondents (28%). New Zealand has endured an unprecedented period of record low interest rates. There is zero percent chance that interest rates will fall any time soon and a 100% chance that rates will rise. ✚

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PEOPLE

People on the Move Wendy Phipps

Avanti adds Chch

Avanti Finance has opened an office in Christchurch and Wendy Phipps has relocated to run the new operation. Phipps is one of Avanti’s senior lenders with over 15 years’ experience in specialist lending. She relocated back to Christchurch to be closer to her family and is glad to be returning home. Avanti has consistently been providing specialist solutions to help clients in the

Canterbury region and with the Christchurch rebuild well underway they see potential for a lot more demand moving forward. Wendy’s extensive lending experience and local knowledge of the Christchurch and wider Canterbury market should provide invaluable support to mortgage advisers in the region. Headline: Another star at Southern Cross Southern Cross Financial has appointed Jeff Mahoney as a business development manager. He has a wealth of experience to bring to the role after successful stints at New Zealand Guardian Trust and Dorchester Life. “It’s great to join a company so committed to the adviser network,” Mahoney says. “ I understand the importance of supporting advisers and am really looking forward to getting out and about”.

Another two join Mortgage Express

Mortgage Express has added new advisers in Whangarei and east Auckland. Jim Fielden has 30 years’ experience in banking, business ownership and hospitality and is

Jeff Mahoney

Jim Fielden starting a new role with the firm in Whangarei. He began his career in the banking industry, and has since moved on to customer service roles in hospitality. General manager of Mortgage Express Sarah Johnston says Fielden “is extremely knowledgeable and well-connected in his local area.” Fielden is based in Whangarei, and will be dealing with clients from Mangawhai to Kerikeri. Peter Heyes has left Westpac to join Mortgage Express in east Auckland. "I’ve spent a lot of time behind a desk crunching numbers, so it’s great to be able to get in front of the customers - to share the knowledge and experience I’ve gathered over the years. There are a lot of people struggling to get into the property market right now, so it’s important that they are well-informed and supported in their decisions. I’m looking forward to providing that service for them."

Former non-bank lender joins TNP

Louise Ledger, who founded the South Island’s first non-bank first tier mortgage company Global Home Loans in 2000, is now the South Island Key Account Manager for TNP. Her previous experience providers her with an insight into the opportunities available to grow business with knowledge, marketing, business planning along with delivering outstanding customer service. Kirsty McAlpine has also joined TNP as an administration assistant. She hasmore than 15 years of finance experience in New Zealand and the United Kingdom. She has a variety of roles at TNP, including supporting advisers on TNP Assist, as well as working with PROfile, organising various event organisations, compliance checks and general administration. ✚

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NEWS

LVR restrictions likely to lead to more complaints The Banking Ombudsman is expecting the new loan-to-value speed limits to cause a spike in mortgage-related complaints.

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anking Ombudsman Deborah Battell said mortgage complaints were already the highest single category of complaints at the scheme she runs. "We don't know how many people will be affected by the LVR restrictions as each customer's situation will be different.” However, bit has two new guides which are designed to help customers avoid problems with mortgage lending restrictions. “If customers do have problems we suggest

they first contact their bank to try and resolve their individual situation.” If they are still unhappy with what the bank proposes, they can contact whichever external disputes resolution scheme that particular bank belongs to. She said the bank could not investigate commercial judgements by the bank but could look at administrative errors in the lending application process. ✚

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NEWS

Providing value still a struggle

Jenny Campbell

PAA’s former general manager says the hard work is not over yet for financial advisers.

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dvisers still struggle to make people understand what it is they do and why it is worthwhile, says Jenny Campbell, former general manager of the Professional Advisers Association (PAA). She stepped down from her role last month,

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wanting to spend time with her young family. Campbell was treated for breast cancer last year. She said she was very proud of her time with the organisation and what it had accomplished. But there was still more to achieve. “One of the biggest struggles is to get the public to understand what we do and put a value on that advice.” Campbell joined the NZMBA a year before it merged with the PAA. Before that, she had worked as a business development manager with non-bank lenders and as a mortgage broker. She said one of her biggest successes was convincing all of the NZMBA members that joining forces with the PAA was a good idea. The PAA was attracted by the NZMBA’s solid education offerings for members and there were efficiencies to be gained through a merger, Campbell said. But it took many months of meetings and backroom work to get the deal across the line. Part of the NZMBA’s constitution required that 95% of members vote for the proposal. Getting advisers on board was Campbell’s job. She said: “I had to work really hard to get people motivated to vote. I had to write to every member with voting forms and tell them what to do.” Ninety-eight per cent of members voted for the proposal. “I was really delighted with that because it gave us a strong mandate.” A strong professional body was needed because advisers were grappling with regulation, Campbell said. Splintered factions would never garner the respect or attention of the regulator, she said.

Another win was the way the PAA was able to muster support for those affected by the Christchurch earthquakes. Many advisers were struggling with the economic downturn and did not have a lot of spare money themselves, but the organisation was able to raise $60,000 for Canterbury members fighting to keep the doors open. “There was an outpouring of good wishes. It was incredible. To ask advisers to put their hands in their pockets, that’s a big deal. But they did it.” The job meant constant meetings and consultation all the time. “Then when you think you can take a breather along comes another one. If anything is not handled properly, something that is detrimental to advisers could slip through. It only takes a strike of a pen and the industry can be destroyed overnight.” Campbell said she was pleased to be leaving the PAA in the hands of very capable staff while a decision was made on a replacement. “I feel good about leaving now because there are enough people that everyone can keep going while the board make a decision on what they are going to do. There’s still so much to do in the regulatory space, I’m not sure if the members understand how much time and effort goes into it.” She said regulation had had the opposite effect of what was intended, because it had become harder for the general public to access advice. Advisers were still always worried about breaking the rules, she said. “The public still doesn’t have a good perception of advisers.” The PAA would have to keep promoting what advisers did and would probably need rebranding and a new marketing campaign to capture public attention. “The new website is a major because it’s a public face the public can go to.” Campbell has already registered a new business and is planning a return to mortgage broking. “It’s still one of the greatest jobs ever. There’s nothing like the thrill of helping someone into their first home. I still think it’s such an undervalued service that we offer people.” ✚


Broker chases non-bank business An Auckland mortgage broker is operating two websites aimed solely at helping people find non-bank finance.

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on-bank.co.nz says it will help New Zealanders find information on non-bank home loans, second mortgages and commercial property finance, even if they do not have good credit. It says home loans are available for people with a deposit as small as 5%. Asecondmortgage.co.nz was launched as an adjunct to the site because of the number of people who enquired about a second mortgage. Lyons’ site says second mortgages have been arranged from $10,000 to $300,000. Lyons said he did not want to talk about the site because he was not interested in telling other brokers how he ran his business, or giving away his competitive advantage. He said the sites were doing reasonably well. “It’s something that’s working for me.” He had told TMM earlier that he was receiving two calls a day from people who would not meet the new LVR speed limit requirements. “There will be more non-bank lenders in the market over the next 12 months. Anyone who can play in that 90% space must be looking at the opportunity in New Zealand.” ✚

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LEAD STORY

LEAD STORY

Round Table The big issues debated TMM convinced some of New Zealand’s top banking and home loan experts to chew the fat on the issues affecting the sector. TMM: What’s happening theLVR space at the moment and how do you think it will affect the market? What are banks doing at the moment? BRUCE MCLACHLAN, Co-operative Bank: There are going to be a few changes to come through. I went out quite early supporting what the Reserve Bank was doing [with LVR restrictions], because I believe house prices growing at 15% when incomes are growing at 2%, is unsustainable. We were very keen for Reserve Bank to take action. The action we think was good; they’ve gone way harder than we thought. Ten per cent is particularly onerous and the most onerous part about that is it’s a condition of registration. [That means if we breach it] we lose our banking licence at worst, but more likely get fined and get penalised and are unable to participate in the market. It’s measured every month on a three-month rolling basis for the big guys, and six months for us, which is a nice little concession. But it’s less about predicting what’s going through in the low equity, and more about predicting what’s going to go on the other side because there's two sides to the equation. And you’re always forecasting. You’re not dealing with actuals you’re dealing with forecasting. And the single biggest issue for everyone, all the banks, is it’s measured at the time the commitment is made not at the time when the loan’s drawn. And not one of our systems can cope with that. So not one of us can measure it at the moment. You can’t get close; it’s got to be exact and audited. We’re in administrative nightmare space and we’re a little bank; there was no way in my view the big banks can actually do this.

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So everyone is going to be extra cautious. So for us, with the 10% limit, we've imposed an internal 8%. So that’s what we’re targeting but I can tell you from month one, I want to prove to myself that we can actually stay within 8%, so we’ll probably target down at 4% or 5% for a couple of months, and then build up and then we’ll know that we've got this under control. The one change Reserve Bank may do is they might move that timing of the flow from the time of the loan commitment to drawdown; they may change that beause we’re all throwing our arms up saying: “How on Earth are we going to do it?”

TMM: I understand that the big banks

have gone out to the brokers and said, “ Don’t bother submitting loans over 80 now.”

JEFF ROYLE (iLender): Yep, more or less. GEOFF BAWDEN (Prosper Advice): I'm not even remotely convinced that this is going to fix the problem.

JENNY CAMPBELL (former general manager of PAA):

I totally agree. BAWDEN: The problem from my perspective is predominantly in Auckland/ Christchurch. It’s a supply and demand problem more than anything else. I've gone back and I've talked to all the clients that I've had in the last six months, who I know were above-80% buyers who I know who had problems; and not one of them was competing against another 90% buyer. They all lost out to other parties and they were a mixture of Asians, ex-pat Kiwis returning home with the cash, and developers who had done their sums and said, “Good investment

return, I'm prepared to pay X.” And my latest incident was just this week where we had a situation, where we had a 90% approval for a client; the client had a friend who was a real estate agent in the company that was auctioning the property. That real estate agent was suggesting to my client that $690,000 to $720,000 was a good range; that was within the ballpark; they got a valuation done at $710,000. The property was bought by an Asian buyer for $870,000.

