TMM - The NZ Mortgage Mag Issue 1 2016

Issue

01

2016

Market

BUYING LOVE INFLUENCER MARKETING

CHANGING GEARS

VANESSA BELTON

KEEPING UP

PROPERTY ROUND-UP NEWS

COMPANY PROFILE Brought to you by Westpac

Westpac's It's a new look with a very experienced team at Westpac!

Westpac Third Party Banking are delighted to present their team, which includes a new Head of Third Party Banking, National Accreditation and Training Manager and some new faces with our BDM and Admin Team. In 2015 Westpac were market leaders in launching digital lodgement and reintroducing trail, the team are very committed in ensuring these initiatives, plus some new ones for 2016, continue to help our Mortgage Advisors grow successful Businesses and partnerships. It's exciting times for Westpac, to announce our team we have included an introduction to each team member. feeling for what’s happening. Colin has enjoyed travelling to the different parts of New Zealand and discussing with Advisers Industry issues which has helped gain a better understanding of what’s going well and where Westpac can improve. Colin is focused on providing great service and making improvements to Third Party Banking to ensure Westpac grows their Business Partners.

10 years. She brings a wealth of experience from having been a Mortgage Adviser as well as her time in the bank. Prior to this Rachael enjoyed 15 years with Westpac in various roles across the Retail network.

With a passion for the Mortgage Broker Industry, Rachael is keen to work with Advisers focussing on training and digital lodgement.

Also working with our Head Groups for new Adviser Accreditation, continuing with minimum standards that Westpac recently introduced.

Colin Smith

- National Manager MMM & Third Party Channels Colin has been with Westpac for 25 years.

During this time he has been in various Bank Manager roles in the Hawkes Bay and Hamilton areas followed by Area Manager roles covering the Waikato and Taranaki area as well as all of the various Auckland Areas.

He joined Westpac’s Third Party team in October last year after completing a term as Regional Manager covering the Retail network across the Bay of Plenty, Taranaki and Wellington areas.

In his new role as National Manager Third Party Banking and MMM Channels, he says his first priority has been to meet as many Advisers as possible and get a

Rachael Lelean

– National Training & Accreditation Manager

Tania Ropati

Rachael recently returned to join the Westpac team as the National Accreditation and Training Manager. Many of you may recall Rachael from her previous role as Business Development Manager with Westpac Third Party Banking of

Tania has been with Westpac for the last 3 years as Business Development Manager Northern Region. Prior to this she was involved

– Business Development Manager – Northern Region

Team for 2016 in renovating residential property, which continues to be her passion, while raising her family and working at the BNZ for 22 years.

Last year Tania was the winner of the Industry PAA BDM of the year for 2015.

Tania also is a recipient of the Westpac Staff Legend Awards as a result of providing superior customer service.

Tania has been instrumental in developing an Outreach program within Westpac which helps train and develop relationships between Mortgage Advisers and the Westpac branch network to provide a seamless customer experience for our customers. Tania continues to focus on developing and building this program.

Steven Hogg

– Business Development Manager – Central Regional Steven being the newest member of Westpac’s Third Party team comes to us from the Retail Banking network after 11 years in the industry.

During that time Steven has worked in various locations in New Zealand and a stint for Barclays Bank in the UK. He has been with Westpac for the last 6 years in Wellington and has covered a variety of roles as a Relationship Manager, Mobile Mortgage Manager and more recently Bank Manager.

Steven has really enjoyed the first few months in his role getting out and about meeting the local Mortgage Advisors, learning about local markets, how they operate their business and how they look after their clients. He feels very privileged to be learning and working with our experienced Mortgage Advisers.

Raffaele Romano

– Business Development Manager – South Island As Westpac’s Business Development Manager – South Island, Raffaele is focused on growing and helping his Mortgage Advisers retain their Westpac lending portfolio’s across all divisions of the bank including Private, Wealth, Business Bank and Retail. Raffaele has worked in the finance industry for 20 years and brings a wealth of experience in Asset Management having being involved in the sell down of the South Canterbury Finance book with the Crown.

