TMM - The NZ Mortgage Mag Issue 3 2016

Issue

03

2016

Round Table: INDUSTRY LEADERS ON THE BIG ADVISER ISSUES

PARENTAL GUARANTEES GOOD OR BAD?

RIGHT FREQUENCY JUDY STEINER

A LOOK INSIDE THE

SQUIRREL’S NEST

CONTENTS

14

UPFRONT 05 EDITORIAL

Time to get your head out of the sand.

06 NEWS

Advisers not keen on authorisation.

08 PEOPLE ON THE MOVE The latest appointments and people news.

Round Table: INDUSTRY LEADERS ON THE BIG 24 ADVISER ISSUES FEATURES 10 HOUSING COMMENTARY

The Auckland market is surging and the regional market continues to grow.

12 PROPERTY NEWS

A round-up of property news and events from New Zealand Property Investor.

14 ROUND TABLE

Nine of the industry leaders discuss the major issues facing mortgage advisers at the moment.

24 MY BUSINESS:

From a thriving advertising career to an award winning mortgage business, Judy Steiner is passionate about helping people with loans today as she was when she started 13 years ago.

Judy Steiner

COLUMNS 22 SALES AND MARKETING

Paul Watkins discusses the artform of keeping clients satisfied and what options are available to potential homeowners.

26 INTEREST RATES

BNZ’s outlook for borrowers and post OCR review.

28 PAA

A snapshot of some of the speakers at the adviser event of the year.

30 INSURANCE

Being efficient - Steve Wright explains the importance of an efficient protection plan.

32 LEGAL

TMM’s resident legal expert, Jonathan Flaws, writes how online mortgages can be effective, but there still needs personal interaction.

34 INTELLIGENCE

The law of mortgages is pretty simple, Johnathan Flaws writes.

EDITOR’S LETTER

Time to get your head out of the sand

O

ne of the biggest games in town at the moment is the review of the Financial Advisers Act. Yet it seems the mortgage broking sector is in denial about what is happening. Maybe it somehow thinks it’s above the fray and doesn’t need to get involved?

If that’s the case then that’s a serious mistake.

What is impossible to understand is why not one single mortgage broking group chose to make a submission on the Options Paper put out by the Ministry of Business Innovation and Employment.

It’s not just me who is dumbfounded here.

I know for a fact officials were taken by surprise.

One thing that is clear is that the rules Registered Financial Advisers play by are likely to change. Betting on that has pretty good odds.

If individual advisers and groups aren’t aware of what is happening and are relying on their professional body to look after their interests, then they better engage – if it’s not too late already.

The Professional Advisers Association, which

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essentially took over the NZ Mortgage Brokers Association and represents, probably, the majority of mortgage advisers submitted on the Options Paper.

It called for all advisers, whether they deal with investments, life insurance, mortgages or KiwiSaver, to become Authorised Financial Advisers.

Its submission also argued for the creation of an External Compliance Assurance (ECA) Package.

The ECA would deal with the supervision of advisers’ activities – essentially a new role for professional associations.

The feedback we have had from many mortgage advisers is varied, but on balance more argue against being AFAs than stepping up to that level.

Unfortunately the industry hasn’t put that case forward in response to the Options Paper so it’s unlikely to happen.

In this issue of TMM we have our Round Table discussion. Regulation is one of the big issues, but there is also some good discussion around topics such as remuneration models, and other industry issues.

New website for advisers Late last month we went live with a new website specifically for mortgage advisersYou can find it at www.tmmonline.nz Please make sure you bookmark the site to keep up with the latest news. If you are not already on our mailing list for the weekly mortgage email newsletter than drop me a line at Philip@tmmonline.nz

PUBLISHER: Philip Macalister SENIOR WRITERS: Susan Edmunds, Miriam Bell, Dana Kinita SUB EDITOR: Phil Campbell CONTRIBUTORS: Paul Watkins Steve Wright Jonathan Flaws Kymberly Martin GRAPHIC DESIGN: Jonathan Harding ADVERTISING SALES: Freephone: 0800 345 675 sales@tarawera.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 tmm_editor@tarawera.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: tmm_editor@tarawera.co.nz

Philip Macalister Publisher

NEWS

MORTGAGE ADVISERS NOT KEEN ON AUTHORISATION

A

ll advisers, including mortgage brokers, should be authorised, the Professional Advisers Association says.

It argued for the abolition of RFA and QFE in its submission on the review of the Financial Advisers Act. The PAA represents a large number of mortgage advisers, after it took over the NZ Mortgage Brokers Association.

"There would simply be Financial Advisers," it said. However, terms like “insurance adviser” and “mortgage broker/adviser” could also be used by financial advisers carrying out those functions.

All financial advisers would need to step up to the provisions that currently apply to AFAs, including the Code, the Disciplinary Committee and the FMA authorisation process.

However, there has been a mixed reaction to its submission.

Mortgagesonline.co.nz adviser Hamish Patel says: “It would be quite profitable for some mortgage brokers (like me) if this was the case.”

Vickie Pickering at the Conveyancing Company says “no is the answer”, if the question is all mortgage brokers need to be authorised.

“We need to look at the difference between mortgage brokers, insurance brokers and financial planners and the risk involved.

“Insurance advisers and financial planners have the final say and either sell the wrong insurance policy, too much or too little while financial planners can invest money that the client either benefits from or not as the case maybe.”

“Mortgage brokers submit loans to the bank and the bank decides if they can have the loan.

Really a mortgage broker works, on the deal and bank to suit the client. Structure of the loan is done usually by the broker but sometimes the bank takes over.

“So RFA for mortgage brokers and AFA for the financial planners and insurance brokers,” she says.

Mortgage adviser and PAA member Diana Bede says: “I heartily object to being forced to become an AFA. Currently as an RFA, I attend all the available seminars and consider I give good advice. The extra cost and study would not be in my best interests.”

The PAA is also proposing a transition period and the establishment of a compliance assurance package, which would help ensure that advisers performed only those advice services that they were qualified and resourced to take on.

The PAA, or other associations, would run the External Compliance Assurance (ECA) Package. ✚

05

INSIGHT

By Philip Macalister

A look inside the Squirrel’s nest It’s not often we get to look inside one of the biggest and most successful mortgage broking firms in New Zealand, but the door has been opened at Squirrel.

J

ohn Bolton’s Auckland-based Squirrel Group recently completed the biggest equity raising by a crowd-funding platform.

The firm raised $3.5 million using the Snowball Effect platform. To do this it had to produce an information memorandum for potential investors which detailed the business and its plans for growth.

Squirrel has been operating a mortgage broking business for seven years.

More recently it launched its peer-to-peer business Squirrel Money and it also has an online tool for property investors to manage their investments.

The money raised will cover restructuring and offer costs, the development of a new online mortgage application process, a Squirrel Money app, and seeding the Squirrel Money reserve fund, which protects investors in the peer-to-peer platform from defaults.

In this feature we look at the mortgage broking side of the business only.

What is clear about Squirrel is that it’s a fast-growing business with aspirations to continue this growth trajectory. While there are other parts to the group mortgage broking is described as the backbone of the business.

Squirrel’s mortgage volumes have grown on average by 57% each year in the past four financial years from $130 million in the year ended March 31, 2012 and is forecast to be $800 million in the most recently completed financial year.

The goal is to arrange $1 billion of mortgages in the current financial year, which is an average of $87 million per month.

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“Our currently montly mortgage volume falls between $70 million and $100 million per month.”

Overall mortgage advisers currently account for an estimated 33% of all home loan originations in New Zealand. If the advisory market can get to 50% market share like its peers in Australia, then they will be responsible for $27.5 billion worth of mortgages a year.

If the sector achieved this growth and Squirrel held its market share in third party distribution then it would arrange $1.57 billion worth of mortgages annually.

But growth is the plan. Squirrel is looking to grow its lending volumes 28% annually, mainly from organic growth. In its growth plans, which are detailed below, it hasn’t factored in any acquisitions.

However the company is not averse to buying other businesses as it showed last year when it acquired North Shore-based Aspire Advisers in November.

Aspire has around $16,000 of trail income each month and arranges around $15 million of mortgages a month.

Squirrel paid $550,000 for the trail book, fixed assets and revenue accrual with a further $1 million of earn out and performance incentives.

Currently the group is trialing three brokers across Waikato and the Bay of Plenty to help it get a better understanding of markets outside of Auckland.

The importance to trail commission Currently 95% of Squirrel’s mortgage revenue comes from upfront and trail commissions

Squirrel Mortgages revenue 2014

2015

2016

2017

2018

2019

Actual

Actual

Forecast

Plan

Projection

Projection

Revenue

2,622,078

3,736,380

6,323,753

7,383,427

10,818,135

14,443,677

Expenses

2,073,257

2,793,451

4,699,983

5,568,431

7,286,705

8,757,627

EBITDA

548,821

942,929

1,623,770

1,814,996

3,531,430

5,686,050

2014

2015

2016

2017

2018

2019

$2,396,532

$3,444,758

$6,240,000

$6,750,000

$9,112,500

$11,475,000

$102,420

$424,260

$1,234,260

$237,760

($312,000)

($337,500)

($455,625)

($573,750)

Mortgage revenue Mortgages upfront Trail Clawbacks

Squirrel mortgage adviser volumes Total FTE Monthly settlements per adviser Mortgage volumes EBITDA

2015

2016

2017

2018

2019

18

40

45

59

73

$3.4mill

$3.8mill

$4 mill

$4 mill

$4 mill

$460 mill

$800 mill

$1 bill

$1.35 bill

$1.7 bill

548,821

942,929

1,623,770

1,814,996

3,531,430

Squirrel Group Profit EBITDA Profit before tax NPAT

2014

2015

2016

2017

2018

2019

548,821

605,429

612,274

567,482

3,454,145

7,238,549

398,299

543,311

8,017

142,086

2,821,955

6,559,924

285,053

351,969

5,722

102,302

2,031,807

4,723,145

Note: This table is selected items from the consolidated financial projections.

It doesn’t include interest and financing costs, depreciation and One-off expenses.

The IM says the revenue projections may look aggressive but they are not as trail commissioms make a big difference to future revenue flows.

Currently trail is only expected to contribute 2% of annuity style income in the March 2016 financial year, however this is projected to rise to 24% of income in the 2019 financial year.