CAMPBELL HASTIE (Go2Guys Mortgage Brokers):

That’s not an uncommon story either. BAWDEN: The problem is, from my group’s perspective, the people that are really hurting


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Our Top 10 experts

Campbell Hastie, Nigel Staples, Ian Webb, Adrienne Church,

David Hart, Philip Macalister, Geoff Bawden, Jenny Campbell, Jeff Royle, Bruce McLaughlin, Peter Rollason. are our regional guys, because a good proportion of what they lend is over 80%. CAMPBELL: It was already difficult to get high-LVR lending in the regions. This is going to make it even more difficult. IAN WEBB, PAA: One of the difficulties that you've just raised is that we’re taking out a segment of the demand market that isn't driving the activity you’re trying to control. Issue number two is they're trying to increase supply. If you're trying to control demand don’t you want to increase supply? Where are the exemptions to allow the supply side of this equation to be an open shot? So if you're closing both the supply and the demand side you've created no change in the

overall situation. BAWDEN: What about the small business owner who’s using their home to support their business activity and maybe as a temporary cash flow problem, is sailing close to the 80% mark and wants a temporary overdraft? Sorry, can’t provide that. What about the guy that’s struggling and needs a mortgage holiday but the capitalised interest will take him beyond 80%? There's a whole raft of side effects that haven't even been thought of. MCLACHLAN: I think you can analyse this too much. This is a macro-prudential issue. There is going to be lots of issues at the micro level. The big part of the government announcing 39,000 new homes in Auckland is

for that same reason. It’s to tell people: “Don’t rush and buy because the supply is coming.” CAMPBELL: When [Wheeler] came out, initially; he didn’t say that it was to try and dampen two particular markets, he was talking about stability of our banking system. So he was looking at high-LVR lending as being risky and potential negative for our banking industry. And I think all of us know that high-LVR lending in the environment that we’re in now, or even just before this, was never easy lending. It was always a difficult loan to get and the credit control around those loans is so good now, that they're not risky. In some ways those loans are some of the safest because you've got that stable

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LEAD STORY

LEAD STORY

The role of a broker is even more important now than ever before. It wasn’t that long ago where you couldn’t borrow over 80% – DAVID HART Chewing the fat: (Top) Mortgage adviser Campbell Hastie and Cressida's Nigel Staples. (Bottom) The Co-operative Bank CEO Bruce McLaughlan and Prosper group head Geoff Bawden

employment history. It’s the self-employed people that have their capital tied up and who get caught in economic cycles of down-turn that cause the problem. WEBB: I think one of the things that the banks are already indicating, is if we've got this 90/10 thing going on, then we’re going to have to be more generous to the higherequity people; and if that means we worry less about their serviceability so that we can keep this book balanced, that’s what’s already been indicated out there. The clients that I've always had go under are people that actually couldn’t afford the mortgage; it had nothing

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to do with the equity. What they’ve done is they’ve actually made that potentially a worse situation.

TMM: I’d be interested to hear from some

of the brokers how you think it will impact on your business; what portion of your business would fit into that low equity category and what impact will it have for you?

HASTIE: The low deposit set makes up a huge portion of my business. That’s who I'm targeting, actually.

TMM: So time for a new business strategy? HASTIE: Not at all. I actually think it requires me to turn the volume up because there's a huge opportunity. Those people still want a solution, they still want to buy a house.

DAVID HART, former CEO of Loan Market: The role of a broker is

even more important now than ever before. It wasn’t that long ago where you couldn’t borrow over 80% and for rental and residential properties it was down at 70%, so it’s nothing new. We’ve been here before, we’ve just got to get our heads around it again. WEBB: For those brokers that have been in the business for a long time, they’ll see it as an opportunity. But for relatively new brokers it’s going to be real tough. ROYLE: They won’t have the depth of experience to deal with it. And I think for most brokers, the principle of what’s happened is fundamentally flawed. It’s not fit for purpose is the way I put it. Because it won’t address the key issues, which are non-Kiwi investors, in fact the biggest bunch are Australians. It won’t stop the mum-and-dad investors, and so on, and so on. And it obviously won't help build houses, and that’s the biggest issue. So that side of it is, I’m fundamentally against it, but from a business perspective, it’s the best thing that’s happened to the broking industry in years.

HART: Yeah, absolutely. ROYLE: My phone is hot.

TMM: We should probably

bring it to our non-bank lenders.

NIGEL STAPLES, Cressida Capital: Traditionally, we’ve only ever lent to 75%, with our funding line is that’s the maximum that we can lend to. I suppose the impact – we’re still trying to get our heads around it really. Bruce is right, it’s a macro tool, which the Reserve Bank has exercised without necessarily delivering a result at that level. It’s going impact all of us in terms of our business.


TMM: So does it create opportunities for you?

STAPLES: What we’ve seen in the past during the GFC the banks had become more conservative and we were able to access a better quality deal as a result. So for example, banks wouldn’t lend on apartments below 30 square metres, they’d lend on 50% on apartments in the Auckland CBD. Those sorts of controls are great for us. ADRIENNE CHURCH, Resimac: It does create opportunities. I don’t believe that the data has shown that a 95% borrower does perform a lot worse than an 80%, or a 75% borrower. The losses that we have seen is not limited to the LVR. So I don’t think it will help from a financial stability point of view. I think it will slow the market, but only from the confidence in trying to pull it back. We will get creative. There will be other ways to get money. The interest rates will go up on those high-LVRs, there will be second mortgages, there will be family pledges, there will be offsets. WEBB: I understand that the banks have been told that they are not allowed to break the spirit of the law. MCLACHLAN: A condition of registration is we cannot break the spirit of what they are trying to do. And they have left that as broad as they can, because the more they try to define that [the harder it is], The biggest mistake they made in this regulation, in my view, was actually putting things like exemptions, because exemptions create nightmares. CHURCH: But some of the banks have already launched products that will [get around the rules]. MCLACHLAN: One of the biggest issues at the moment is, what is included in the L and the V calculation. That’s the biggest challenge for us, because you have all the obligations for mortgages, does it pick up overdrafts, credit cards, all those other things. Are they aggregated or not? That is a very grey area.

BAWDEN: Two things that have already been demonstrated are: (1) interest rates are going up for borrowers who are borrowing more than 80%, along with other costs, and (2) interestingly, we’ve already seen examples where we’ve gone in to negotiate an interest rate for an existing client, and the lender has said, “based on the GV, which is three years old, we’re actually sitting at 83%, no negotiations.” WEBB: Banks have got to find their margin. If they reduce their number of deals, then they’re going to find that margin another way, and ultimately those rates will go up. And at the moment they’re taking the long-term rates up in preparation for that. But the time’s coming where the short term rates will go up as well. CHURCH: We’ve put our rates up over 80%; (1) there’s a margin component, (2) I can’t have a whole portfolio at 90%, so you need to balance that. So if I’m going to be writing business at 90%, I also want a balanced portfolio, keep it healthy under the 80%. BAWDEN: One of the impacts that is fairly immediate is that we’re pushing the cost of credit up. ROYLE: The banks on Friday sent out these saying anything over 80%, just don’t bother. And yet on Tuesday, we got the email from banks that said: “If it’s over 80%, we’re going to tier LMI fees.” So it’s a bit of a mixed message here. You’re telling us don’t even bother, and then you’ll say, well actually.... MCLACHLAN: I think there are exceptions. Once a loan is through the gate, with any one bank, it then becomes immediately exempt for any other bank. So all banks have to be very careful not to overcharge

TMM: Just to finish off the non-bank lenders, what’s your expectation Peter?

PETER ROLLASON, Liberty: The phones are running hotter, there’s absolutely no doubt about that. And it’s interesting, we had an application come in very soon afterwards; it was 81 point something per cent. Forty-eight hours earlier, every bank would have done it in the blink of an eye. These are very good applications, but because it’s got an eight in front of it, it’s just quite extraordinary that the banks have just closed in like you wouldn’t believe, to make sure they’re on the conservative side, as you say, of the rules. WEBB: I’d like to ask Bruce a question about the existing pre-approval pipeline and how that’s impacting on your current decisions, and whether you’re going to change your terms of a loan offer so that you can manage and control that pipeline? MCLACHLAN: My belief from day one was pre-approvals for low-geared loans will disappear, and I think that’s proving to play out. The reason the Reserve Bank gave a six month phase-in period was to allow existing pre-approvals to flow through. No, because we’ve got that phase-in period, and the thing we’re mainly focusing on is to prove to ourselves that we actually can manage the uncertainty. You all know how much a deal changes, even the last day. The first deal that comes through, does it get through? I mean, none of us have had to do this before, so we just are kind of going into it conservatively, we’ll learn a lot over the phase-in period. But what we don’t want is a month of zero and then a big month. Because while that looks good in that six months, we get measured every month on that rolling. So imagine if you have a zero then a big month, then the zero drops off and you’re in trouble because you’ve got to have another zero. In a perfect world, we’d like to be running at the speed limit every month.

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LEAD STORY

LEAD STORY because that is the value of an adviser, is the advice; that is your essential proposition that you have for your clients. If you do just sell on rate, it’s lazy, it’s not sustainable for anybody, and really, why bother? So I think the advisers generally fall into two camps: there’s the advisers, and there are still brokers out there.

Peter Rollason representing Liberty Financial and Mike Pero Mortgages

TMM: So how big are those two groups? HART: Unfortunately, I think the adviser group is way smaller than the rate-chasing mob.

TMM: So how do we change that? ROLLASON: Basically, if you continue to be a commodity or price chaser, you’re going to find it very, very tough going forward. And to be successful, you’ve got to adopt the advicebased approach, which is, I’m here to get you a solution.