Raffaele also has extensive experience in Property Finance and Business Banking within Westpac and holds a Post Graduate in Management Studies in Property Finance, through the University of Waikato.

warmer climates of Tauranga taking up the role of Central North Island BDM. She has 19 years’ experience in the finance industry as well as 12 years as a self-employed business owner in Central Otago. Carmen has been with Westpac Third Party Banking since 2012, initially as Otago / Southland Business Development Manager, and more recently as the National Accreditation & Training Manager.

Carmen has a real passion in working with Mortgage Advisers, Internal Business Partners and Industry Bodies to increase the professional standards in the industry.

Carmen's strengths are in building relationships and working with advisers and Westpac Staff to ensure that our customers enjoy the Westpac experience.

Scot Bailey

– Business Development Manager – Northern Region

Carmen Moran

– Business Development Manager – Central North Island

Carmen and her family have recently taken the opportunity to move north to the

Scot joined the Westpac Third Party team in August last year having come full circle back to where he started his working life from school. Now 24 years later, he has a strong background in Operations and Business Development in New Zealand and Australia.

The last 15 years have been in the Specialist non-bank sector where he has built some really strong relationships of which many have become close friends.

Scot as an advocate of Mortgage Advisers is passionate about helping to build their businesses and more importantly finding the right solution for clients and their individual circumstances.

CONTENTS UPFRONT 05 EDITORIAL

Interesting times ahead for advisers and TMM.

Market 14

06 NEWS

Westpac beefs up business offering, REISMAC makes policy changes, interim CEO for SBS and more...

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

TMM looks at how 2016 is heating up to be a another busy year for advisers.

25

Vanessa Belton

FEATURES

COLUMNS

10 HOUSING COMMENTARY

22 SALES AND MARKETING

12 INVESTMENTS

26 INTEREST RATES

As Auckland’s market cools down, what impact will that have for the year ahead?

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

14 THE YEAR AHEAD

While 2015 was frenetic, Susan Edmunds finds out why this year could be just as busy.

18 SPECIALIST LENDING

Miriam Bell explores why it pays to be unconventional if looking to expand your business.

24 MY BUSINESS:

Vanessa Belton

Fixing cars to finding financial solutions - Vanessa Belton is always keen to take on the challenge.

04

Paul Watkins finds out why consumers are paying attention to marketing ‘influencers’.

ASB economist Kim Mundy predicts cuts for the OCR later this year taking it to a new low.

28 PAA

Clearing the confusion over what NZFS means for qualifications.

30 INSURANCE

Steve Wright explains why understanding different insurance covers could ultimatley save time and money.

32 LEGAL

TMM’s resident legal expert, Jonathan Flaws looks the pitfalls to be aware of with power of attorneys.

34 INTELLIGENCE

EDITOR’S LETTER

Changes Ahead

W

elcome to the first issue of TMM for 2016 – a year which already looks to be pretty interesting for mortgage advisers.

I say interesting for a number of reasons.

Firstly markets. They got off to a shaky start this year and it is pretty hard to pick what will happen this year. Our most recent survey of economists showed some quite divergent views. That means where interest rates go is uncertain.

For all advisers there is the over hang of where the review of the Financial Advisers Act goes. It’s unlikely we will see change implemented this year, but there will be a lot of discussion and the group which is most likely to face the biggest change is registered financial advisers.

My guess is RFAs will come under a new regime which is much more closely aligned to what Authorised Financial Advisers currently have to do.

Watching how the banks operate in the third party distribution space is also going to be interesting. Will we see changes to remuneration models from ANZ and ASB? How aggressive will the smaller banks and BNZ be in this market? These are all good questions.

Although it hadn’t been officially announced at press time, we understand Liberty has a new chief executive. Someone with good experience in the lending and distribution space.

Our changes I would like to thank all the readers who responded to our recent online survey asking

a few questions about the magazine’s content and telling us what you would like to read in the magazine this year.

Firstly it was great to see that nearly 80% of respondents described the magazine as either excellent or very good.

All PAA members get a copy of the magazine and we hope that this will continue into the future. The cost to the association is about $1 per issue per member. That covers postage!