The three banks which pay trail, Westpac, BNZ and Kiwibank make up about 50% of the mortgages Squirrel writes each year.

“The benefit of trail commission, is that it builds a recurring income stream. Over time we become less reliant on arranging new mortgages to cover our overehead costs,” the IM says.

Squirrel says about $300 million of the loans arranged in the 2016 financial year paid trail and that amount is expected to increase to $500 million in the year ending March 21, 2017.

Fifty per cent of loans will be written with lenders which pay trail commission. This comes at a short-term opportunity cost but long-term benefit with more trail commission. This is particularly evident on FY2017.

How busy are Squirrel advisers?

Currently Squirrel advisers are writing around $3.8 million worth of mortgages each month and that is forecast to grow slightly to $4

million in subsequent years.

The group is looking to grow the number of full-time equivalents from 40 to 73 in the 2019 financial year.

While mortgages are the backbone of the business Squirrel is looking to grow income in other sectors of the market including life insurance and KiwiSaver.

It is aiming for a 12% cross-sell rate of insurance into mortgage clients in the financial year to March 2017 year, increasing to 15% in the following year.

Why Squirrel is different?

To many observers a key strenght of Squirrel is its brand along with the media coverage the firm and its principal, John Bolton, generates.

However, the IM describes how Squirrel’s focus on technology as one are which makes it different.

“We have always had a focus on technology.

Squirrel Mortgages was an early adopter of online mortgage applications and cloud technology, and as a business we will continue to invest in technology.

“Squirrel Group is at the cutting edge of technological change in financial services.

We are well positioned to take advantage of a rapidly changing market.”

Other points of difference include:

▶ Employees are salaried with performance incentives (not pure commission) and Squirrel is owned by or tied to a real estate company or lender. ▶ Squirrel Mortgages is not a franchise and doesn’t have self-employed contractors. ▶ Squirrel Mortgages invests heavily in marketing and advertising to build its brand. ▶ Employees are office-based and most client meetings occur in the office (the business is pitched much more along the lines of a “professional services” business.

The IM says that other brokers are likely to join Squirrel as it can help them to “adapt in a fast changing environment where technology will play a much more significant role”.

“We can get productivity and scale into their businesses.”

Ultimately the company is looking at some form of share market float as its exit strategy.

“There is a lack of good quality growth financial sector stocks on NZX. We are considering raising further capital and listing Squirrel Group on the NXT Market in the second half of calendar year 2017.

“Listing on the NXT Market will give us access to more capital and will provide investors with a liquid market to buy and sell their shares,” the IM says. ✚

07

PEOPLE

PEOPLE ON THE MOVE

Got a new appointment you would like to tell advisers about? Email details and a pic to tmm_editor@tarawera.co.nz

Mentoring focus at MX

Mortgage Express has a new regional manager for the Northern/Central North Island. Rob Tucker’s role at Mortgage Express will focus on strengthening relationships with sister-company, Harcourts, and personal development of Mortgage Express advisers through coaching, mentoring and training.

“I’m looking forward to working with the advisers, helping them grow their businesses as I believe I can add real value in that area,” Tucker said. With more than 40 years’ experience in the financial services industry, Tucker’s career highlights include being founding chairman of the New Zealand Mortgage Brokers Association serving five terms, where he was instrumental in formalising a code of ethics and standards for its members, helping shape the mortgage adviser industry of today.

As well as managing his own consulting company, Tucker’s interest in company compliance and risk management led him to contract to Financial Dispute Resolution for a number of years, providing relationship management services. He has successfully set up and managed a mortgage investment

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Rob Tucker business, worked as an assessor for ETITO (now The Skills Organisation) and, more recently, was appointed an independent director responsible for monitoring and strengthening the company’s compliance and risk management processes.

After more than three decades in banking Pete Tilley has made the move to be a mortgage adviser. Tilley joined the Mortgage Express team based in Paremata recently

and will be providing mortgage services for commercial and residential borrowing.

Before joining Mortgage Express, Tilley worked for Westpac for 33 years, managing branch networks, business banking, and loans administration. “I love interacting with people and look forward to passing on my experience and understanding of the industry to my clients,” Tilley said."

Also joining Mortgage Express is Jenny Cheevers. A mortgage adviser for nearly 20 years, Cheevers had previously working at ASB. She was a finalist of the NZMBA Broker of the Year award for several successive years and described herself as a strong negotiator, skilled in putting together successful applications and making deals happen.

“Communication is my big thing, along with efficiency and speed,” Cheevers said.

“I’m skilled in putting applications together and making deals happen, negotiating excellent rates for clients, and making the entire buying process as stress free as possible.

Cheevers is based in Wellington but also helps clients outside of Wellington and overseas in providing advice around residential mortgages.

Trio advances at Advanti

Avanti has welcomed three new team members to their team. Two will provide business development support - one in Christchurch and one in Wellington whilst the third has joined their growing Auckland lending team.

Nicole Glover joined Avanti’s Auckland lending team in February bringing nearly 20 years’ experience in the banking/finance industry, having previously worked with several of the major banks in both retail and commercial lending roles. Glover has also worked in broker/adviser units within several main banks.

With the introduction of their specialist longer-term first mortgage product, Avanti has experienced significant business growth and Glover’s appointment will support their current experienced lending team enabling them to ensure that they continue to deliver quick, knowledgeable, common sense lending solutions to their advisers.

Michael Harrison (business development manager, Christchurch) has spent many years operating in finance and insurance including time with several of the major banks. Harrison also spent a couple of years lending in the mortgage adviser channel with Avanti back in 2009 so he has an understanding of the adviser space. Harrison will join Wendy Phipps in Avanti’s Christchurch office in High St and will be also be working in the greater Canterbury region.

Paul Rolton (business development manager, Wellington) joined the Avanti team and will be based in Wellington covering the lower central North Island.

Rolton has had an extensive background in business development and finance including time operating as a mortgage adviser. He has lived in the Wellington region for many years and has strong ties to the local community through his family and the club rugby scene.

Julia Winterbottom (national business development manager) is pleased to welcome the two new BDM’s to the team as they will be able to provide greater support to the local advisers in Wellington/Christchurch and the surrounding areas.

Aaron Skilton

NZHL has new chief

New Zealand Home Loans has appointed Aaron Skilton as chief operating officer.

Skilton, who is currently chief strategy officer, is taking over from Phil Harris,

who is to remain with the business on a consultancy basis.

He previously held senior roles with Sovereign as a corporate sales and senior operations manager before moving to Marsh as an associate director.

Chief executive Julian Travaglia said his experience was an asset.

“We are very pleased to appoint Aaron to the COO role,” Travaglia said. “He is already a valued member of the NZHL team and in this role he will be instrumental in supporting our future growth goals.

“We would like to acknowledge the significant contribution Phil Harris has made to the business. Over the past 16 years, he has been a committed member of the NZHL team, supporting and driving the business to become New Zealand’s leading managed home loan provider.”

Supporting

Mortgage Advisers

Since 1991

Branded and Non-Branded Options

Jeremy Seales

Wealth of experience with Westpac BDM

New business development manager, Jeremy Seales has been with Westpac for four years and brings much knowledge from his experience as a mortgage adviser in the United Kingdom for five years.

Seales has worked in the broker unit, and more recently has been a business manager in Westpac's business on demand unit, as part of the team which is now expanding the business offering through the mortgage adviser channel.

Mike Pero expands in the south

Having worked around the globe, Wayne McCarthy has returned to his Central Otago roots as a mortgage adviser and franchise owner with Mike Pero in Dunedin.

He has previously been an AFA advising on investments and has 30 years’ in the finance industry.

Joining the Wellington team, is franchise owner Firuz Alimov. The mortgage and insurance adviser provides a wealth of banking, lending and insurance experience.

He speaks fluent Russian, Japanese and English and in his spare time enjoys playing ultimate Frisbee.

New franchise owners Claire Picone and Jennifer Webb also join the Wellington team. Picone is a mortgage and insurance adviser following a 10 year career with Kiwibank. Webb is also advising on mortgages and insurance. ✚

Promotion on Website Advice Process and Flowchart Market Leading CRM’s Iress incl Mortgage Tool & Finware Leads PD Days and Conference New to Industry Adviser Training Compliance Support Business Planning and Support Succession Planning and Support PI Cover and Disputes Resolution Scheme Package Access to Insurance Link and Insurance Link General

Call Josh Bronkhorst: 027 397 7198 Helena Merson: 027 466 7010

Thinking Mortgages ?

Think Link

mortgagelink.co.nz 09

HOUSING COMMENTARY

By Miriam Bell

Strong market breeds concerns It’s game on for those with housing market concerns as Auckland’s market again surges upwards and regional markets grow, writes Miriam Bell.

E

ver contrary, Auckland’s housing market is keeping everyone guessing.

All the March data showed it had roared back into contention – with a vengeance. But while March’s data recorded strongly rising prices and sales, the first of April’s data hints at a slightly different story.

SuperCity confusion aside, evidence of accelerating growth in many regional markets just keeps coming. And the combination of a resurgence of the Auckland market and ongoing strength in the regions has left many worried.

Once again, there is talk of affordability and the potential threat to financial stability. This, in turn, has prompted renewed debate on whether intervention will, again, be needed.

SIGNS OF RESTRAINT Realestate.co.nz’s data was first off the blocks in April. It showed minimal change in Auckland’s average asking price over the month.

The city’s average asking price came in at $861,305, which was down by 0.1% on March’s average asking price. It also showed that in Auckland weeks to sell fell by 2.78% in April 2016, compared with the same time last year, and that listings in the city were down year-on-year.

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Realestate.co.nz CEO Brendon Skipper said Wellington’s housing market stole the limelight from Auckland’s in April. “The capital’s inventory levels are at a record low,” Skipper said. “There is upward pressure on prices with 2% growth in April, and there are plenty of buyers out there,” Skipper said.

Confirmation that April activity in Auckland’s market was more subdued than expected came in Barfoot & Thompson’s latest data. It showed a big drop in sales numbers, along with only small increases in both the average sales price and the median sales price in April.

The average sales price was up by 0.8%, to $873,599 and the median sales price was up by 2.8%, to $820,000, compared with March.

Barfoot & Thompson managing director, Peter Thompson, who described April’s market as restrained, said house prices had pulled back from breaking into new territory.