TMM: But are there other things that can happen in the industry to drive that along?

on a low-equity loan, because that customer then becomes ripe for a churn. WEBB: My feeling is that the broker community probably sits in that higherLVR market. So are there going to be two lanes going on here? Are the banks going to squeeze out the broker market because that’s a market that sits more in that high-LVR space, and go back and hoard that for themselves? That’s a question. HART: I don’t think the broker market sits in the high LVR space at all. Bruce said it, in 2007 you weren’t lending over 80% anyway, so you guys are just going to have to get used to it.

TMM: We heard from Campbell about where his book sits, how about yours, Jeff? ROYLE: It’s pretty high in the 80%-plus space. But we’re far more an advice-based practice, so most of us know that the average person looking for an average deal can do it themselves, they can, if they’ve got the time, the inclination etc. And one of the benefits of using a broker is obviously, it’s no cost to them, it’s impartial. So a broker can look at a customer and say, “In my opinion, out of these six opportunities, this one best fits your needs, not my needs” and that’s enshrined in the legislation that we work under… I think it’s the best news for the broker community that we’ve heard in a very long time. HASTIE: I tend to agree, I don’t think my customers come to me because they want a 95% mortgage.

I wish more of them got it, because that is the value of an adviser, is the advice; that is your essential proposition that you have for your clients. – CAMPBELL HASTIE know how to buy a house. That’s what the problem is. ROYLE: It’s not, I can’t go to the bank and do it myself, because they can. HART: One of the things that I notice in coming to Auckland is that this Auckland market is rate-driven, and that’s it. And all the brokers that just sell on rate only, are the ones that wil suffer with this. The guys providing advice, Geoff, Campbell, you guys, providing advice, assistance and help, those are the guys that will benefit out of it again.

TMM: They come to you

because they’ve got a problem.

TMM: How is that transition from being brokers to being advisers going? Jenny, your members?

HASTIE: Yes, and that problem is, I don’t

CAMPBELL: I wish more of them got it,

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CHURCH: If it get’s to the point, our volumes are out of control because we are writing at 90%, if it gets to a point where that becomes too unweighted, we will give that to the people who have supported us to date and understand looking after their consumer and not being rate-driven. The rate-driven ones have been continuing to go the major banks and they’re not in my channel, and they’re now knocking on my door. So there will be changes, that will drive that.

TMM: One of the things that I’ve banged

on a bit about this year, and it’s the same sort of topic, is that brokers can’t build a business now just sending prime deals back to three retail banks. They’ve got to actually learn about insurance, and maybe KiwiSaver, they’ve got to know the products that the non-bank lenders are offering, car loans, personal loans. Do you think that brokers or advisers are actually getting that message?

HART: If they haven’t got it by now, then they’re in danger of not being here in 12 months. Simple as that. CHURCH: That’s what we go back to, that’s the advisers, they’re the ones that have the need to diversify, the need to have other income streams, the need to support nonbanks that will pay trail. So there’s other things that will go into that, and how many of them are still brokers? HART: They need to sell personal loans from reputable lenders, not Johnny-come-lately on the corner, but lenders that are going to do the job properly. HASTIE: I've got a slightly different take on that; and it came from the experience we had in 2009, when we were wondering if we were going to be able to write anything. It was a pretty lean time. So what we decided to do


then was to actually stop saying that we do everything, to just say,: “We do this.” You’ve got two options, you can be more diversified or you can say, “I do one of those things,” and really shout about it. The risk that we took in 2009 was that we would get no business, because we were just after first-home buyers, and they don’t exist. But we made the change anyway, and we got more business. WEBB:You need a business strategy, and that’s critical, and that’s a discipline that a lot of people don’t have the time or really the inclination to do. And the other thing seems to be finance is moving more and more online, the banks are heavily investing in online platforms and applications and pre-approval is conditional to some extent. And if you’re not online, if you haven’t got your business visibility online and someone googles you, or googles that product, and you’re not popping up then.. My point is that I think you can be very specific and be successful with that, or you can be diverse and be successful with that too. There’s no middle ground. CHURCH: And what a lot of people have done, and I know especially in the loan market group, but they’ll have a mortgage adviser, then they’ll have an insurance adviser. So they

If they haven’t got it by now, then they’re in danger of not being here in 12 months. – DAVID HART have all that in their shop, or they’ll have a referral model.

TMM: Will this drive more

consolidation in the advice industry?

BAWDEN: If that’s the market that you choose to operate in, and you don’t provide a range of solutions for those things, then the client goes somewhere else to get the part that you don’t offer. And as soon as you do that, you put your client at risk, because that person is likely to have included in their business strategy the things that you haven’t and go, “Well, while you’re here, we can do these other

things as well.” ROYLE: And the first thing the client thinks is, “Well hang on a minute, why didn’t that person – why didn’t they talk to me about this?” So you’re shooting yourself in the foot twice, because you’re getting a clawback, potentially, and you’ll never see that client again. And it cost you a lot of money to generate that client in the first place.

TMM: I hear recently that the LVR

speed limit restrictions will stop banks doing all these deals with TVs and iPads and things like that.

CHURCH: I think for the over 80 it will. ROLLASON: I’ve been here 18 months, obviously from the other side of the Ditch, and I just thought it was completely unsustainable; it was just crazy. CHURCH: [Brokers] get paid travel in Australia; they get paid good upfronts and it is a large portion of the market; its 45% to 50% of the market distribution. Here rather than pay trail and pay the brokers as they should be paid you throw a TV at the consumer; how’s that creating any activity that should be sustainable? WEBB: [In terms of clawbacks], I think it’s an

015


LEAD STORY

LEAD STORY NS: Do the banks actually give financial advice? Are they actually giving financial advice when they’re saying, “This is the product you should take.” ROYLE: Well I would argue they’re not, but… BAWDEN: It’s no different to picking up the paper and opening it and Briscoes have a got a sale, you know… you know interest rate’s wrong. The key is giving sensible advice. Yeah in two years time, if the rates are good now, you can front that person and say you did the right thing, ‘cause if they choose not to take your advice that’s completely different than if you don’t give it to them.

Ian Webb, Adrienne Church and Jenny Campbell

TMM: There’s a sort of a view that the banks

have become quite focused on their own bank distribution rather than the independent channels like the guys here - is that happening, or do you think they’re still really supportive of the adviser broker market?

HART: You’ll have to look at how many of the issue that needs to be addressed from where the consumer’s going to and the behaviours that they’ve been taught, and being taught with all the gimmies. And even the banks have been hurting themselves because they’ve been paying for other bank’s clawbacks, or other banks’ business break fees and then going straight back. And I’ve heard ASB paid some big massive break fee to get a customer and as soon as that happened they went back to their bank. The consumer feels like they have the right to just shop around irrespective of the loyalty. So we’ve got a whole new generation of people whose loyalty is only as good as the next offer put in front of them. How do we educate the consumer that there’s a much bigger value proposition that we’re offering to them. It drove me mad that banks continually drive interest rates to get consumers to take the wrong product at the wrong time and get away with it. MCLACHLAN: I 100% agree with you on that, I think the whole advice model is actually breaking down. Because what has been done poorly across the industry, banks and advisers alike, is assisting people around affordability. Clearly for the last two years we’ve been at the bottom of the interest rate cycle. The chances of interest rates dropping are zero and have been ages. The chances of them going up are 100%. There’s been a lack of advice going to borrowers with all this upside risk now and they’re going into one year and saying, “We’re on a fixed rate.” One year’s not fixed. You know fixed in my mind doesn’t even come into it till you’re two years along. It’s all about protecting people’s ability to manage their home budget, you know can they afford it. And guess what; they’re all sitting, the vast majority of the market there is sitting completely exposed to what is going to happen “when” not “if”. ROYLE: I think the real issue is that the banks are promoting 4.95% as a headline -

016

The problem here is that the people around this table are people that want to embrace and deal strongly with the broker - Bruce included – IAN WEBB ANZ is classic for it - and that in my view is a really wrong thing to do, particularly as we’re in the upward side of the rate curve because in a year’s time that person is going to be hit with a huge shock; whereas the advice process should be to warn them of that, and I’m not aware of any bank that does that and say maybe that’s not a good idea. MCLACHLAN: I can hand on heart tell you that our margin at one year or four is exactly the same. So what we’re trying to do, or what we’re doing is we’re taking that out of it and saying, “I’m just reflecting that that’s the yield curve.” It’s right for some people; it is just an option, just like floating. It’s just where it is. It’s just like what is right for people, what can they afford… NS: Well its just one product in a range of products isn’t it? ROYLE: It’s unfortunate that some of the majors are promoting it as the product; that’s what’s coming over.

big banks are sitting around the table; I mean Bruce is the only one that’s bothered to front. So are they really supporting us? I don’t think so. ROLLASON: It’s an interesting point because we’re talking about pricing and rates a lot. What we’ve actually got now is a form of rationing into the market place which is, those who are supplying 95% of the market have had to scale back how much business they can do on the over 80%. If you sit there and think about it, if you were a bank, theoretically you’ve got the direct channel and you’ve got the third-party channel and you’ve got only so much you can do on low deposit lending. Which channel are you going to favour? And no one knows how that’s going to play out and that’s going to affect everyone around this table. You’re great supporters of the third-party channel, as we are, but it’s going to be interesting when you can only do so much and you’ve got to effectively ration, what are you going to do? I mean some are going to say first-home buyers will be the front of the queue, others will say existing customers at the front of the queue.