One significant change is that TMM will become bi-monthly. Part of the reasoning is that previously we had tried to publish the magazine in tandem with the Reserve Bank’s Official Cash Rate announcement cycle. This year the central bank is only scheduling seven announcements. That is an odd number so we chose something more uniform.

Adviser feedback was strong about news. In order to deliver news in a more timely fashion, with this bi-monthly cycle we will deliver more and more news online via TMM Online.

We started the email newsletter last year and that has proved extraordinarily successful. (If you would like to go on the mailing list please send your name and email address to editor@ tarawera.co.nz).

In terms of feature material in TMM we will work hard to provide you with information around regulation and compliance. Another area of interest was property investment news. To meet this request we have added two pages of relevant news in this issue. We would love your feedback on what else we can provide for you in this area.

The other area which was highly rated as must-have content was specific lending features. In this issue we have a good feature on specialist lending.

Again thank you for the feedback. We look forward to delivering more excellent content to all mortgage advisers this year through TMM and TMM Online.

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

05

NEWS

Westpac beefs up business offering

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estpac has started the year by enhancing its business banking offering to mortgage advisers.

“Over recent months we have taken some time to review our business bank structure for our mortgage advisers and understand that any partnership needs to be committed to for the long term.“ Under its new model the bank will have a dedicated business development manager (BDM).

The, yet-to-be-appointed, BDM will be supported by a team of experienced business managers based across the country.

“Local knowledge and relationships are a driving factor to any successful partnership and we now have a fantastic team of very knowledgeable experts on hand for your business clients,” the bank says in a note to advisers.

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“We understand the importance of being able to discuss a potential client, particularly business related with an expert, and to have clear accountability of the outcome of any application.”

Commission of 0.50% will be paid on business term lending on a permanent basis and will form part of our head group agreements. ▶ 0.50% will be paid on term lending secured by commercial security for clients whose business turnover is $2 million or less. ▶ Business turnover greater than $2 million may be considered on a case-by-case basis. ▶ Residential choices lending as part of the clients proposal will be at standard residential commission rates which include trail. ▶ No commission will be paid on unsecured lending, business overdraft or business revolving facilities, property finance and any

agri-business applications.

The bank has a tiered structure for assessing applications depending on the turnover of the business making the application.

Firms with turnover of up to $500,000 will be dealt with by assessors in mortgage operations.

Businesses with bigger turnover will be assessed by Westpac’s specialist Business on Demand Centre.

The bigger companies and more complex applications will will be referred to the bank’s Business BDM. “Our Business BDM will review and forward to one of our nominated business managers across the country to assist this group of business customers. “ ✚

RESIMAC makes more policy changes

R

ESIMAC Home Loans is continuing to evolve its lending products to differentiate itself from other lenders and meet client needs.

It released a range of lending policy enhancements last month. These include:

Cash Out/Equity Release For both Prime and specialist applications where borrowers are seeking cash out/equity release to a maximum of 80% LVR, it no longer requires documentary evidence to substantiate the use of the funds being released. Borrowers will simply need to advise RESIMAC about how the funds will be utilised.

Prime Low Doc – Increased Loan Amounts and LVR The maximum loan amounts and LVRs for its Prime Low Doc product have been increased across Group 1 and Group 2 security locations.

Apartment Lending – Increased LVRs The maximum LVR for Prime applications with apartment security has been increased to 80% for owner occupiers and 75% for investors, for apartment properties located in acceptable security locations. ✚

SBS name interim CEO

A

n interim chief executive was named by SBS following the recent death of Wayne Evans.

In a statement, SBS chairman John Ward says its chief risk and innovation officer, Mark McLean would be stepping into the role.

“Mark is a capable individual who currently holds an executive position with us. In addition to his five years in executive management with SBS Bank, he has previously held financial services leadership roles in the United Kingdom, Singapore, the Netherlands and New Zealand,” Ward says.

“Over the past 18 months the SBS board and executive team have been working hard on achieving their long-term strategy, which endorses the vision of SBS becoming New Zealand’s member bank.