The year-on-year increase in the average sales price was also less than of late, he said. “While it was 8.6% ahead of where it was in March last year, for the past year we have been looking at monthly year-on-year increases of around 12%.”

The agency’s sales numbers dropped significantly in April. They were down 29.6% on

March and 11.8% year-on-year. Thompson said they sold the lowest number of homes in April that they have sold in an April in four years.

Further, new listings were down for the third consecutive month.

REVERSE IN TREND However, the latest Quotable Value (QV) data provided a contrary view. It showed that Auckland’s market, while not the star performer, had reversed its recent downward trend in values.

Auckland’s values increased by 1.5% over the past three months and by 16.5% year-onyear, which left the region’s average value at $942,760. This means they are now 72.5% above the 2007 market peak. Once adjusted for inflation, Auckland’s values were up 16.0% yearon-year and are 47.1% higher than in 2007.

QV national spokesperson Andrea Rush said values in all parts of the Auckland region were increasing again. “But they are rising at a slower rate than other upper North Island centres, like Hamilton, Tauranga and Rotorua, and districts in surrounding areas,” Rush said.

The QV data supported the March data from the Real Estate Institute of New Zealand

(REINZ) and the Trade Me Property data which showed significant jumps in Auckland’s house prices in March.

REBOUND SHOCK While both sets of data provided evidence of the Auckland market’s resurgence, it was the REINZ data which was taken as authoritative proof that the city was firmly in recovery mode.

It showed Auckland’s median price rose by 7.7% in March to hit a new record high of $820,000. On top of this, sales volumes were also up by 66.8% on February, although they were down by 21% on March 2015.

REINZ chief executive Colleen Milne said the rebound of Auckland’s prices in March indicated fears of the market cooling off had been overstated. “The slow-down in sales volumes after the introduction of tax and LVR changes last year appears to be coming to an end, with a significant lift in sales for March and a further uplift in the median price,” Milne said.

The strength of the REINZ data was a surprise to Westpac chief economist Dominick Stephens. He said that, while other data sources and anecdotal evidence had foreshadowed the upturn in the Auckland market, the REINZ data was more positive for Auckland than anticipated.

“The fact that the Auckland housing market has rebounded is not particularly surprising – the tax and LVR regulations introduced last year were always expected to have a temporary effect on the trajectory of house prices. But the power and extent of the rebound in March has taken us by surprise.”

NATIONAL STRENGTH Meanwhile, many property markets around the country continued to display strong growth.

This, in turn, impacted positively on nationwide values, prices and sales.

The April QV data showed that nationwide values increased by 2.1% over the past three months and by 12.0% year-on-year, which left the national average at $568,058. This means they are now 37.1% above the 2007 market peak. Once adjusted for inflation, national values were up 11.6% year-on-year and are 16.9% higher than in 2007.

According to the REINZ data, regions around the country hit new record median house prices, while the national median house price rose to $495,000. This was a 10% increase on February’s national median price (of $450,000) and a 4.2% increase on the March 2015 national median price.

Sales volumes were up nationwide, too.

March saw 9,527 sales, up 30.7% on February and up 8.2% on March 2015. Sales volumes increased in 10 regions, compared with February, while 10 regions saw increases compared with March 2015.

STAR PERFORMERS QV’s data showed that all the main centres and many regional centres saw values increase during April. Values were up in Wellington, Dunedin and Christchurch, while Queenstown values accelerated in the past three months (up 6.6%).

Hamilton and Tauranga turned in April’s star

performances, however.

Hamilton’s values increased by 5.2% over the past three months and 25.3% year-onyear, leaving the average value at $471,072.

Tauranga’s values were up 3.6% over the past three months and 21.5% year-on-year, which left the average value at $577,494.

Rush said much of the growth was driven by the promise of record low interest rates continuing and increased activity by people looking outside of the main centres for either more affordable homes or higher rental yields.

Auckland’s strength was leading to a growth in the “halo effect” which continued to flow on to other regions, Milne said. “Right across the country regional markets have been strong with a large number of record medians and the strongest sales for nine years for most regions.”

In her view, the data points to a generally robust real estate market across New Zealand, with Auckland in recovery and anecdotal evidence of surging investor demand in a number of regional markets.

RESTRICTIONS TO COME? The ongoing strength of markets around the country, but particularly in Auckland, has left economists speculating whether more Reserve Bank restrictions were on the cards.

Stephens said the situation, which had led Westpac to upgrade their forecast for 2016 house price inflation from 6% to 11.5%, was due to the big drop in mortgage rates over the past year. This, in turn, was leading to households taking on more debt and banks extending more mortgage credit.

In the long run, the “borrow-to-spendfacilitated-by-rising-house-prices” dynamic posed economic risks, he said. “Specifically, if interest rates rise materially then today’s house prices will start to look less supportable, and today’s debt levels will be harder to service.”

This left him wondering how the Reserve Bank would respond – given it has to adhere to its inflation targets. “The more likely reaction lies in macro-prudential policy.

If house prices continue on their current trajectory much longer, the RBNZ will start thinking about another round of mortgage lending restrictions.”

ANZ chief economist Cameron Bagrie agreed that, with regional housing markets booming and Auckland coming back to the boil, the odds of more macro-prudential measures were growing by the day.

A logical first step would be to make the current Auckland LVR restrictions for investors a nationwide policy, he said. “In other words, all residential property investors, no matter where they were buying, would be required to have a 30% deposit. It’s tweaking something already in place, and hence easy to do.”

However, the Reserve Bank could increase risk weights on sectoral lending, introduce the counter-cyclical capital buffer, or limit the amount of interest-only borrowing.

“Macro-prudential measures won’t be a panacea for housing market strength amidst supply shortages. Yet housing exuberance at present is becoming increasingly difficult to ignore.” ✚

REINZ SALES: UP

Once seasonally adjusted, sales were up nationwide in March. This was driven by a large increase in Auckland’s sales volume.

INTEREST RATES: DOWN

Interest rates remain at historic lows.

OCR: DOWN

The Reserve Bank kept the OCR on hold at the record low of 2.25% in April

IMMIGRATION: UP

Migrant numbers were down in March, but the annual net gain still hit a record high, according to Statistics NZ’s latest data.

BUILDING CONSENTS: DOWN

Once seasonally adjusted, building consents were down nationwide in March – and the trend shows signs of easing, Statistics NZ says

MORTGAGE APPROVALS: UP

Reserve Bank data shows that mortgage lending rose strongly to hit a record high in March.

RENTS: NEUTRAL

Rents continued to be largely static nationwide in March.

011

INVESTMENT

By Miriam Bell - Brought to you by New Zealand Property Investor

Too busy to keep up with everything that is going on in the property sector? TMM is here to help. Read our round-up of property investment news and events in each issue of the magazine.

Property dreams on ice Property owners may be happy with the strength of the housing market, particularly in Auckland. But for many others, including the Reserve Bank, it is not cause for rejoicing.

The latest Massey University Home Affordability Report showed a small improvement in the affordability of Auckland

012 WWW.TMMONLINE.NZ

houses. But report author Dr Susan Flint-Hartle said the “modest” annual improvement of 3.1% was because of lower interest rates and the Reserve Bank’s LVR restrictions.

She said Auckland remained 59% less affordable than the rest of New Zealand, which was a record high. Further, that trend was beginning to tail off and she couldn’t see

Auckland houses getting any more affordable over the next year.

This was bad news for first-home buyers – and for those wanting to take the first step on the investment property ladder.

Correspondingly, a Barfoot & Thompson survey of the first-home ownership aspirations of young Aucklanders (18 to 34) showed that, while 91% wanted to own their own house, most didn’t anticipate that they would any time soon.

Nearly a third (31%) said it would be 10 years or more before they could purchase a house.

Even among the older respondents (25 to 34), 55% said buying a house was five or more years away. Barfoot & Thompson managing director Peter Thompson said responses indicated this was due to the high costs of buying in Auckland and difficulty saving the required deposit.

The survey also showed that young Aucklanders were not keen on the traditional alternatives to buying a family home when it comes to securing a property.

Thompson said the number thinking of buying a first property with family or friends in future was relatively low. “And when it came to buying smaller for a first property, just 9% of those surveyed wanted to buy an apartment – although that figure did increase to 22% for those in the 18 to 19-year old range,” Thompson said.

Auckland on rebound Auckland’s housing market has roared back into contention in the last couple of months.

This has prompted renewed focus on issues such as affordability and financial stability – and what can be done to address the pressure.

At the same time, landlords have been confronted with a range of new concerns.

After a slowdown over the summer months, Auckland’s housing market rebounded with vengeance. While the bulk of March’s price and sales data suggested this, it was the release of the REINZ data which confirmed it.

The REINZ data showed that the SuperCity’s median price rose by 7.7% in March to hit a new record high of $820,000. Sales volumes were also up by 66.8% on February, although they were down by 21% on March 2015.

REINZ chief executive Colleen Milne said

Intervention options As evidence of Auckland’s resurgent housing market kept coming, talk of crisis grew – and this, in turn, has prompted renewed debate on whether intervention is needed, or on the way.

Colleen Milne

the rebound of Auckland’s prices in March indicated that recent fears of the Auckland market cooling off have been overstated.

“The slow-down in sales volumes after the introduction of tax and LVR changes last year appears to be coming to an end.”

Auckland was not, however, the only region to turn in a record breaking performance in March. Regions around the country hit new record median house prices, while the national median house price rose to $495,000. Sales volumes around the country were up, too.

Milne said Auckland’s strength was leading to a growth in the “halo effect” which continues to flow on to other regions. “The data points to a generally robust real estate market across New Zealand, with Auckland in recovery and anecdotal evidence of surging investor demand in a number of regional markets.

First, there were mutterings that further macro-prudential policy from the Reserve Bank is on the horizon. Then, in late April, Prime Minister John Key added fuel by raising the possibility of a land tax for non-resident property buyers– if evidence showed they were pushing up house prices.

Suggestion of such a land tax were greeted with dismay by many in the property sector.

Some said it would open the door to the introduction of a capital gains tax. Others said alternative options would be more effective.

Veteran property investor Olly Newland said a land tax wouldn’t work because overseas

buyers will keep buying as it is still worthwhile for them. “Imposing stamp duty on local sales for everyone, with the exception of first home buyers, would be a much better solution,” Newland said.