TMM: Some banks have come out and said our priority is the first-home buyers; is that window dressing or is it serious? WEBB: Will they take the deal from the branch network before they take it from the broker is the question being asked. BAWDEN: The problem here is that the people around this table are people that want to embrace and deal strongly with the broker - Bruce included. The question I’d ask is if you had the majors around the table too would they have the same appetite to want to do that and you know this is… ROYLE: I think one in particularly would probably say no. I think the banks in general, big banks, if they could get rid of the broker


distribution channel, I think they’d probably like to do that. MCLACHLAN: It’s logical that there’s going to be way more demand for that speed limit than there is supply. So that process will take in a whole raft of factors and its reality is it’s going to limit quite significantly a major source of business for broker community into the banks. BAWDEN: And each party will make their own decision about what suits their business model best and it is what it is. MCLACHLAN: In the meantime I think that it would be incorrect to give the whole mortgage broker community a signal that “don’t worry everything’s all right, just keep sending your deals in”. It would be misleading and irresponsible. If you've got great deals and that, well we still want to see them, but I can’t guarantee… The interesting thing for us is that it differentiates between what’s an approval and what’s an approval that gets through. So we might approve your loan. Say, “Yeah that’s a great deal, we’ll approve that. But actually, guess what? We’re going to wait until we've got some capacity to do it. So yeah we can’t settle that in October but if you could settle that in December we've got a gap in our December;

we’ll do it for you in December.” HART: You’ll see fewer or shorter preapprovals. MCLACHLAN: I think pre-approvals will go from the low-equity part of the market which makes those people’s participation think like auctions, almost impossible because we need certainly. So bring us your deal; bring us the property. When the sale and purchase gets in and then we've got certainly, we know its happening on that date and I know I can fit that in on that month. The other thing for us is if I give you a pre-approval tomorrow or for an auction next week, I'm keeping track of that; then you don’t win the auction, I've used up my… there’d be nothing worse than having months I'm missing out. I've said other customers can’t have that because I've given it to you and you haven't used it. I think auctions will become almost impossible for people with low deposits; the only one able to participate in auctions will be those with equity. BAWDEN: Getting rid of pre approvals is one of the best things that could happen in this market. The pre-approval is really dangerous.

I think personally all pre-approval does is give a buyer a licence to shop. The second point is that, what are they in reality? All they are is an undertaking that, provided certain conditions are met, we will lend X to Y. It doesn’t actually guarantee anything. It’s a cost to the adviser as well. If an adviser is running doing 100,000 pre-approvals that’s a cost on their time, and how many of those do you think come to fruition? I'll guarantee that most advisers will sit there and they’ll say, “I've got a pre-approval.” My job’s done, they put it in the drawer and they don’t think about it again. WEBB: I was a broker in the US and you didn’t submit an application without a $300 fee. Period. That stopped the churn, that stopped the shopping; it just slowed things up. The customer’s like, “I'm committing to something.” At the moment, they're not…There's this whole loyalty thing that’s missing here, right? We’re only loyal until somebody puts a better offer in front of us and we’re playing this game. Unless we come up with a new game with new rules that everyone’s willing to participate in, then we’re going to continue to be at the whim of the customer who’s going to continue to play us like a fiddle. ✚

017


By Jenny Campbell

Rate shock!

Are your customers prepared? With interest rates still very low, it might seem premature to start worrying about rate rises. However, despite the new LVR restrictions that apply from October, it is reasonably clear that interest rates are likely to start rising from next year.

018


W

hile most advisers

have been around long enough to have seen a number of rate change cycles, it is important to remember that a large number of your clients have not! There has also been an influx of new advisers to the market and this rising cycle will be a first for many of them. The OCR has been held at 2.50% since March 2011, and it is of concern that many borrowers believe that the low rate environment that we have been enjoying is ‘normal’ and will stay for the foreseeable future. Here is a quick reality check: it was only five years ago that floating rates hit the double digit mark—and there is nothing to stop that happening again. It is vital that these cycles (and the associated risks) are clearly explained to clients. Rates will rise at some point and this can be a big shock to clients. Now would be a good time to review your processes for ‘stress testing’ clients, and to discuss strategies with them for minimizing this rate shock when it comes. Here are some points to consider:

It is a huge temptation to ‘max out’ loans – particularly for first home buyers.

When they see a lender’s servicing calculation that tells them that they can afford, say, a $500,000 mortgage, it is difficult to convince them that this may not necessarily be a good idea. If these clients experience massive rate shock, then there is a good likelihood they could come back to you saying that you should have known that their loan was going to become unaffordable at a higher interest rate. It is not enough of a process to just pop a copy of a lender’s current servicing calculation into a client file. All advisers have a duty to clearly explain the benefits and the risks of financial products they are advising on and merely telling your clients that rates may rise is not enough. Take a few moments and calculate their repayments at higher rates. Make sure clients take away a copy of this and you file another. Seeing a mortgage repayment at 3% (or more) higher than right now may be a good reality check. Have you discussed the pros and cons of products such as Income Protection or Mortgage Repayment Insurance? Have you demonstrated how difficult managing a mortgage can be if incomes disappear? Again, this must be noted in the client file.

Discuss interest rate fixing strategies.

This is one obvious area where a mortgage adviser can shine. Anecdotally, we hear that bank staff are becoming more and more reluctant to advise on rate strategies and seem more likely to tell a client to just pick a rate. Utilizing a good strategy is a huge value-add, as it can help your clients enormously. As a nation, we are obsessed with interest rates, and trying to ‘beat the bank’ seems to be a national pastime. It is important that clients

understand that a great rate today may not seem like such a great deal if rates are much higher in the future and trying to pick the absolute bottom of the market is very difficult! If economists and other market commentators struggle to agree on rate strategies, it is a minefield for the general consumer. This is why this conversation is one of the most important that you will have with your clients.

Beware the teaser rates.

It is concerning to see that many lenders are trying to lure customers with very low shortterm rates that could almost be described as ‘teaser rates.’ If your clients are adamant about fixing for, say, a one-year term, then you need to be even clearer that this decision could lead to major rate shock in 12 months’ time.

Can you clearly explain a rolling rate strategy?

If your clients are dead set on taking advantage of low short-term rates and you have serious concerns about their repayment ability at higher rates, consider a compromise with a rolling rate strategy. This way they will benefit from the certainty of the longer term rates, and still get the psychological ‘win’ of the cheap short-term rate.

Explain what break fees are.

Some clients will be keen to take a long-term view and fix for 4-5 years. These are the very same clients that may blame you if rates fall again during this period! Make sure they understand what break fees are and how they work. It would be a good idea to give them an example of what some clients had to pay last time there was a flurry of break fees.

Keep your eye on the trends.

As banks will be rationing their over-80%-LVR lending, it will be in their interest to boost their books in the under-80% territory. This could well lead to a price war in the sub-80 market and more established clients may well want to take a ‘wait and see’ approach. Never forget that, if clients do get into difficulty with their mortgage repayments or become unhappy with an interest rate taken, it is human nature to seek someone to lay the blame on—and unfairly, advisers are often targeted. Your paperwork and process are the only things that can help you protect yourself from unwarranted complaints. Rate Shock is not just inconvenient, it can devastate clients. You are the expert—it is your job to be the voice of reason. No-one wants to be a negative doom-andgloom merchant, but if you can demonstrate to your clients that you are here to help insulate them from shock and to help them through the long term then you will inspire loyalty from your grateful clients.If you would like further advice on this topic (or any other!), please feel free to contact the PAA office, on 0800 275 722, or email admin@paa.co.nz. ✚ Jenny Campbell is the former general manager of the PAA.

019


MY BUSINESS Q&A With John Bolton Squirrel Mortgage Brokers

{Q} How has your business evolved in five years?

??

{A} It’s always been a branded business.

Wise

Words Amanda Morrall sits down with one of New Zealand's highest profile mortgage advisers, John Bolton, and finds out what makes him tick. {Q} Broker, adviser: What do you call

yourself and what’s the difference anyway?

{A} We like to call ourselves mortgage

advisers now—we like to describe the value we’re adding. We’re about more than just getting you a better rate and I think all of the language that describes what we do relates to adviser. So we are an advisory business and we very much see ourselves that way. But when it comes to marketing it’s a mixture of both and that simply reflects that at the end of the day people still search for mortgage brokers. If you start to change that you’ll confuse the public probably. So I think it’s evolving and over time maybe the term mortgage broker will disappear, but the market pretty much dictates how we externally brand ourselves

020

??

We’ve got an office in the City and one in Manukau. We have a team here centrally focused on the traditional NZ market, then team China focused on the Chinese market and team India focused on the Indian market. The business is growing fast and it has evolved and adapted and changed with the market. More recently I’ve been doing quite a bit of property development. I’m building 31 townhouses in Avondale and have another development in Titirangi that will start next year. More recently I launched another business called Tenansee. It’s a cloud-based, one-stop property management system. Basically it does cash book, rent reconciliation and has bank feeds going into it. It has a tenancy ledger too, so if your tenants miss the rent they receive an email reminder but also it tells you. So you can see who’s missed. It can generate tenancy agreements and store property information. It can look at overall ratios, LVRs and interest coverage ratios and tell you how much more you’ve borrowed. I have probably another two or three businesses in the pipeline as well.

{Q} Do you ever sleep? {A} Ha, no. Well, probably I average six hours a night.

{Q} Is this the life you imagined when you left the bank?

* **

{A} It’s pretty much what I expected. The

idea was to build a really good foundation with Squirrel and for that to give me the ability to leverage Squirrel as well as capital and adjust everything into other businesses. It’s not surprising when you think about the businesses I’ve gone into. They’re all property related.

{Q} Do you think of and the reality is that the public is still going to talk to a mortgage broker.

{Q} How did you get into the business? {A}I started off in banking and my resumé includes General Manager of Products at National Bank, and Head of Marketing and Strategy at Westpac. I went into mortgage broking at the start of 2008. I felt that I had done my time in a corporate environment and I was looking to get out and start a business. I didn’t leave head office to become a mortgage broker, I left to set up a business. As GM of Products, I pretty much knew mortgages inside out. To be a mortgage broker was the natural extension —I think a lot of people go through that.

yourself as ambitious?

{A} I’m not ambitious in a me, me, me

sense. There’s nothing worse than reading something that’s all me, me, me. I just quietly go about doing what I like doing and that’s building businesses. I just love seeing stuff grow and become successful. That's the motivation for me.

{Q} Worst and best experience as an entrepreneur.

{A} My biggest moment was leaving the bank and starting fresh. I came out of head office and I didn’t have any clients or networks. I just opened a business, put up my shingle and expected people to come flooding in but then it dawned on me, nobody knew I existed.