“This strategy, which centres on bringing the theme of mutuality to life, is now firmly in execution mode,” he says. ✚

07

NEWS

MPM books $4mill profit

M

ike Pero Group which reported a $3.9 million after tax profit for the 12 months to June 30, has a new chief executive.

Former national manager Simon Frost has returned to Australia and Mark Collins has been appointed to chief executive of the New Zealand business.

Collins was previously the chief executive at Kiwibank-owned NZ Home Loans and prior to that had senior roles at Sovereign.

Melbourne-based Liberty Financial gained full control over MPM in 2013 after an acrimonious battle with its joint venture partner NZ Finance.

NZF was forced to accept $2.8 million for its half share in the mortgage business. Although it had valued the stake at $7.6 million.

Since Liberty gained control of MPM it has

08

Mark Collins

restructured the business. Under the new model Mike Pero Group owns Mike Pero Mortgages and non-bank deposit taker Secure Funding Ltd, which now trades as Liberty Financial.

In its annual accounts, filed just before Christmas, Mike Pero Group, reported total operating income of $19.46 million. This was mainly made up of $8.89 million in fee and commission income, and $8.9 million in interest income on financial assets.

In the seven-month period from when the company was established to June 30, 2014 fee and commission income was $2.77 million.

One issue Collins will have to deal with is a dispute with former franchise holders. They are seeking to overturn a restraint of trade clause in their franchise agreements and the case is due to start in court later this month.

MPM says in its annual accounts that contingent liabilities exist in claims or possible claims against the company.

“An assessment of the likely loss to the group has been made in respect of the identified claims, on a claim by claim basis, and specific provision has been made where appropriate.

“The group does not consider the outcome of any current proceedings, either individually or in aggregate, is likely to materially affect its operations or financial position.” ✚

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

Seamless transition at SuperCity

Making a switch from banking was an easy decision for Wayne Henry. After 15 years combined with the National Bank and ANZ respectively as a branch and mobile mortgage manager he decided he needed a change. He has recently joined the SuperCity Mortgages team.

“My love for the mobile mortgage manager role made my decision easy when considering the move to a mortgage advisor,” Henry said.

“The transition thanks to [managing director] Joel [Oliver] and the team at SuperCity Mortgages has been seamless. I find the independence in the role gives me the ability to focus 100% of my time and energy on my clients, providing them with options and solutions for long-term financial commitments and goals. The role also enables me to see them through a full home loan cycle, and I can now be available for my clients anytime, anywhere.”

Henry’s philosophy is, “Do it right, do it well and have fun along the way.”

“So I am able to assist clients with KiwiSaver, as an AFA, also their mortgage needs, and cover their insurances at the same time,” Sale said.

Sale has been in the insurance industry for over 30 years, the last 12 in the life industry, is an authorised financial adviser and a member of Newpark Financial Services.

Long Han Steve Sale

Han on deck at Mortgage Express

Wayne Henry

All needs covered in Wairarapa

Mortgagelink Wairarapa has a new owner.

Steve Sale, of Steve Sale Insurance, took over the business just before Christmas last year.

Previous owner, Sam Oldfield has moved on into the hospitality industry.

Sale said it’s a good mix with his existing insurance business.

General manager of Mortgage Express New Zealand Sarah Johnston said Long’s business background and tenacious nature would assist his clients in making the right decisions about their own financial future.

Long Han is the latest recruit to join the Christchurch team of mortgage advisers at Mortgage Express.

Originally from China and conversant in English and Mandarin, Han provides mortgage advice on pre-approvals, home loans, commercial loans, refinancing and re-fixing.

Before joining Mortgage Express, Han spent eight years in London furthering his education. He holds a Masters’ Degree in Management and a Bachelor's’ Degree in Business. His previous experience includes working for Hewlett Packard as an Innovation Leader, where he was responsible for designing and implementing an employee development programme, and training the internal support team.

“After an extensive time in England furthering my own education and a period of personal reflection, I am excited about helping my clients reach their dreams. I have an excellent understanding of business and finance, and believe I can help my clients secure the right financial solution,” Han said.