He said a stamp duty would mean much bigger cash lump sums were required for deposits which would slow down many buyers. “The government needs to do something to curb the market without collapsing it and stamp duty would do that without affecting prices to much.”

In contrast, Property Institute chief executive Ashley Church advocated the Australian approach whereby non-resident buyers are restricted to only buying or building, new houses. If these rules are breached, nonresident buyers are liable for large fines.

This would address the shortage of supply rather than trying to artificially dampen demand, he said. “Rather than penalising those who want to invest in our real estate market, we should be channelling that investment into getting more homes built, more quickly.” ✚

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ROUND TABLE

GOOD TIMES ROLL ON, BUT

warnings ahead

TMM publisher Philip Macalister sat down with nine industry leaders to discuss the issues facing mortgage advisers at the moment. This is what they had to say.

MARK COLLINS Chief executive, Liberty Financial.

JENNY CAMPBELL General manager The Mortgage Supply Company, and New Zealand Mortgage Advisers Ltd. The mortgage broking industry is actually pretty healthy at the moment. It’s a great time to be a broker, and the levels of entry now are at about the right spot. I don’t think anyone is interested in seeing people working out of their basements anymore; it’s all about professionalism.

JEFF ROYLE Adviser.

I totally agree. I think the mortgage broking industry is healthy. It’s getting stronger and stronger. The message is beginning to get through to the public that when you go to a broker; you tend to get a bit more balanced advice as opposed to going to a product provider.

ROD SEVERN Chief executive Professional Advisers Association.

It’s a pretty healthy and robust area at the moment. There is still a fair amount of work to be done in the eyes of the consumer about getting trust and confidence into the overall adviser market, not just the mortgage advisers. We are very much looking forward to the outcome of the FAA Review. Overall, it’s great to see there is an increase in professionalism across the board.

If you look at Australia, you've got 50% of originations coming from mortgage brokers; whereas in New Zealand it’s about 30-40%. But the market feedback seems to be that about 60% of Kiwis want to delegate their financial services to a financial adviser, but only half of them are doing it. There’s a massive upside for people wanting advice, but not knowing where to go; and I think that gives a really good pathway for more brokers in the market at a higher standard, and better advice.

PENNY BURGESS Head of Specialist Distribution ANZ. The thing that I'm really encouraged about is that lift in professionalism, and the great standards of service that advisers are providing to customers. The real focus on actually helping a customer through what can actually be quite a stressful time. So I think that’s really great to see that focus and that professionalism – keep on lifting, and lifting, and lifting.

BRUCE McLACHLAN Chief Executive The Co-operative Bank.

In terms of mortgage broking, I think maybe it’s doing well; but I don’t think now is the time you judge – you don’t judge an industry in the good times; you judge an industry in the bad times.

It’s very easy for anyone of us to get complacent; markets are growing and credit’s growing; house prices are going up and there’s a feel-good factor in New Zealand which it just has a halo effect on everything. I think the risk is to think about how would you get through a significant downturn when it occurs; because it’s always when, not if.

ADRIENNE CHURCH General Manager RESIMAC Home Loans. The industry is doing well. I particularly agree with Mark’s comments about the statistics. There are new rates coming in the market, new advisers coming in the market which is good but it's just getting them to that same level of professionalism as everyone else. I think because the market is so busy people are jumping in without actually understanding what the downturn could be like or how they have to do their businesses; so they just see that it is easy money.

BRUCE PATTEN Deputy Chairman for the New Zealand Financial Services Group, and Loan Market adviser.

I am looking forward to the next downturn because we need that to clean out the industry; there’s too many coming in at not the right level. The industry is quite polarised into two very distinctive visions now; business owners and everyone else and I think that is going to be become more apparent with the split in the market and the way the banks are approaching how they remunerate brokers.

KRIS PEDERSEN Adviser, Kris Petersen Mortgages.

I'm pretty optimistic about the industry overall.

A few years ago you just used to do a lot of part-time applications with people who had given some pretty poor advice and I wouldn't say I'm seeing as much of that now. We will probably need to go into a downturn to see how much damage may be there from some of that advice.

TMM: We are seeing a lot of new advisers coming into the industry; how do we know they are up to scratch?

Bruce P: We are certainly turning people down. What we don’t like to see is when we turn someone down and them then being accepted by the banks even though we have told them.

We have had people come to us who have been turned down by someone else so I’m not saying it’s exclusive but certainly something we need to start giving some thought to and picking and choosing who comes into our industry.

Rod: Theoretically, the banks have chosen two organisations which they have mandated for acceptance into the mortgage industry. I don’t know that they are adhering to that the way they should do at every occasion.

We know that there are people out there who will never make it so we don’t let them start.

Penny: We used to issue accreditation subject to the proof that somebody had gone on course. This was creating an industry to chase people up, so we put the fact that people need to complete the course first and actually show

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they’re committed to demonstrating a level of competence before we will consider their accreditation.

TMM: Do the standards for entry have to keep lifting higher and higher? Should it be Level 5?

Jeff: Level 5 should be the bare minimum.

Rod: In our submission to the FAA Review, we

" In our submission to the FAA Review, we said that all new people coming into the industry should get Level 5 before they are allowed to be accredited" – Rod Severn

said that all new people coming into the industry should get Level 5 before they are allowed to be accredited; they should be hooked at the hip with an experienced adviser as a cadetship or apprenticeship.

There should be some gap analysis type exam out there for all existing advisers to see where they sit if they get an 80% pass mark and off they go. If you don’t, we have got to figure out how we get you there.

But I think probably Level 5 will be the result of the outcome of the FAA review I suspect and it should be. We have got to be very careful though because a qualification doesn’t equal competence and we need to understand that just because you have got some letters after

the next level, assuming that is going to happen?

Jeff: It definitely will happen. There’s been enough press about that. Anybody who says they’re not prepared and not ready perhaps should look at themselves.

Bruce P: They’re all got heads in the sand and they always will until it is enforced on them to do something. That’s just the way it is. There will be a lead time; they will have time to go and do it and get it done.

Kris: But it will probably tip a whole lot of people out of this industry.

Bruce P: Regulation is the best thing that can happen for mortgage broking; the worst thing that can happen for banks because it drives people towards us.

You will find that it happens in every place in the world where regulation comes in; mortgage advisers become more known and there is more activity. Yes, there will be more work.

The biggest travesty is the politicians will get it wrong. They always get it wrong.

Bruce M: (At the previous Round Table) people said “No, no, no, we don’t do advice”, which of course was behaviour driven by trying to comply with being RFAs. (Today) there has been more mention of the fact that you give advice all the time.

Of course you’re in the business of advice. I reckon the main thing in all this is it’s all about the consumer.

So the real question to ask mortgage brokers is: “Are we all really clear what consumers need and what do we need to do to deliver what it is that consumers need?” and then whether you like it or not you have to slot into that.

Rod: This is the single biggest thing that FAA Review is struggling with; the difference between sales and advice. Where do you draw the line?

And then when you draw that line how do you

your name, or you have got a certificate to wave around, doesn’t mean you are any bloody good.

Penny: The difference between advisers operating a business versus [those] operating as one-man bands is that good, healthy businesses are constantly reviewing their business, constantly advising, constantly investing the training, whether or not a piece of legislation says that or not.

Jenny: There are things like you have got your AML audits and all that sort of rubbish which is just completely irrelevant for a mortgage adviser; they are at such a low risk of any money laundering activity but they have to.

Penny: It may be low risk but if you have one person you have written a deal for and you haven’t followed good practices around money laundering then far out!

Whether it’s even got to the product but do you really want that on front page news. It’s really low but it certainly keeps me up at night.

TMM: How ready, or how prepared, do you think mortgage brokers are to actually step up to

They could have made it so simple; they could have just gone, “Right I am a licensed mortgage adviser, I am a licensed insurance adviser, I’m a licensed financial planner.”

– Bruce Patten

split it? Our suggestion has been everybody that is on advice side is under the FAA and everybody else is under Consumer Guarantees Act and the Credit Consumer Act and everything else.

Bruce P: They could have made it so simple; they could have just gone, “Right I am a licensed mortgage adviser, I am a licensed insurance adviser, I’m a licensed financial planner.” Very straight forward and simple; that’s your job and you get licensed. That’s been like that in Western Australia for 40 years and they have never had an issue. That is probably the best place to breed mortgage brokers as an example because they have got to have a mentor, they have got to go through licensing; they have got to do everything before they get into it.

TMM: What’s the risk that we are actually going to lose quite a few advisers in the industry?

Adrienne: I think it’s a risk but I think it’s a

" It may be low risk but if you have one person you have written a deal for and you haven’t followed good practices around money laundering then far out! " – Penny Burgess

good thing. The big ones won’t go, but the little ones which are the butcher, baker, candlestick maker...there are still some out there.

Mark: In terms of do we think we’ll lose – I am kind of a bit with Bruce – is that the good businesses have already prepared their people for it and any change, the bigger the change the more the transition period they’re going to allow for it. So, really, to me, if we lose people it will be because they are wanting to go.

TMM: Three big banks have pretty much dominated the mortgage broking space, now there are new competitors like BNZ and SBS getting involved. How is all this going to play out?

Penny: What a surprise that BNZ enters back into the market. I think it's a great thing – the more competition the better. BNZ entering the

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market has made us look at what we are doing.

In terms of an impact to us we haven’t seen any dramatic impact on the market share but it is still early days.

Bruce M: At the moment BNZ entering the market has not been felt in terms of market share changes but it has been felt in terms of the price.

There has been quite a contraction in margins, particularly in the latter half of last year. When you get more competition that’s what actually happens; everyone is fighting for their piece a bit harder. Our volumes from brokers are up 65% from last year so it's still not going to bother Penny. She probably didn’t notice but we did and we are fairly happy about it.

My view is the market is far from being in balance and the risk to the mortgage advisers when you get competition will be in compensation because as the margins contract we all look at our businesses. Most banks in the last six months have been operating below balance sheet hurdles and that’s not sustainable.

Every bank in New Zealand right now is looking at how they take out costs because the margins

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are poor and lower interest rates are putting massive pressure on the system.

TMM: The question I was going to ask was does that become a risk for mortgage advisers?