@


MY BUSINESS

{Q} Any other tips or observations for would-be entrepreneurs?

❝ I just love

seeing stuff grow and become successful. That's the motivation for me. ❞

{Q} Fair to say that marketing

was the hardest challenge then?

{A} I came into it with the expectation that I was prepared to blow a certain amount of money until I got the brand established. I probably went into it with $250,000. What surprised me is how quickly it ran out. It ran out inside six months.

{Q} What other challenges did you face? {A} I started the business with several staff

and without the business in place. That was a recipe for disaster. I went into the Google world very early and spent money on search and stuff like that, hired students to give out bottles of water and flyer drops—probably cost-effective marketing. Still, within the first year I just about went bust. I went through $250K within six months, ran out of money and had to leave the office to go do some consulting to generate extra income to cover the bills. So I was working in the bank during the day doing strategic consulting then at night I’d come back to the office and be doing deals and holding meetings with clients. I did that for a whole year and by then we were getting to the size where the business could afford to take me back in. The big break for me was probably when interest rates collapsed in 2009, because all of a sudden there was a huge number of people seeking advice around whether they should break their loans. I think we did 1,500 free advices and restructures for people. We didn’t make any money out of it but all of a sudden we had a 1,500-member client base because they loved us and then they started to send us referrals. That’s how we bought our client base—by offering this awesome free service.

{A} One of the big observations I would make is that for all the marketing that we do, the reality is that the vast majority of our business is through referrals. {Q} What are the top three

questions potential home buyers should ask of a broker?

{A} Hmmm. I think it’s a case of substance

over form. I get frustrated, when you are almost in an interview situation where someone is grilling you and asking you a list of questions. They invariably end up being your hardest clients. For me, an ideal relationship is a trusting relationship. I guess it’s how you build that trust early on in conversation. I think what people want is someone who is genuinely interested in them and that’s not something you can easily interview for. The key thing you are looking for is someone with experience, who knows what they are doing, and you can judge that from their credentials. Second is their availability and, third: what’s the value they will add through the whole process? In our team, we help them through the whole house buying experience. We’ll do house analysis, look at the house, offer feedback and look at LIM reports. So we have a broad level of expertise and my guys are pretty much at various stages of going through their real estate training. When you get into the ethnic markets, it’s much more about networks and communities and people’s ability to cold call and get the door open. A lot of those traditional broker skills come into play.

{Q} How is business doing? {A} We’re writing $27 million a month. {Q} Put that into context for me. {A} The first year we wrote $55 million, in

2009 $70 million, 2010 $98 million, 2011 $125 million, 2012 $200 million and in this calendar year we’re tracking toward $320 million. Basically we’re growing at a rate of 50-60% per year.

{Q} When do you plan on retiring? {A} Increasingly, I’m stepping away from the

day-to-day now. I still have a number of larger clients that I deal with but in terms of day-today stuff, I’m starting to step back.

{Q} What kind of car do you drive? {A} A 1996 Mitsubishi Lancer. It’s old. It’s shitty. It’s got lots of prangs and a bad paint job.

{Q} Are you mortgage free? {A} God, no. I owe around $5 million.

{Q} Are you in a hurry to pay if off? {A} My goal is to have the house debt-free, which isn’t there right now.

{Q} How many properties do you own?

{A} It’s probably not that many, eight or

so. The more interesting thing is that I own two hectares in central Auckland; one in Avondale and one in New Lynn. Both are development sites.

{Q} When do you plan to stop working?

{A} If I stopped working I’d die. You might call it retirement or doing what I want whenever I want. It’s more financial independence and I want that soon.

{Q} How far away are you from that goal?

{A} About two years.

{Q} How old are you? {A} 40 {Q} Favourite holiday destination? {A} In NZ, it’s Queenstown. Abroad, Fiji. {Q}What are you reading right now? {A} Nothing at the moment. I have no time. But my favourite author is Seth Godin.

{Q} What do you do for fun? A) Uh, what’s that? I work. I would say my favourite pastime is skiing. {Q}Any reflections you care to share on

starting a business? A) It’s interesting—I wrote up a business plan before I launched the business. Recently, I went back and had a look at it. It was so embarrassing I threw it in the fire. It was the worst business plan I’ve ever seen. I think if there was an observation I’d make, it would be how naïve I was in jumping into the business. If I’d known what was going to happen when I jumped, I would have stayed in the nice comfortable ivory tower. At the time I left the bank, I had a house, an $800K mortgage, I was leaving a fairly high paying job with a wife who doesn’t work and two kids under the age of five. I had no clients to start off with. You can imagine how I was feeling at the end of six months when the money ran out. If I had known what I was going to go through, I’d never have done it but being on the other side now I’m so glad I did what I did, no regrets whatsoever. Sometimes the best things that ever happen are the things you don’t do. ✚

021


SALES & MARKETING By Paul Watkins

The Commerce Bank in the US needed a competitive advantage in a very crowded marketplace. Before opening, it took the time to work out exactly what it was that motivated customers to choose a bank and what most annoyed customers about their current bank.

T

hey discovered that it

was opening hours and a lack of appreciation shown for their business that most annoyed customers. They also discovered that there are generally too many types of account on offer, which confuses the customers. Of high importance: It was discovered that interest rates on deposits are not very motivating, as few customers understand the difference or the implications for their balance. Few customers taker a long-term view of their accounts. So what did Commerce Bank do? They focused on the issues that mattered most and more or less ignored the others. They opened their branches from 7:30 am to 8:00 pm. On Friday evenings, drive-through windows stayed open until midnight. They advertised this set of opening hours with the tag line “America’s most convenient bank.” But how did they pay for this? Opening those extended hours added considerably to their overheads, since staff costs are a huge proportion of a bank’s expenses. First, they limited their offering to term deposits, basic savings accounts, mortgages and cheque

022

accounts. Simplicity of product means an economy of offer and less administration. However, their biggest point of difference was their deliberate offer of the lowest deposit rates in the market! Trimming a full percentage point off their nearest rival is hardly a recipe for growth—or is it? It turned out that the deposit interest rate was not a significant motivating factor for their target customer at all—but convenience was. This is an example of being “bad to be good.” They clearly identified the factors that most motivated their target market and made themselves the very best at that. But in doing so, they had to sacrifice the bits that didn’t matter to the customers and quite blatantly do those ones badly. You quite simply cannot be good at every aspect of your service and you shouldn’t try to be. How do you work out how to do this? You ask your clients. First, list the most obvious factors in your offer. These could include your physical location (making it easy for you to be there), the loan options you offer, the way you can rearrange or consolidate a client’s total debt, how you can (perhaps) trim their payments and your negotiating power with lenders. Brainstorm

on the factors. Now find the web sites and advertising of your main competitors and see if they promote any further factors you may have overlooked. Now you have a list, you need to test them. This can’t be done by you as you are too biased in your thinking. Your best bet is to phone your nearest university or polytechnic and ask to speak to a marketing lecturer. Explain your project and ask for students who might be able to research it for you. Yes, you will have to pay the student, but nowhere near the rates of a market research company. They invariably do a good job as they can access their lecturers for academic guidance. What will emerge is which bits of your service matter most to your target clients. This will give you a clue as to the main attributes you should be focusing on. The practical application of this is to work out how to make those key attributes even better and more prominent than any of your competitors are achieving. Then it logically follows to make them the highlight of your promotional activity. The goal is to find just one or two at most! From my own work in market research for mortgage and insurance brokers, these factors


❝ Take the time to do the research and accept the results with an open mind. This is a topic in itself, but we can become so firmly fixed on what we BELIEVE ❞

are rarely what you think they are. For example, I found that few clients care about you being able to access loans from 15 lenders—they simply want the one that YOU choose for them based on their individual circumstances (as you probably know, all clients think their circumstances are unique). When you consider it, why would they engage a broker if the result is not a strong, well-researched recommendation? There is a famous example of how this concept works, involving Southwest Airlines. Texas-based Southwest Airlines are cited time and time again as the perfect example of a business that prides itself on service. They know exactly how to sacrifice all but the most critical factors asked for by customers. They fly fixedprice fares on single-class Boeing 737 aircraft to a large number of short-haul destinations in the US and pride themselves on a very fast turnaround time. The founder and CEO of Southwest is Herb Kelleher and he is single-mindedly focused on his core mission of low-cost, no frills domestic travel. One day he received a letter from a woman complaining about Southwest’s policy of not transferring bags to other airlines. The complainant outlined how, due to her age, this brittle-boned grandmother suffered hardship when taking her own luggage from one airline to another while on cross-country trips to visit her grandchildren. She asked for the courtesy of a luggage transfer service, like all other airlines. Kelleher responded in a way that on the face of it hardly displayed a service attitude. He wrote to her stating that the business model that Southwest Airlines operates on would never survive such a service and that the whole basis of the airline was low prices and fast turnarounds. He said that while he sympathized with her plight, he would not be making an exception by taking care of her bags. When you take the highly successful approach of identifying and focusing on exactly what most motivates your target market, then you have to be brave enough to turn some potential clients down. This is very hard to do. Much of the time you may be almost desperate to find the next deal and take the view that if they breathe they could be a client. This is a chicken and egg situation. If you take just anyone then you fill your time with the wrong clients and don’t give yourself time to focus on finding the ones that matter most and building a strong brand. A strong brand requires a clear set of brand identifiers. “We can get you the best mortgage” is not a brand identity, it is a meaningless, untargeted statement. A frequent objection I hear to this approach is that New Zealand is too small and we don’t have enough of any one kind of client. It’s true that we are relatively small, but there are still things that motivate clients ahead of other factors. Take the time to do the research and accept the results with an open mind. This is a topic in itself, but we can become so firmly fixed on what we BELIEVE the motivating factors of clients are that we close our minds to new ways of looking at things. ✚

023


INTEREST RATES By Jane Turner

Where to for interest rates?