Bruce M: What everyone forgets is that a

" My view is the market is far from being in balance and the risk to the mortgage advisers when you get competition will be in compensation" – Bruce Mclachlan

mortgage is about using a balance sheet and balance sheets are huge and there is regulatory pressure to hold way more capital.

What you are talking about is splitting up a value pie and making sure that the balance sheet gets its fair bit of the pie.

So where is the added-value going to come from? That’s what you are always looking at when splitting up a pie; the value pie of a mortgage is not getting bigger it is actually shrinking and the balance sheet is going to take more of it. You start looking at what are all the other components which are going to have to give up a bit to the balance sheet.

Rod: But Bruce that then creates innovation for the banks to go find other products and other services that they can generate revenue from to

by the banks themselves…

Bruce M: Yeah I know but I am just saying the impact potentially falls on adviser because the amortisation periods banks use are quite different. I do not know how their auditors are letting them get away with amortising over such a long period because it's not based on fact that I can see.

Jenny: It's a real worry too because I think the banks have inadvertently turned mortgages into a consumer commodity where previously it was a long-term commitment to a lender.

I see it now – people walking in as soon as their fixed rate is up and they’re like, “What’s my next bite of the cherry? Who’s going to throw more money at me to move my mortgage to another lender?” And who has done that? The lenders.

Bruce M: I’m not pointing fingers; it’s just we look at the dynamic I think it’s a risk for advisers.

Bruce P: Same as it was when we got down to very, very low margins when the banks stopped paying trail; that was the easiest out.

Adrienne: Difficult to take it away though now it’s there.

Penny: I agree and (cash is) certainly not sustainable. Isn’t it one of those things that you wish you could stop?

Mark: It puts advisers in a difficult position.

If the client comes and says, “What’s my next option?” and you say, “Your best option is stay there”, then they’re going to go to another bank themselves or another broker and say, “What can you get me?”

Bruce P: It just shows you how poorly the banks actually trust us as advisers. Like, yes, there is an element of pricing required to get a client on but once they are on and they have got a trusted adviser set-up it’s very easy to retain the business. It’s the lenders that are allowing the people in our industry that shouldn’t be there to create the churn.

add that piece back into the balance sheet – the sauce on top.

Bruce M: Just one thing I was just going to throw in just for consideration here is the other dynamic that is happening is there is no doubt mortgage churn is increasing.

Bruce P: I think if you spoke to Westpac, as an example, it would be the opposite; their churn is more than half due to the changes it has made.

Bruce M: I was just going to take it though to the next step. The impact of that shortening is the reason lenders can afford to pay what they do today because they amortise it over a period. As that period shortens, then again talking about the goose of the balance sheet, that is a major risk to advisers because actually commission levels are not affordable if you shorten it up.

That is what is happening. There was a huge kick up the day Wheeler dropped the OCR. That next week, for us, was the single biggest week of mortgage breaks we have ever seen. It is linked strongly to rate reductions and people are refinancing using cash from other banks.

Jeff: Which is generated by and large

" It's a real worry too because I think the banks have inadvertently turned mortgages into a consumer commodity where previously it was a long term commitment to a lender."

– Jenny Campbell

TMM: Do mortgage advisers have an issue that their remuneration levels may be coming down?

Bruce M: What we know is margins go up and they go down. What I would look for is when margins are good; what are the things that are introduced which then become really difficult?

One was cash.

The second thing is the change in some of the broker remuneration, both in terms of the absolute levels, the bonus levels and trails.

That’s not to say that they can’t survive in a lower period. The question is what is sustainable through cycles?

TMM: A couple of people have said to me in recent times that they actually felt – and these were people who were advisers – that they are actually paid too much for the work they do.

Bruce P: If you compare the mortgage

It puts advisers in a difficult position. If the client comes and says, “What’s my next option?” and you say, “Your best option is stay there" – Mark Collins

industry to, say the insurance industry, I think that mortgages because it’s a demand product, it’s a product you don’t so much have to sell – it’s a product unlike an insurance product – I think the model is wrong and think the model is flawed, both be it too much upfront or trail.

I think there is a much simpler way that you could remunerate and have somebody build a business that is sustainable over time and able to scale up; but I don’t think the banks have really put enough thought into how they go about it.

It’s more been a back of the cigarette packet conversation that we need to pay more because somebody has brought trail in so let’s push our up-fronts up to 95 basis points. That is a very

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short term view of how to pay people.

I am not picking on ANZ because ASB does it as well. So I do think there could be a much cleaner way of modelling where you get remunerated long-term for the longer the business is with the bank.

Jeff: Are you more pro or trail model?

Bruce P: I’m a 100% trail.

TMM: All the advisers here support trail commission. Is that the model we should go to? Is that a better model?

Bruce P: That’s really a choice for the banks as to how they want to remunerate. All I am saying is that neither of the current models is actually sustainable.

I think there is a better way that it could be done to reflect someone who is prepared to invest in their business long-term and be in the industry long-term.

Penny: Some of you will know ANZ has had both models; we’ve had trail and we’ve got upfront now.

There are pros and cons on both sides.

We review it a lot; we have papers coming out of ears about what the pros and cons are and we

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" Some of the banks in Australia actually have stepped trail, so they will start at one level for the first year, second and third actually increase" – Adrienne Church

need to land on a decision.

A couple of proof points that we have being doing recently are that (upfront) is simple; our current model I think is simpler than what we have had before which I think is a benefit. And it is easy to explain to advisers and to consumers if that’s required.

Are we wedded to up-front versus trail?

No. Will things change and create that case to move back to trail? Maybe at some point; I don’t think we’re there yet but as Bruce (M) has alluded to banks are looking pretty critically at every single part of their business and commission is a big portion of our costs so we will look at it and that may be things differently.

I want a model that is simple, easy to understand, easy for you guys to disclose to customers and creates a sort of fairness to consumer and to the adviser. I don’t like the idea that an adviser will put business to one bank versus the other based on trail versus upfront.

Adrienne: I agree but I also agree that the people that build a business and the bigger companies should be rewarded differently, or could be rewarded differently.

Some of the banks in Australia actually have stepped trail, so they will start at one level for

the first year, second and third actually increase; and that’s for people that will actually retain the customer, work with the customer and be that trusted adviser doing the work for them opposed to the bank having to do all the work.

We look at segmenting our adviser network so the larger ones will actually get better product, better price, better processes based on the value that they give back to our business.

TMM: Segmenting is a big thing in Australia with the big banks is that going to happen here?

Penny: There are so many models and so many options.

The key message is we are absolutely willing to review and we review it all the time, but I want something that is simple and easy to understand.

Mark: Whenever you have disparate economic incentives you’re going to get different behaviour. So if I have a cashflow problem and ANZ are paying 95% well guess where my business is going? If I am building a longterm business and am having a cashflow problem I would probably be more likely to go to where it’s best for the client.

So that’s my concern. Without true levelling you are going to get different economic drivers.

It doesn’t necessarily mean it is going to influence everyone but it has a risk to it also. You wouldn’t put your commission up if you didn’t think it would have effect. ✚

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SALES & MARKETING LEGAL

By Paul Watkins

Parental equity: good, bad or ugly?

Keeping the client satisfied is an art form.

Paul Watkins discusses many options available to potential homeowners.

T

he NZ Herald recently had an article called "The Bank of Mum and Dad." It outlined the way many mortgages now (a quarter to twothirds according to the article) have a parental guarantee or input. It offered a range of options to those who see their first home close to impossible without mum and dad’s help.

Are parental guarantees a good thing or a bad

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thing? In marketing terms the answer to this is irrelevant. Let me explain. The value of the article is in how you use it to prove your own expertise.

And reminding clients of your knowledge and expertise is the only thing that matters.

I’m picking that the double page spread in the NZ Herald, and others like it, are well read and discussed in thousands of households around the country. So how do you take advantage of this?

The answer is being timely in your client contact and having your name connected to the article, by answering the question, "so-what?" I know many of you send out newsletters and emails to clients on a regular or semi-regular basis. So let’s say you send one out monthly (which is the frequency you need to keep now to stay in their minds).

❝ Take clients on a

journey. Constantly remind them of your knowledge and expertise by educating them.❞ Article choices If an article appears like that mentioned above, you have two options. One is to wait until your next monthly newsletter and reference it, which is fine if it’s only a week or so away, but if it’s still three weeks from now, you could send an immediate email with a link to that article (it also had a video) from the paper’s website.

The key here is to connect you as the expert to current issues in the mortgage market. I have been asked to write newsletters for brokers that talk about OCR changes or house price trends in the market they service. But such things can be seen every day in the press and are simply not interesting to clients. What is definitely interesting to clients is the "so-what" or the "how to" based on these reported items.

Here are some examples: So parental guarantees are in the press?

Your client contact item should read something like: “This article appeared in the NZ Herald over the weekend just gone (article attached). Is using parents’ equity in their home a good or bad thing? What if the marriage splits?

What if one of the young couple loses their job and can’t service the debt? Does that impact on the parents? Is there any other way to help your kids into a home? I can explain the pros and cons so you and your kids go in eyes wide open.”

Your newsletter should never offer an opinion or give advice. It should only offer thoughts and questions to consider with the implication or perhaps a statement that you can help them through the decision. If you have ever visited a counsellor for help with a personal issue, you will know the concept.

Choosing best options They rarely if ever offer advice, they just take you through a series of questions, designed to help you arrive at your own decision and remedy. That’s what a broker does. They take the client down a path towards their own decision based on options that you present.

And since you are the expert, you know the best options for their circumstances.

You know all too well that the circumstances of any given home-buyers are unique and that’s where you come in. You can tailor a solution to those unique circumstances.

The client is not fitted into a "one-size-fits-all" box, as they could be by the big lenders. While you know this and hopefully your clients hold this opinion, prospects don’t. Hence the need to find ways to constantly remind them of your value in the process.

Another example: So the press item reads “Mortgages now at record lows of 4.1%”

The wrong way to message clients and prospects is to say that you can help them into such rates or simply that such rates exist.

That sort of message could send the client or prospect straight to the lender concerned. Your headline or message should read something like, “There are six things to know before chasing a low rate like the currently advertised 4.1%” What are those six things? I’m sure you can work out six appropriate ones, the newsletter being a teaser and not offering the full answer.

Take clients on a journey. Constantly remind them of your knowledge and expertise by educating them and answering the question, "so what?" It’s easy for them to think that what you did for them was a one-off and that they don’t need to think about it again for whatever the term of their mortgage is or until they sell again. Wrong! If they think that, then you will forever be searching for new clients and not getting referrals.