ASB economist Jane Turner reports in on economic matters and offers some suggestions on where interest rates are headed.

024


INTEREST RATES

T

he Reserve Bank of

New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.5% in September, but warned that higher interest rates will be required over the coming year. There is growing evidence of NZ’s economic recovery gaining traction and also early signs of inflation pressures starting to rise. We expect the RBNZ will start to lift the OCR from March 2014. New Zealand’s economic recovery is strengthening. The Canterbury rebuild has picked up the pace. Increased housing demand is expected to lift housing construction in Auckland while earthquake strengthening work will underpin construction in Wellington. Business confidence has lifted to the strongest level since 1999. Fonterra is predicting a record milk-price payout for the 2013/14 season. Consumer confidence continues to lift and retail spending growth has increased. Low interest rates, increased income growth and increased population growth (through net migration) have supported housing demand. However, the housing market remains undersupplied, particularly in key regions such as Auckland and Canterbury. Annual house price growth in those two markets is running at 13% and 11% respectively, according to QV August figures. The RBNZ is more wary of housing-related inflation risks and in recent statements explicitly tied the lift in the OCR to the degree of inflation pressure spill-over from momentum in the housing market and construction sector. The elevated level of the NZD has been a key factor holding inflation below the RBNZ’s target band over the past year. However, the trade-weighted New Zealand dollar has eased slightly, largely due to a decline in the NZD/USD rate owing to a recovery in the USD. Inflation pressures are expected to increase swiftly over the coming year, from the current below-target pace. Construction costs are growing strongly in Canterbury due to the rebuild and there are some early indications higher costs may be starting to flow through to Auckland as well. The lower NZD and reduced retail discounting will also contribute to stronger inflation. Inflation indicators, such as pricing intentions and inflation expectations, have all lifted in recent surveys. In the meantime, the RBNZ has introduced high loan-to-value lending speed limits which take effect from October 1. No more than 10% of new lending (excluding exemptions) can have a loanto-value ratio greater than 80%. The introduction of these rules is aimed primarily at reducing the financial stability risks associated with high LVR lending. However, the RBNZ hopes that these rules may also slow the rate of credit growth and house price inflation at the margin, and buy the RBNZ more time before having to lift the OCR. We expect these tools will have a limited impact on the housing market and continue to expect the RBNZ will lift the OCR from March 2014.

As always, the perfect rate decision will probably only be known with the benefit of hindsight. Faced with uncertainty the best strategy for borrowers is to weigh up their priorities Advantage of fixing starting to fade We continue to expect a modest tightening cycle from the RBNZ. This will involve a cautious approach to lifting interest rates, with 150 basis points of rate hikes spread out over almost two years. Over the past few months, stronger economic data have increased market confidence of OCR hikes. However, the pace and extent of the tightening cycle priced in by the market is slightly more aggressive than our view. Medium to longer-term fixed rate mortgages have lifted in line with higher market interest rates. As a result of these moves, the medium to longer-term fixed rates no longer present good value in a fixed versus floating trade-off based on our OCR outlook. Nonetheless, these rates still provide a borrower with certainty of repayments relatively cheaply. Short-term fixed rates remain quite competitive, ensuring a lower cost of funds now. However, these will still leave a borrower exposed to uncertainty and higher interest rates in future. Some rates are particularly attractive (although high LVR borrowers are unlikely to qualify for these) and are likely to compensate for reduced certainty relative to longer terms. Borrowers who prefer flexibility can still benefit from the floating rate remaining at 40-year lows until early 2014, although they should be prepared for the floating rate to increase in line with the OCR over 2014 and 2015. Which mortgage strategy proves cheapest will depend on how economic developments unfold, and how the RBNZ responds to these. There remain large uncertainties around the economic outlook, and given the current risks it is equally conceivable that borrowing rates could end up lower or higher than average. The key threats to the economic outlook

% 11

% 11

Home Loan Rates

10

10 5 year rate

9

9

3 year rate

8

8

7

7

1 year rate

6

6 Source: ASB

5

Jan 07

% 11

VARIABLE RATE

Jul 08

Jan 10

Jul 11

Jan 13

5

% 11

Home Loan Rates High (past 10 years)

Source: ASB

10

10

9

9

8

8

10 -year average

7

7 September 2013

6

6 Low (past 10 years)

5

Variable Rate

1-year Rate

3-year Rate

5-year Rate

5

remain developments offshore. The global economic recovery is still fragile and there remain some large political risks in the Eurozone. The US is having a pronounced impact on global long-term rates as the slowing of quantitative easing looms. The RBNZ will respond to housing market pressures, but exactly how remains uncertain. Should the newly implemented macro-prudential tools not perform as well as hoped the RBNZ has warned it may opt to use more conventional tools instead. This implies additional interest rate increases than would otherwise be the case. Likewise, there are uncertainties around the sensitivity of the economy to interest rate increases. It may not take much to cool the economy and temper inflation pressures. As always, the perfect rate decision will probably only be known with the benefit of hindsight. Faced with uncertainty the best strategy for borrowers is to weigh up their priorities and make the choice that best aligns with them. While future events are uncertain, it is inevitable that interest rates will be higher. It is important to make sure that finances have enough headroom to absorb the impact of higher interest rates. ✚ Jane Turner is a senior economist at ASB Bank.

025


PERSONAL LENDING By Susan Edmunds

Stepping into equity breach risky, finance firm says. It has been suggested that other lenders may pick up the slack as banks are forced to cut back on high-LVR loans but not all are keen.

026

S

tepping into the breach

as banks move away from lowdeposit lending may be too risky for a lot of finance companies, some industry participants say. Wayne Croad, of Finance Direct, said it would only be lenders with the ability to offer first mortgages that would benefit much from new loan-to-value speed limits. From the beginning of October, banks are required to lend no more than 10% of their total loan books to borrowers with a deposit of less than 20%. That is about half their current level of low-deposit lending. Lending to low-deposit borrowers has also become a lot more expensive. Westpac has increased the premium it charges on top of interest rates when a borrower requires a loan of more than 80% and Kiwibank and ANZ have upped their one-off low equity fees. Many commentators have suggested that will result in borrowers struggling to piece together a 20% deposit, turning to personal loans to make up the difference. Broker Christine Lockie, of LoanPlan, said she had already seen that happen. She said buyers were looking at second mortgages and private funding. "Of course, all these options are higher risk, more expensive and achieving nothing but more debt." Croad said industry players that had funding from outside New Zealand would step in as first mortgage lenders because the new rules only apply to banks, not non-bank deposit takers. He said it was a good opportunity for businesses such as Liberty Financial and Bluestone. Peter Rollason, of Liberty, did not want to comment but Bluestone said it had already been considering re-entering the New Zealand market before the Reserve Bank’s announcement was made. It would be up to a year before it did so: “It is more attractive – there is a gap that has


PERSONAL LENDING

opened up.” Australia’s non-bank lenders have a significantly larger proportion of residential mortgage lending than New Zealand’s—about 20% of the market compared to just 5% on this side of the Tasman. Broker Kim Lyons, of First Rate Mortgages, said he had built up a network of non-bank contacts over the years. “When banks restructure things, we try to keep things happening because you can’t just shut up shop.” He said he was receiving two calls a day from people who would not meet the new requirements and had been told by a mainstream lender that they were only approving two high-LVR loans per month across the country. “There will be more non-bank lenders in the market over the next 12 months. Anyone who can play in that 90% space must be looking at the opportunity in New Zealand.” Croad said the proposition was too risky for his business: “I don’t think finance companies would step up into that space. The property market is inflated and seems to be out of step with other countries. The market in Australia is struggling even though interest rates are low. The world economy is struggling but here we keep on firing ahead with property.” He said Finance Direct would not be jumping on any new opportunities in the market because low-equity borrowers were not a safe enough proposition. Even in regional New Zealand, where only a small amount would need to be lent to get to the 20% threshold, there were problems because houses were difficult to sell if a borrower struck difficulty. “The second mortgage might only be $20,000 or $30,000 but if it is difficult to sell and takes a year or two, you

"We’re seeing a lot of growth and a few mortgage brokers are quite proficient at personal lending" won’t get your money back. It’s very high risk.” He said banks generally preferred to lend as much of the money themselves as they could but there had been situations where they had been happy to have another lender sit in behind them as a second-mortgage lender, provided it was fully disclosed. The banks have first priority. Croad said brokers had started calling to see if Finance Direct was willing to stump up with deposit help: “There’s definitely been more calls and queries.” Adrienne Church, of Resimac, said there had been a big change in volumes for her organisation. The difference had been noticeable from about three months before the loan-to-value speed limits were announced: “Volumes are out of control.” She said most of the loan applications were coming from borrowers wanting 90% loans: “We’ll still write it but we’re encouraging brokers to give us a balanced portfolio because we can’t have a whole portfolio of 90% loans. If it doesn’t change we’ll have to do something about it.” Resimac is not regulated by the Reserve Bank.

Church said: “Who knows what will happen in the future?” General Finance’s William Cairns said his organisation had not yet firmly decided whether it would delve into the market. “Are we going to go and create a high-LVR product? Probably not.” He said General Finance was already writing a reasonable amount of quality first mortgages: “If we’re looking all right on existing stuff, why change? We haven’t really thought about it but it’s unlikely.” Cairns said there was more activity in the market and banks appeared to have tightened their criteria a bit, so people were looking to other lenders. “Someone will come into the market but we’re quite happy doing bridging and short-term stuff.” Croad said even if his company was not getting involved in the high-LVR space, personal loans from finance companies were something that more brokers needed to get involved with. “We’re seeing a lot of growth and a few mortgage brokers are quite proficient at personal lending, they understand that you can’t make a living just out of mortgages, you’ve got to have a diverse product offering. Longestablished brokers understand the personal loan market.” He said brokers could supplement their incomes by direct marketing to their database, letting them know that if they wanted a car, boat or debt consolidation loan, they could help. “Ninety per cent are not proactive and are niched into one product and a bit one-eyed, thinking they just do mortgages and don’t believe in higher interest-bearing loans. They don’t stop to think that it’s a $2 billion market and someone is writing that business.” ✚

027


PRODUCT FEATURE Offset Loans

Take years off home loans with Westpac Choices Offset At Westpac, we’re committed to putting customers in control of their home loan.

H

elping them structure

it the way they want now, and giving them the flexibility to change it when their life changes – after all, we’re here to help today, tomorrow and in the future. That’s why we’re offering another option for broker customers – an offset home loan that’s focused on helping take years off home loans.

broker channel. “As well as being a great addition to a broker’s toolbox, Choices Offset will enhance the value and sophistication brokers can offer their customers.”

You could pay off your loan

4 years, 1 month sooner

Choices Offset

028

We all know that owning your own home is the kiwi dream and likely to be the biggest purchase someone will ever make, so it’s no wonder we all want to minimise our home loan interest costs as

You could save in interest

$88,411

Loan

Your effective interest rate

5.09% p.a.

Home loan without offset Choice Offset

300k

Loan balance ($)

Our newest home loan option, Choices Offset, is a great way to help broker customers save money on their home loan and pay it off faster. Choices Offset gives broker customers the ability to offset the balance of their eligible Westpac transactional and savings accounts against their floating home loan, and only pay interest on the difference. And it also has another bonus - a competitive floating interest rate of 5.69% p.a. David Gopperth, National Broker Sales Manager, Westpac New Zealand Limited says the bank’s Choices Offset will set it apart from the competition. “Our brokers and customers have been asking for a home loan option along these lines and now we’ve delivered it – with a great floating interest rate,” says David. “While we’re not the only bank to have this home loan option, we’re absolutely delighted we’re the only one that can provide offset through our third party

How it works

200k

100k

0k

0

5

10

15

Years

Example is for illustrative purposes only.

20

25

30


With a range of benefits, Choices Offset may be a wise choice and attractive option for broker customers much as possible. As outlined in this example (left), say you have a $300,000 home loan over 30 years, with $25,000 in savings, you would only pay interest on $275,000. This could make a big difference over the life of your mortgage. You could save more than $88,000 in interest and pay off your home loan 4 years and 1 month sooner, based on our current Choices Offset floating interest rate.

Key benefits There are a number of benefits of Choices Offset for broker customers, including: • The potential to save thousands on interest payments and reduce the length of a home loan • Keeping accounts separate, so money can still be managed to suit different needs • Linking up to 10 eligible Westpac accounts, for example those of parents or children, to help increase offset benefits • Offering the flexibility to pay lump sums off a home loan at anytime • The ability to make the most of day to day transactional account balances.

Next steps With a range of benefits, Choices Offset may be a wise choice and attractive option for broker customers – it offsets savings against a Choices Floating Home Loan and it could help save thousands on interest repayments and cut years off a home loan and save thousands on interest repayments; making it a very attractive option.

For more information on how Choices Offset could help you, talk to your local broker or visit http://www.westpac.co.nz/offset This information and the Choices Offset floating interest rate is current as at 9 September 2013 and is subject to change without notice. Westpac’s current home loan lending criteria and terms and conditions apply. An establishment charge and other fees and charges may apply. A Choices Offset arrangement fee and monthly fee applies. You can link up to ten eligible Westpac transaction and savings accounts for Choices Offset. Linked accounts will not earn interest. Terms, conditions, fees and charges apply to Westpac transaction and savings accounts. For full details on Choices Offset, visit www.westpac.co.nz/offset. You can get a copy of the current disclosure statement for Westpac New Zealand Limited from any Westpac branch in New Zealand free of charge. Westpac New Zealand Limited. ✚

029


ANALYSIS Bank market share and LVRs ANZ results show that their high LVR lending peaked in the December quarter with the loan book shrinking for low LVR lending and increasing a massive $818 million in the high LVR range. In the two subsequent quarters their 90% plus lending has been in negative territory. High LVR lending made up 164% of the movement in the December quarter and a mere 3% in the June quarter (well within Reserve bank proposed guidelines). Nearly 24% of ANZ’s loan book is in the high LVR range compared with 22.3% one year ago.

BankWars Our latest quarterly update of big bank home loan market share is the last quarter before the Reserve Bank’s lending restrictions came into force.

R

eserve Bank figures show total home loans increased $2.97 billion (1.64%) to $183.7 billion in the quarter ended June 30. Home loans across the nine banks we monitor increased $3.11 billion to $181.1 billion suggesting loans from non-bank lenders actually fell during the period. Home loan approvals averaged 6,665 per week over the last 13 weeks – the last eight weeks have all been lower than the equivalent period last year. Home loans for the top five banks grew $2.82 billion according to their June GDS reports. ASB again showed the highest growth rate at 2.2% for the quarter and 7.7% for the 12 months ending June 30. The following graph shows how the share of new business was divided between the top five banks in the last quarter and for the last 12 months in relation to their overall stake of the total lending.

Westpac Westpac has increased its loan book by 1.4% to $36.98 billion in the June quarter and like ANZ only 3% of this increase fell within the 80% plus LVR range. Since a year ago the proportion of Westpac’s total loan book in the high LVR range has decreased from 24.3% to 23.2%. In the December 2012 quarter Westpac went the opposite way to ANZ and decreased high LVR lending by $84 million causing its total loan book to fall in that period.

LVR Restrictions – Had the Horse Already Bolted? A closer look at the composition of the banks loan books shows the three biggest players have already ratcheted up their high LVR (80% +) lending supposing none would want to breach the 25% threshold. ANZ and Westpac both have over 23% of their loans in the high LVR range and in the last quarter they both sheeted back high LVR lending so it accounted for only 3% of the quarterly change. ASB has increased high LVR loans from 19% of its total book to 23% in the last 12 months. 73% of new loans in the June quarter was in the high LVR range following on from 71% in the March quarter, 95% in the December quarter and 82% in the September 12 quarter. These three banks account for 73% total home lending amongst the nine banks we monitor. Generally the other banks are more conservative as the below tables shows.

ASB ASB results show the bank has eased off on its high LVR lending since it hit a high of 95% of new lending in December 2012. It recorded an enormous drop in 90%+ LVR loans in the March 2012 quarter so to a certain extent has been regaining that. Just under a quarter (23.2%) of its total loan book of $40.284 billion is now in the 80%+ LVR range compared with 18.8% a year ago.

BNZ In the past 12 months BNZ has grown its total loan book by 5% to $29.33 billion. Low LVR loans grew 3% and high LVR loans grew 15% so the composition of loans in the high LVR range increased from 13.9% to 15.2%. ✚

BREAKDOWN OF TOTAL LOAN BOOK BY LVR AT 30 JUNE 2013 KIWIBANK

TOTAL

Large Banks

$Billion

ANZ %

$Billion

ASB %

$Billion

%

$Billion

%

$Billion

%

$Billion

%

Low LVR

42.45

76%

30.92

77%

28.38

77%

24.88

85%

10.12

81%

139.91

78%

80-89%

8.58

15%

6.23

15%

5.75

16%

2.25

8%

1.99

16%

25.34

14%

90%+

4.67

8%

3.13

8%

2.85

8%

2.20

7%

0.37

3%

13.52

8%

High LVR

13.25

24%

9.36

23%

8.60

23%

4.45

15%

2.35

19%

38.86

22%

TOTAL

55.70

100%

40.28

100%

36.98

100%

29.33

100%

12.47

100%

178.77

100%

TSB

WESTPAC

SBS

BNZ

HSBC

Co-op

Total

TOTAL

Small Banks

$Billion

%

$Billion

%

$Billion

%

$Billion

%

$Billion

%

$Billion

%

Low LVR

2.02

79%

1.27

77%

0.95

95%

0.96

82%

8.53

82%

139.91

78%

80-89%

0.27

10%

0.11

7%

0.04

4%

0.13

11%

0.87

8%

13.52

8%

90%+

0.27

11%

0.26

16%

0.01

1%

0.08

7%

0.97

9%

38.86

22%

High LVR

0.54

21%

0.37

23%

0.05

5%

0.22

18%

1.84

18%

178.77

100%

TOTAL

2.55

100%

1.65

100%

1.00

100%

1.18

100%

10.38

100%

030


ANZ Movement $ Million LVR Range

30/09/2012

Comp

31/12/2012

Comp

31/03/2013

Comp

31/06/2013

Comp

Low LVR

470

52%

-318

-64%

591

70%

874

97%

80-89%

436

48%

87

17%

366

43%

276

31%

90%+

-2

0%

731

146%

-114

-14%

-247

-27%

434

48%

818

164%

252

30%

29

3%

904

100%

500

100%

843

100%

903

100%

WESTPAC Movement $ Million LVR Range

30/09/2012

Comp

31/12/2012

Comp

31/03/2013

Comp

31/06/2013

Comp

Low LVR

176

73%

82

196%

523

70%

515

97%

80-89%

47

24%

-20

52%

89

43%

69

31%

90%+

-133

4%

-64

-148%

-41

-14%

-66

-27%

-86

27%

-84

-96%

48

30%

3

3%

90

100%

-2

100%

571

100%

518

100%

LVR Range

30/09/2012

Comp

31/12/2012

Comp

31/03/2013

Comp

31/06/2013

Comp

Low LVR

56

18%

50

5%

226

29%

227

27%

80-89%

306

96%

527

57%

400

51%

455

53%

90%+

-44

-14%

355

38%

165

21%

170

20%

262

82%

882

95%

565

71%

625

73%

318

100%

932

100%

791

100%

852

100%

ASB Movement $ Million

BNZ Movement $ Million LVR Range

30/09/2012

Comp

31/12/2012

Comp

31/03/2013

Comp

31/06/2013

Comp

Low LVR

181

87%

144

40%

294

65%

197

53%

80-89%

107

52%

77

22%

75

16%

64

17%

90%+

-81

-39%

135

38%

86

19%

110

30%

26

13%

212

60%

161

35%

174

47%

207

100%

356

100%

455

100%

371

100%

031


LEGAL By Jonathan Flaws

ANY WAY THE

wind blows Have you ever noticed the effect the wind has on you— both physically and emotionally? Ever noticed how these effects change depending on the wind direction?