Encouraging contact Why would a client contact you? Keep these reasons in mind when you put together any client communication. The obvious ones are to buy a new home, to buy a first home, to buy a rental and to restructure their mortgage to a better rate or to ease the payments. So each article in your newsletter should address one of these to encourage contact.

Another example: “Big drop in housing affordability” is a common headline, not just in Auckland. The press is full of doom and gloom, as that sort of headline sells newspapers. But think about the implications.

Readers just see their dream of a house purchase slipping away or if they want to move up in their housing, it looks increasingly unobtainable. This is where you come in again with the "so what?" and offer solutions.

Highlight the negative headline and then offer your thoughts in a positive way. Your own message could be, “Got kids that see their first home being out of reach? There are many options that never seem to make the press. I’m happy to meet with them to discuss these and remember that it’s free to ask.” Or “Moving up is not necessarily the challenge that the press are making out. You would be buying and selling in the same market, which has positive implications. Ask me for details.”

Another example: Buying a rental property is a frequent topic of everyday conversation, usually accompanied by, “But I missed the boat on that one. Wish I’d bought one 10 years ago.”

So your client communication could be, “Think you missed the rental property market by 10 years? Think again. There is never a bad time to invest in property, just an appropriate time so long as you fully understand how to structure your debt right.”

Put yourself in the shoes of a typical client and when topical mortgage or housing issues arise – which happen a lot – ask yourself, "So what?" What does this mean to a client or someone wanting to enter the property market? Hinting at the answer to this is what you communicate to your clients to generate repeat business and referrals. ✚ Paul Watkins writes blog content and newsletters for financial advisers.

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MY BUSINESS

By Dana Kinita

Radio start delivers for mortgage broker From her start in radio advertising, Judy Steiner tuned into mortgage brokering and now operates a thriving business.

Last year’s Mortgagelink NZ Advisor of the Year says it’s about putting clients first who appreciate her service...and her baking.

HOW DID YOU GET STARTED? I started in radio as an advertising rep. I moved to Gisborne where I was the sales manager for Radio 2BG and then I got promoted to general sales manager for Hawkes Bay for Bay City Radio and Apple Radio.

In the mid-90s, the next step was to move the station to another town and by that stage my kids were teenagers and I didn’t want them to move.

The Mortgagelink owner was a client of mine; he suggested I might like this type of work as it is with customers/clients and as radio is conceptual, so is lending as it is based on a promise, I liked the idea as well. I have been a broker since 1998, I worked with the Mortgagelink owner Geoff in 1998 to 2000, I left and moved to Auckland for four years, and decided after remarrying to move back to Hawkes Bay. My timing was perfect as Geoff was wanting to sell the business, and so I bought 17 in December 2004. I was working for AMP during 2000-2004 in their NZRT, Group Superannuation.

WHAT IS IT ABOUT BROKING YOU LOVE/ARE PASSIONATE ABOUT? I love the knowledge I have gained over these years and mine and my team’s ability

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to help ordinary Kiwis into their dream. The best time is when someone has been told they could never buy a home and we get them there.

HOW DID YOU LEARN THE BUSINESS AND EDUCATE YOURSELF? DO YOU HAVE A MENTOR? I learned about mortgage brokering from Geoff Yates, the former owner of Mortgagelink. He told me I had the ability to talk with people and this can’t be taught, but he could teach me the numbers, which he did. I also have a mentor, Mark Sutherland, who has guided me through the good times and also the tough times during the GFC. He also encouraged me to also sell personal insurance to our clients as that was an untapped opportunity to grow the business. The rest is learned at the coalface.

DO YOU REMEMBER YOUR FIRST CLIENT? I do actually. Geoff said to me, "You don’t know anything about banking but you know how to talk to people so you go and talk to people and when they ask

a question, you say, ‘That’s a really good question, I’ll make a note of it and come back with the right information that is specific to you". So I faked it I suppose. He would teach me behind the scenes. In the end, people just wanted something fairly simple. I really had to listen and come back with a solution he helped me create.

The second clients were a young, gay couple who were really were amused by me. I think I visited them seven times picking up bits of paper. They thought it was hilarious, "Oh, you’re back again", they’d say.

One of them, they’ve since broken up, is still a client and I’m doing a loan for her again that’s 13 years later.

BEST AND WORST TIMES IN THE BUSINESS? These are the best times, when the demand is high, the need is great and we are able to find many different ways to get our clients over the line; the toughest time was through the GFC when I had to refocus on other ways to grow the business, I have staff who I need to keep employed and so I had to find ways to keep the business going.

BEST BUSINESS MOVES YOU’VE MADE? Best move was taking premises in Onekawa in Napier. Having a professional store front being accessible to our clients during normal business hours has made our business stand above the rest. Not seeing clients in their homes was another good move as I tell them "this is a very important thing you are undertaking and you need to be focused".

Being here in our offices, means we are totally focused on your needs, If you need anything printed, we can do that here for you.

BEST ADVICE YOU’VE RECEIVED? Best advice was to include personal insurance in the package for our clients along with their mortgage. Three years ago we started insurance. To survive in this industry I had to do something. The GFC was pretty tough, I had to make it work. Mortgages were getting thin on the ground.

BIGGEST CHALLENGE NOW? Apart from the market: keeping time management at its most optimum, we see around 25 clients a week and each of those generate a lot of work, with mortgages and insurance and with three of us in the office, two advisers and one support, making good use of all our time is the biggest challenge.

Having a top-of-the-line CRM system is key and we are in the process of changing to Iress, with insurance and mortgages as the platform. We can’t wait to get it in place.

WOULD YOU DO IT ALL AGAIN? Absolutely, but from the outset I would write the insurance along with the mortgages. They really do go hand in hand and our clients like to have us look after them on both levels.

BEST BUSINESS BOOK? The E Myth Revisited, by Michael Gerber.

IS THERE A TYPICAL WORKING DAY? Yes, it usually has formal appointments, but you need to be ready for the phone calls that come in, be available to answer questions from our existing clients who might be in the process of negotiating to buy their property but also stopping for breaks, and making sure we the team find time to have a coffee together and a bit of a laugh.

TOP TIP? Clients first, staff next, then you, the owner; get it in that order and it will be all ok.

WHO IS THE INDIVIDUAL THAT HAS MOST INSPIRED YOU IN BUSINESS? Michael Hill, [for] courage when he lost everything at aged 40 and the foresight to see where he wanted to be and how to get there and got there. Also how he treats his customers and staff. Customers first, staff second, shareholders third.

WHAT IS YOUR BIGGEST LONG-TERM BUSINESS GOAL? To grow our team to four advisers, two in Napier and two in Hastings, with support teams working from two offices.

I’m 60 this year and Peter (son) came into the business 18 months ago and he’s my succession plan. So I so myself in 10 years moving into a three to four days a week, I’ll see how it goes. But Peter needs to be in the position to buy the business from me or we be co-owners.

HOW ARE YOU PREPARING FOR REGULATION OF FINANCIAL ADVISERS THIS YEAR AND HOW WILL THIS AFFECT YOUR BUSINESS? I have almost completed by requirements for regulation so will have that finished by September. ✚

Family Husband, children, Moana, Nicki and Peter, six grandchildren, one great-grandchild.

What do you do in your spare time?

I don’t have a lot of spare time.

I exercise, I do boot camp four days a week.

I take care of my Mum, she’s 91. I spend Saturdays with her and Sundays, I breathe.

Caring for clients: One thing that nobody does, that I do - I make little carrot cakes. When clients get their loan offer, I get them in and we celebrate. I make them myself and put with it a little card called, "The Journey".

I think it’s important to celebrate.

INTEREST RATES Kymberly Martin

Low OCR but further easing expected The RBNZ has indicated further OCR cuts are to come.

While this sounds like good news for borrowers the benefits may be offset by the rising bank funding costs.

OCR review

Floating rate outlook

The RBNZ left its Official Cash Rate (OCR) at the historic low of 2.25%. It maintained an easing bias, reiterating that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”. (Recall the mid-target is 2%y/y whereas the most recent reading stood at 0.4%) However, overall the bank appeared a bit more reluctant to cut than at its last meeting.

It also gave concerns around pressures in the housing market renewed prominence. The bank also appears keen to deflect focus from low headline inflation, saying core inflation remains within target range and that long-term inflation expectations are well-anchored at 2%.

The bank sees the global growth backdrop as having weakened in recent months but that financial market volatility has eased.

It sees the domestic economy continuing to be supported by net migration, construction, tourism and easy monetary policy. Although dairy prices have improved they remain below break-even levels for most farmers.

The NZD, unsurprisingly, came in for mention. The bank sees a lower NZD as desirable to boost imported inflation and help the tradables sector.

Despite the bank’s reticence, we expect it still has at least one more rate cut in reserve. It is simply being tactical in deciding when to use its last ‘bullets’.

We formally now look for a 0.25% cut in June, with the potential for a further cut in August.

This would take the OCR to a cyclical trough at an historic low of 1.75%.

Once a trough has been reached we anticipate that the OCR will stay at this low rate until late 2017, at least.

Then, a very gradual process of rate hikes would likely take place, as CPI inflation finally moves up towards the RBNZ’s mid-target. It may not be several years before the OCR is back at more ‘normal’ levels. Furthermore, the peak in the next OCR cycle could be below 4.0%.

This outlook suggests borrowers can enjoy historically low floating rates for a reasonably prolonged period.

Some borrowers may wish to take advantage of this situation by paying down debt.

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Short-dated wholesale fixed rates NZ short-dated wholesale fixed rates price that the OCR will be cut to 1.94% within the year ahead. i.e. it prices one more cut, to 2.0%, by September this year. It then assigns around a

25% chance of a further cut. This is probably a fair representation of current risks.

In coming weeks/months we anticipate that short-dated wholesale fixed rates can still trade lower. Potential catalysts could be: a rate cut by the RBA that causes the market to increase expectations for RBNZ rate cuts; resumed global market volatility; a renewed drop in the global oil price and associated decline in inflation expectations; weakness in global dairy prices, negating recent tentative signs of improvement.

However, we are likely not far from cycle lows.