I

n Auckland, if it blows from the south

it tends to be cold. If it’s not too strong a breeze then the sky is generally clear and you can get some stunningly clear winter days. You feel good inside even if you feel chilled externally. Some summers we get constant east or north-east winds and it can be humid, hot, sticky and wet and if it lasts for days on end you have a summer break but come back to work feeling worse than when you left. In some parts of the world a common summer wind is from a dry and hot interior, like the Mistral in France and the Santa Ana in California. That can be so depressing and debilitating that it makes you want to top yourself. Spending too much time in California can do that anyway, but at these times, the suicide rate goes through the roof. Westerlies tend to be just wet and miserable. Occasionally you get a severe gale or hurricane that takes out the power for large areas of the country and blows down forests. Some events take their names from the wind, like the Japanese pilots who described themselves as Kamikaze—the wind that kept the Korean forces from invading Japan. We should be used to the wind. We live on two main islands in the middle of an ocean. Everything below Wanganui lies in the latitudes of the roaring forties so we should expect to be battered by winds of all sorts. Ever notice how the wind is often used as a metaphor to explain or describe changing conditions? Some people are described as being as fickle as the wind. The state of the nation is affected by economic winds that blow from offshore. You could be forgiven for coming to the conclusion that the mortgage industry and its

032

"An LMI policy insures the lender against loss arising out of a credit default by the borrower. It does not insure the borrower" participants are as fickle as as the economic winds that blow us about. Up until the end of 2007, if you were in the mortgage industry in Australia, you really needed to be in New Zealand. You thought of it as part of Australia— different, but apart from the differences pretty much the same. Like Tasmania; another State of Australia. It was natural that you would let these favourable winds blow you across the Tasman. Then, like the Kamikaze, the wind we now call the GFC hit and doing business in New Zealand became too hard. It became too hard wherever you were, so it’s not just a New Zealand thing, but it was exaggerated here. The population was too small, it was being hit hard economically and with the pressure up and fires burning across the Tasman, it was time to pack up and go home. The Australian non-bank lenders led the charge. Their funding dried up and they were spending more time servicing their arrears. Not all left—Liberty Financial stayed and dug in for the long haul by acquiring new businesses.

The reality is that the mortgage industry is a commodity industry and if you are providing mortgages or insurance services to mortgagees, unless you have the volume you are going to find it hard to sustain a profitable business on just mortgages. The domestic finance companies couldn’t leave but had their own problems that caused them to disappear off the financial scene. Some disappeared in dramatic circumstances and took down a lot of unsuspecting public investors with them. Interestingly, the Lenders’ Mortgage Insurers stayed longer. There wasn’t much business to write but they hung around, presumably in the hope it would reappear or possibly to keep a local eye on their arrears management. But they too succumbed to the fact that the costs of doing—or not doing—business in such a small economy made it uneconomic to remain. The GFC winds finally hit the LMI lenders. Genworth was the first to go. According to the financial press, “during the year ended December 31, 2011, the company exited the mortgage insurance market in New Zealand and ceased offering insurance coverage on new loans.” Last month, QBE followed suit and its website states simply: “The QBE Lenders' Mortgage Insurance office in New Zealand is now closed.” I’m not sure why QBE took so long to move on. Perhaps their largest client, Kiwibank, who was still insuring its above 80% book, justified remaining. But with the impending restrictions to high LVR lending perhaps QBE saw the writing on the wall and decided to move on before their premium income fell to uneconomic levels. It seems strange to think of LMI in the past tense but before its memory gets blown into


LEGAL

history it may be worth looking back at what it delivered. This hindsight may help us decide whether the loss of mortgage insurance is a good or a bad thing. An LMI policy insures the lender against loss arising out of a credit default by the borrower. It does not insure the borrower or provide any relief from circumstances that might give rise to a credit default so on the face of it, the lender and not the borrower benefits from LMI. However, in a perverse way, the borrower may also benefit because without the credit support from LMI, the lender might not agree to lend as much against the value of the property. The presence of LMI provides the borrower with access to a level of funding that might not otherwise be available. As indicated above, Kiwibank took advantage of LMI to enable it to

lend above 80%. The changes implemented by the Reserve Bank as well as the loss of access to LMI insurers locally will therefore reduce their 80% plus lending. Securitised lenders would often insure their entire book, not just the high LVR loans, in order to persuade the rating agencies that a larger portion of their book should be included in the AAA rated tranche and attract better pricing. This means that the lender is able to be more competitive on the rates it charges its borrowers. When applying for an LMI policy for a loan, a non-bank lender was required to provide the insurer with evidence that the application met the insurer’s loan criteria. Although this was not intended, this gave rise to some mortgage managers adopting a ‘tick-the-box’ attitude. Instead of adopting the traditional approach of an extensive and detailed loan underwriting process, for these mortgage managers the underwriting of a loan sourced from a broker became more of an exercise in compliance. The manager’s job became one of making sure that all the right boxes in the LMI application were completed and sufficient information and answers to the LMI questions were obtained in order to persuade the LMI to issue the confirmation of cover. The first the non-bank lender knew of the loan was when it received from the manager the loan application and confirmation of LMI insurance. In the heady days before the GFC, some lenders would simply take the application and presence of LMI at face value and approve the loan without any further review. A downside of the presence of LMI was therefore that the lender was even more divorced from the borrower and left the assessment of credit to third parties whom

it assumed had met the LMI criteria. The LMI confirmation of cover always commenced with a statement that, based on the applicant’s advice that its criteria had been met, it confirmed that insurance would be made available upon payment of the premium. The LMI insurer will tell you it wasn’t their fault. So it was possible that a loan could be approved by a lender, and LMI confirmation provided by the insurer, on the assumption that a third party who had not met the borrower had assessed pieces of paper that indicated that certain criteria had been met. If there is ever a question in any financial services exam that asks for an explanation of the causes of the global financial crisis that hit in late 2007, you could be assured of scoring some points by referring to the role of LMI, particularly in the US where the main LMI insurers are government-backed institutions. To be fair, it was not so much the presence of LMI but the way in which some participants in the industry used it. But the economic wind has blown and the reality has hit home that while we are small and perfectly well formed, we are still small and vulnerable and LMI has been blown away from our shores. What will this mean for the nonbank market? It should mean that lenders (if this hadn’t already happened) will now take a much greater interest in the underwriting process because the credit risk can no longer be passed across to an insurer. Higher LVR loans will be harder to come by—even without the Reserve Bank requirements—and interest rates will rise. Or put another way: Regardless of which way it blows, there will still be wind to fill the sails, just not as much as before—and you will need to be a better sailor. ✚

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INSURANCE By Steve Wright

KIDDY COVER

Children are precious and valuable —ever thought about insuring them?

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edical insurance aside,

many parents don’t think about insuring their children and neither do their advisers. I’ve even heard people suggest it is somehow wrong to do so, and it may well be if there are evil intentions involved. The law in New Zealand, via the Life Insurance Act 1908, recognises the risk of these evil intentions and prohibits life insurance companies from paying more than $2,000 on the death of any person aged under 10. The date of this act tells you how old it is and hopefully the likelihood of evil intentions are much lower now than they were a century ago. While the death of a child is traumatic, it does not generally cause a family financial loss beyond funeral costs (for example, through loss of income), especially as we frown on the idea of sending under 10s out to work these days, so the restriction on life cover is not so important. However, and it’s a big however, a

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seriously disabled child, one who can never properly fend for themselves, let alone work and earn a living as an adult, will usually represent a massive financial loss to most families. For a start,

It’s natural not to want to think about the unthinkable but as an adviser it is your job to try to help clients understand that bad things happen

a child seriously disabled will need someone to take care of them and really there are only two options—pay someone to do it, leaving you and your spouse or partner to continue working, or for one of you to give up work and its associated income to do it yourself. Both options are likely to cost several thousand dollars a month, either in expenses or lost income. Multiply that over the many years for which your child will need care, which may be the remainder of their life, including years in adulthood, and you can see how the cost could easily run into hundreds of thousands of dollars. WINZ benefits might be payable in some cases but they are usually relatively modest (for example, the Child Disability Allowance is less than $50 per week) and are sometimes income or asset-tested: they are certainly not going to match a reasonable salary lost. I do invite you to visit the WINZ website to discover what might be payable. Another problem is that insurance companies don’t generally offer disability insurance on children under 16 and while medical insurance might pay some of the medical bills, it won’t compensate for many extra expenses and it won’t replace a loss income. Fortunately for us parents and advisers there is trauma cover. More insurance companies and advisers are waking up to the fact that there is a need for trauma cover on children and are now offering more than the usual $20,000 to $50,000 typically provided on the parent’s policy. Some insurance companies will allow up to $200,000 on children and one will go as far as allowing $450,000 on children from four months of age in addition to any free trauma cover that may be attached to the parent’s trauma cover. Some companies have different trauma conditions and definitions for children so make sure you know what conditions are covered and how much will be paid. Make sure also that you establish whether there is a continuation option allowing the child’s cover to continue once they become adults. It’s natural not to want to think about the unthinkable but as an adviser it is your job to try to help clients understand that bad things happen to us all, including children, even very young ones, and if that does happen, financial distress will make the problem for the whole family much worse. Some of the most frequent causes of permanent disability in children is severe head injury and loss of limbs because of motor vehicle accidents. If you are still not convinced that bad things happen to children, consider why we have Starship Hospital, a specialist hospital for children. Every year Starship sees more than 100,000 children. Fortunately, most will go home soon but there are many unfortunate children admitted with cancers, severe head wounds, severe burns, permanent disabilities, even strokes, whose lives and the lives of their families will be changed forever. Wouldn’t it be great to take that family a really big cheque? ✚ Steve Wright is the general manager product at Partners Life.


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


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