But we suspect it will only be late this year/ early next, that the market starts to seriously contemplate the next hiking cycle, and shortdated wholesale fixed rates move higher. We therefore see no great urgency to fix shortend rates.

Longer-dated wholesale fixed rates Longer-dated NZ fixed rates (5+ years) also have potential to trade a bit lower near-term. This is especially true if the RBNZ delivers further rate cuts, while the US Federal Reserve (Fed) continues to signal reticence to follow up its December 2015 rate hike.

However, ultimately, if the Fed delivers further rate hikes in 2H as we expect, and the global oil

to still readily available domestic deposits.

However, at the margin, these global trend it will be impacting bank’s overall funding costs.

Certain sectors of the borrowing community may also face higher individual credit costs which offset some of the benefits of a lower OCR. Overall borrowing costs may therefore not get much better than current historic lows, even if further OCR cuts are delivered, or wholesale fixed rates decline.

On a more comforting note, the RBNZ has noted that a further surge in bank funding costs, due to deterioration in global risk appetite, is a scenario where it could feel compelled to cut the OCR more than its central projections. Its central projection is for one more 0.25% rate cut. In a scenario of notably higher funding costs it has indicated it could deliver 0.75% of cuts. To be clear, this would mitigate the rise in borrowing cost that would otherwise occur, not provide a further substantial decline in overall borrowing costs.

Summary

price proves to have found a floor, we see US 10-year bond rates trading higher by year-end.

We anticipate that US 10-year rates will end this year at least at the level where they ended 2015 i.e. around 0.50% higher than current.

Consistent with this view, we see NZ 5 and 10-year wholesale fixed rates being 0.25% and 0.50% higher, respectively, by year-end. We therefore believe that borrowers should be actively looking for opportunities to

increase long-dated hedges.

Bank funding costs The RBNZ is aware of recent rises in NZ bank funding costs that may limit their ability to pass on the full benefits of OCR cuts to borrowers. This is illustrated by the chart below which shows the trend in offshore wholesale borrowing costs. Banks have had only limited need to borrow at these higher rates due

This week the RBNZ left its cash rate at an historic low of 2.25%. However it continued to indicate there is at least one more rate cut likely this year. Our central forecast is for a cut at the June 9 meeting, with the potential for a further cut in August.

This should see floating rates fall further and staying low until late-2017 at least. This provides an opportunity for borrowers to pay down debt at historically low rates.

Short-dated wholesale fixed rates may also fall further in the near-term, but are likely approaching cycle lows.

We don’t see any great urgency to fix shortdate rates but would be actively looking for opportunities to fix longer-dated borrowing.

We anticipate that NZ 5 and 10-year wholesale fixed rates may be 0.25% and 0.50% higher, respectively, by year-end.

Finally, we see risks that rising wholesale funding costs and increased credit costs offset the benefits of OCR reductions. Paying fixed rates helps mitigate this risk and provide some certainty of outlook. ✚ Kymberly Martin is an economist at the BNZ

The views expressed in this article are Kimberly's own and do not purport to represent the views of the BNZ. This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. To the extent that any information or recommendations in this publication constitute financial advice, they do not take into account any person’s particular financial situation or goals. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.

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PAA LEGAL

Together towards tomorrow Knowledge, insight and experience – three crucial elements that turn business goals into reality. The National Advisers Conference 2016 has a huge line-up of leading thinkers and speakers – on business, on advice, and on life. Here’s a quick snapshot of just five speakers you can hear from on July 28 and 29 this year. Find out more at nationaladvisersconference.co.nz.

the New Zealander of the Year Awards in 2014.

Julia Hartley Moore Personal relationships that endure Julia Hartley Moore is not only New Zealand and Australia’s most recognised private investigator, but also an author, radio host, media commentator and inspirational speaker.

Through her work as a private investigator and her life experiences, Julia has gained immense knowledge on the subject of human nature and relationships.

Karen Schaeffer Clients for life Karen Schaeffer is the managing member and co-founder of Schaeffer Financial LLC, a financial consulting firm in suburban Washington, DC. With over 30 years' experience, She has developed a diverse client base including professional women, Foreign Service officers, foreign nationals and Federal government employees.

Dr Oliver Hartwich Together in a new world Dr Oliver Hartwich is the executive director of The New Zealand Initiative, an independent public policy think tank supported by chief

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executives of major New Zealand businesses.

Before joining the Initiative, he was a research fellow at the Centre for Independent Studies (Sydney), the chief economist at Policy Exchange (London), and an adviser in the UK House of Lords.

Mai Chen Super diversity for tomorrow Mai Chen is the managing partner of Chen Palmer New Zealand Public and Employment Law Specialists, Australasia’s first specialist public law firm, which she co-founded in 1994. Mai Chen is an adjunct professor at the University of Auckland School of Law; a director on the board of BNZ; and was a top 10 finalist in

Steven Bradbury Be the last one standing Speed-skater Steven Bradbury collected the most unlikely, unthinkable gold medal in the history of the Olympics. Australia’s first Winter Olympic Gold medal. Bradbury tells an inspirational story of triumph over adversity, of how he underwent years of obsessive training, and of how he armed himself with the information and tools he needed to achieve this amazing success. ✚

Visit nationaladvisersconference.co.nz to find out more about our speakers, sessions and what we have lined up for the National Advisers Conference 2016.

INSURANCE

By Steve Wright

Building efficient

insurance cover Ensure an efficient insurance protection plan.

I

n the most recent edition of The Mortgage Mag, I argued that one of the reasons clients were not well placed to do-it-themselves was that it took detailed knowledge of different providers’ products and their associated options and ancillary benefits, in order to build not only a comprehensive protection plan, but also an efficient one.

So what does an efficient protection plan look like? First, efficient does not mean cheap.

If the aim is to spend as little as possible, not only will the client wind up with many gaps in their protection, which means they fail to transfer all the big risks they can to the insurance company (which should surely be the aim of most clients), but their protection plan will also not be cost efficient.

Paying too little for something that does not do the job well is very expensive.

As advisers I believe we should not focus

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unduly on premium and multiple quotes, as these are less important than properly protecting the client. Focusing on premium simply entrenches in the client’s minds that it is all about cost and no one likes cost.

Cost is something to be minimised or avoided. If we focus instead on quality, then clients are more likely to see their protection plan as something valuable and worthy of keeping long term. So an efficient protection plan is not necessarily cheap.

BEST COVER, LOWEST COST It is also not wasteful, however. An efficient protection plan does not lead to gaps in protection, rather it is about providing comprehensive cover at the lowest cost. By careful combination of quality products and options in ways which avoid duplication of cover, windfall gains and unnecessary transfer of risk, all of which are unnecessary and make the client’s plan expensive, we can deliver maximum cover without wasted cost.

❝ Never being

able to work again represents a massive financial loss to a family and an efficient protection plan is essential ❞ If we accept that the purpose of insurance is to reimburse actual losses suffered, insurance that provides windfall gains is not insurance, it is something else. Something else that, when incorporated in an insurance plan, simply raises the costs, does not represent necessary transfer of risk, causes duplication and creates increased likelihood of gaps because the money to fund this unnecessary cover is not spent on necessary risk transfer. An insurance plan which incorporates windfall gains is thus not efficient or effective.

LEGAL REQUIREMENT A good example of inefficiency and ineffectiveness parading as good advice is our obsession with avoiding ACC offsets, particularly where this results in loss of valuable benefits otherwise included, such as specific injury benefits or additional total and permanent disability (TPD) benefits and monthly claims benefit indexing for inflation.

ACC represents compulsory insurance against accidents that we are forced by law to have.

Clients do not need to be financially better off on claim by having their private insurance pay when ACC does (unless their disability brings significant extra expenses which typically only occurs with relatively few, long term, disabilities). Continued pressure on insurance companies not to offset ACC from the likes of Income Protection and Mortgage Repayment Cover will mean a significant rise in premiums soon. When insurance gets too expensive none of us have a career in it. Better benefits are more important than the absence

of ACC offsets in my view, as these add to the value and are not simply duplication and unnecessary transfer of risk.

Good efficiency gains can be found with risk transfer for the most financially severe risk we all face, total and permanent disability (TPD). Never being able to work again represents a massive financial loss to a family and is arguably the most important risk to transfer to an insurance company.

Unfortunately, TPD cover seems to be the first benefit to be avoided for a number of reasons and I’d confidently guess that almost all clients are underinsured against TPD. However, careful selection of particular insurance company’s trauma cover and income cover or mortgage repayment cover products can provide significant protection against TPD at no or very small additional cost.

COVER SELECTION As long as the definition of total and permanent disability is the usual ‘own’ occupation definition commonly found in TPD products, selecting these trauma, income cover and mortgage repayment cover can allow a significant reduction in separate TPD insurance, thereby avoiding duplication, unnecessary risk transfer and reducing premium – effective and efficient!

Trauma cover is another area where inefficiencies abound. No one needs a million dollar pay-out for a minor trauma that inconveniences them for a couple of months (minor heart attacks for example), this

is very expensive and unnecessary. Clients do however need millions of dollars if they suffer a very serious heart attack that leaves them with permanent physical impairment.

Typical trauma products are very comprehensive and force clients to pay for inefficiencies they may not need. This inefficiency (expense) can be avoided by combining comprehensive and severe trauma covers to create severity based trauma solutions, paying sufficiently large amounts when clients suffer financially significant trauma events yet still covering many of the smaller less financially significant events.

Other potentially inefficient strategies include: ▶ Additional trauma cover to cover a recommended medical insurance that does not adequately cover drugs not funded by Pharmac, when other provider’s comparable medical products do indeed cover it adequately. ▶ Paying premiums to get back limited amounts for minor expenses where transfer of risk is not really needed, so-called ‘dollar swapping’. ▶ Paying premiums for life cover when the client only needs protection against the financial consequences of terminal illness, not death. ▶ Not insuring the children. The significant disability or terminal illness of a child represents a massive financial risk to families. ▶ Recommending medical insurance products which do not allow for large excesses, as this limits the clients premium options in old age.

If you can show your clients that their protection plan includes a carefully selected range of quality products which makes it effective (that they are properly covered against the big risks they need to transfer to the insurance company – no gaps) and, that their protection plan is efficient (that they are not paying more than they need to because there is no duplication or unnecessary transfer of risk), they are more likely to treat their protection plan as a valuable asset and stick with you as their adviser. ✚ Steve Wright has qualifications in law, economics, tax and financial planning and is general manager Product at Partners Life.

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LEGAL

By Jonathan Flaws

Mortgagee’s power of sale: Keep it fair, simple Despite apparent complexity, the law of mortgages is simple after all, writes Jonathan Flaws.

O

n the face of it, the law of mortgages is pretty simple.

A borrower gives a mortgage over land to enable the lender to sell the land and create a fund to be used to repay the debt following a borrower default. The power of sale after default is the lender’s ultimate sword.

The borrower can stop the lender selling by repaying the debt or arranging for someone else to repay the lender and take a transfer of the mortgage. This is called the equity of redemption and is the borrower’s ultimate shield.

Anybody else with an interest in the property can use the borrower’s shield to prevent the lender bringing down its sword and cutting off their interest in the property.

It seems fairly simple. Move away from being fair and simple and you create layers of complexity that can trap you.

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COMMON LAW VS. EQUITY Legal principles operate at two levels. One level can described as the common law principles. This refers to the strict application of the law which is either based on case law precedent or legislation.

The other level is referred to as equity which is based on the concept of fairness and equity that comes from the old Chancery division of the Courts. One judge once described equity as being constantly fertile so that it is never a closed set and new rules can be developed if the situation requires.

You can see this division in land law. The Land Transfer Act 1952 provides a regime for creating and transferring interests in land. The resulting ownership of land is shown on the government land titles register.

NEW INFORMATION The Property Law Act 2007 contains a regime

for determining interests in land or resolving disputes relating to land. These determinations may be independent and provide a result that differs from the register and may cause the register to be changed to record new information. Many Property Law Act provisions are developments of equitable principles.

Things are complex when you try to apply equitable and common law principles and marry them with legislation.

A recent Court of Appeal decision is a good example of how a mortgagee can be tripped by these principles when it ignores them and uses its power of sale for a purpose other than a sword to cut through a default and repay the mortgage debt.

FACTS A company (“G Ltd”) purchased 24ha of land in the Hawkes Bay intending to subdivide and create some rather special lifestyle blocks. It raised money and gave a mortgage to a bank.

G Ltd agreed to sell one of the blocks to an individual (“C”) who took possession of the homestead and spent over $1.5 million renovating it, though the subdivision was not complete and titles had not issued.

Five other lots were then sold to a number of associated purchasers (“L Group”). When G Ltd defaulted on its loan, L Group procured another related party (“LCI Ltd”) to pay out the bank and take a transfer of its mortgage. The equitable principles gave it the right to use the borrower’s shield – the equity of redemption – to repay and obtain either a discharge of the mortgage or a transfer to itself.

Once LCI Ltd was mortgagee, it used other powers that the Property Law Act gives mortgagees to help them use their power of sale. It adopted and confirmed the L Group agreements to purchase. It went further and varied the L Group’s agreements to provide that if the subdivision did not proceed and the agreements came to an end then the L Group purchasers would be paid compensation.

Instead of adopting C’s agreement, it purported to cancel it under another provision of the Property Law Act that it assumed allowed it to do this.

As you would imagine, C was not happy. So much so that he then offered to buy the whole property from the mortgagee for an amount that the Court of Appeal referred to as market price. The court found that the price would have provided the mortgagee selling with over $2 million more than it would achieve by completing the subdivision and settling the existing agreements to L Group purchasers.

But LCI Limited was established to favour L Group so it put its sword away and rejected the offer. The web of legal complexity was now woven and the court was asked to sort it out.

The simple questions were: ▶ Can a mortgagee act for a purpose other than getting repaid? ▶ When several people have a right to redeem, who takes priority? ▶ To whom does the mortgagee owe a duty of care? ▶ Does a mortgagee have the right to cancel a contract entered into by the owner? ▶ If a mortgagee owes a duty of care to get the best price obtainable at the time of sale, can it reject the highest price offered?

THE DECISION In the High Court, LCL Ltd was the favoured party and the court agreed that C’s caveats must be removed when a sale by the mortgagee is presented for registration. The judge also found that the cancellation by LCL Ltd as mortgagee of C’s agreement was valid.

It was stated in evidence in the High Court that LCI Ltd was created as a means of providing a solution to the problem L group would have if the bank sold the whole property to another person and L Group’s purchase falling over.

In answering the questions, the Court of Appeal worked through the complex web of equitable principles and ultimately came back with a different result and confirmed the basic principles. On the way to its decision it came

❝ The power of

sale given to a mortgagee is a very powerful tool but it must be used fairly and only for the purpose for which it was given.❞ up with some interesting observations which confirm that perhap s the law of mortgages is relatively simple after all.

(A) The mortgagee’s motivation to sell.

The mortgagee, LCL Ltd stated that accepting the L Group agreements, cancelling C’s agreement and changing the L Group agreements to award them compensation if the sale did not proceed were actions motivated not by debt recovery but by achieving another advantage for the mortgagee’s associated parties. The Court of Appeal found that varying the agreements to compensate L Group had no commercial basis.

The High Court of Australia in a strikingly similar case had already decided that a mortgagee cannot sell to itself. In that case, a purchaser of part of the property purchased the mortgage and sold the land to an associated party.

The mortgage gives the mortgagee the power of sale so it can recover the debt due to it – not so it can act to benefit an associated party.

(B) Who can redeem the mortgage?

Section 97 of the Property Law Act specifies who can redeem the mortgage and in a brilliantly circular use of the English language says that the current mortgagor or any other person entitled to redeem may redeem. In other words, the person who can redeem is the person who is entitled to redeem. It then tries to be helpful by defining the term “person entitled to redeem”. But creates another circle.

It says that this expression means any person “with an interest in the mortgaged property and entitled to redeem it.”

The Court of Appeal broke these silly semantic circles and explained that anyone with an interest in the property that comes from the current mortgagor is entitled to redeem. If you were to create a hierarchy of property rights it would be: 1 Mortgagee – power of sale.

2 Mortgagor – equity of redemption.

3 . Second mortgagee/purchasers from mortgagor/any other interest in the property – Equity of redemption.

Anyone in the third category has priority over the mortgagor.

(C) Mortgagee’s duty of care.

Deciding who can redeem is important because the Property Law Act also imposes a statutory duty owed to the current mortgagor to obtain the best price obtainable in the circumstances. There was a question as to how far that duty of care extends. The Court of Appeal answered the question by saying that it is owed to any person who has the right to redeem the mortgage.

(D) A mortgagee’s right to adopt and to cancel an existing sale.

The Property Law Act 2007 introduced the concept of allowing a mortgagee to adopt and gain the benefit of an agreement already entered into by the owner.

That is fair enough and is a device that is now often used by mortgagees. But only because it makes sense in achieving a sale at the best price reasonably obtainable. Everyone benefits.

LCI Limited looked at another out powers “incidental to the power of sale”.

This is sensible because if the mortgagee sells to a third party, the other agreement falls away. It doesn’t need a right to cancel the mortgagor’s part other part of the Property Law Act which said that a mortgagee can cancel a contract for sale and argued that the Act allows it to both adopt and cancel a sale.

The Court of Appeal found that other section only allows a mortgagee to cancel a sale that the mortgagee has arranged. It says that the mortgagee can cancel a sale and resell the property without being liable for any loss on the resale. The right to cancel is included in the section setting contracts; it already has this.

(E) Mortgagee’s duty of care – act in good faith.

Finally, the statutory duty of care is only one component of the overall duty of the mortgagee to act in good faith. The mortgagee cannot recklessly sacrifice the interests of the mortgagor or any party claiming an interest through the mortgagor.

Refusing to accept an offer to purchase at a price that greatly exceeds what you would otherwise get is about as clear an example of not acting in good faith as you could get.

Which brings us back to the simple and basic principle. The power of sale given to a mortgagee is a very powerful tool but it must be used fairly and only for the purpose for which it was given.

In the course of confirming these simple principles the Court of Appeal made an interesting observation. On the face of it both, L Group and C had the same right to redeem.

If this happens and they both wish to redeem, who takes precedence. The Judges suggested (although this was not binding) that because the action of the mortgagee was sufficiently unfair to C and because L Group was an associate of the mortgagee, Equity could well create a new principle that said that because of this unfairness, C now had a superior right to exercise its right to redeem.

Apparently, if you don’t play fair, you risk the fertile body of Equity giving birth to a new principle to put you in your place. ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.

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Intelligence

WHAT AUSTRALIAN BROKERS EARN

T

he Australian mortgage broking industry is considered to be ahead of New Zealand in a number of ways, particularly with its market share of business written.

Currently advisers in Australia were responsible for 52.6% of all mortgage originations in the quarter to September 30, 2015.

Despite that the industry is considered to be in a mature phase.

To help understand the shape of the industry and to identify areas mortgage broking businesses need to focus on the MFAA has produced its Finance Broker Business Benchmarking Report.

The report uses information from 16 aggregators which represent more than 90% of the industry. It says the total number of brokers in Australia is 13,841 as at September 30.

Aggregators represent 11,468 brokers and franchise brands account for 2,373 brokers.

AVERAGE EARNINGS PER BROKER National

$89,000

NSW

$108,000

Victoria

$83,000

Queensland

$79,000

South Australia

$66,000

Western Australia

$85,000

Tasmania

$56,000

Northern Territories

$43,000

NOTE: BASED ON GROSS UPFRONT COMMISSIONS ON NEW HOME LOANS PA.

Overall the MFAA represents more than 80% of the industry.

One of the surprising findings is the average earnings each broker makes.

The report also says the average value of home loan portfolio per broker during the six-

month period was $49.1 million.

Meanwhile the average settlement volume for each broker was $1.15 million per month. It was slightly higher in New South Wales sitting t $1.38 million.

There are two main camps when it comes to the volume of loans written. At one end around 45% of brokers wrote $5 million or more of loans, while the next biggest group wrote less than $1 million worth of loans during the six month period.

COMMERCIAL AND BUSINESS LOANS

• Commercial loan volumes totalled $5.9 billion • 1673 brokers wrote commercial loans • Average value of new commercial and business loans settled $3,522,405

THE AUSTRALIAN MORTGAGE BROKING INDUSTRY IS CURRENTLY MALE DOMINATED. NOTE: ALL NUMBERS ARE IN AUSTRALIAN DOLLARS.

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