From banking to EdgeMortgages

Barry Mitchell is the latest to join the EdgeMortgage team. He has worked in ANZ Business Banking, ANZ Credit and ANZ Commercial for approximately 20 years. He has also worked with Westpac for two years in Commercial Banking.

“I have an interest in the property market and property development. I have significant lending experience in the childcare industry and retirement industry. I have been involved in asset lending and have a number of years of experience in construction finance and working capital solutions,” Mitchell said. ✚

Barry Mitchell 09

HOUSING COMMENTARY

By Miriam Bell

Market predictions

mixed Auckland’s slowdown is now a matter of record – and this has left the gate open for speculation about what 2016 might bring for the country’s property market overall, reports Miriam Bell.

D

rama surrounded Auckland’s property market throughout 2015. Record-breaking price growth went hand-in-hand with predictions of doom and increasingly stern official measures. This meant that few observers were surprised when the market started to cool.

As the year drew to a close, opinions were divided over how much the market would slow, or fall, and for how long. Now, as the first sets of December data to emerge show a third month of reduced pace, the tone has changed.

Auckland’s slowdown is accepted, but there are divergent takes on the national prognosis.

SUBDUED END TO YEAR To ring in the new year, realestate.co.nz released their December 2015 data. It showed that Auckland’s average asking price levelled off and the national average asking price fell.

In December, Auckland’s average asking price was $848,195. This was down from $849,882 in November and on September’s record high of $851,531. Wellington’s average

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asking price also levelled off in December, while Canterbury’s average asking price fell by 5.5% to $450,740.

This left the national average asking price in December at $522,930. Realestate.co.nz spokesperson Vanessa Taylor says the drop continued a downward trend from the record high of $568,215 set in August 2015.

The apparent impact of Auckland’s slowdown on national asking prices was reinforced by Trade Me Property’s December 2015 data. It also revealed a slower pace in Auckland’s average asking prices and a decline in national average asking prices.

In Auckland, the average asking price rose by just 0.2% in December, which left it at $805,300.

At the same time, average asking price nationwide [excluding Auckland] declined by 0.4%, leaving it at $427,250 – as compared to $429,100 in November.

Head of Trade Me Property Nigel Jeffries says the long term trend has been positive. Over the last year the national average asking price went up by 3.7%, while over the last five years they increased by 22.8%.

But the New Zealand market ended 2015 with a whimper rather than the roar which characterised the rest of the year, he says. “The cooldown of the Auckland market was not surprising as 2015 was one of the most heated years on record for its market. After a year of unprecedented rises in expected selling prices, it ended the year on a subdued note.”

STEADY RESULTS Mixed messages characterised Barfoot & Thompson’s December 2015 data. It showed Auckland prices have remained stable, but there has been a significant fall in the number of sales.

The December sales figure [of 796] was 19.3% lower than in November 2015, and it was the lowest number of sales in a December for four years. Further, it was the lowest sales figure of any month for the past 22 months.

The data also showed that while December’s average sales price of $869,492 was down 0.8% on November, December’s median price of $800,000 was up 0.6% on November.

Barfoot & Thompson managing director Peter

Thompson says this meant it is uncertain as to where the market will head in 2016.

In his view, the extremely low number of listings on the book at year’s end could have a big impact on January sales. “With a growing population and the number of new builds failing to keep pace with demand, competition for properties is likely to remain strong in the first quarter of 2016.”

The summer holiday period always influenced the market in the first months of the year, which means it won’t be till mid-March, when February’s sales data is available, that a clearer understanding of prospects for 2016 emerge, Thompson says.

SUPERCITY PACE OFF Quotable Values' (QV) December 2015 data repeated the story its November data told.

Values in Auckland rose, but the rate of increase decreased.

In December, the average residential property value in the Auckland region rose to $933,264, as compared to $931,807 in November. This was an increase of just 0.2% and left the value increase recorded in the last three months of 2015 at 4.1%.

It seems that the introduction of the new tax and LVR measures in October and November, have had a slowing impact on the Auckland market. QV national spokesperson Andrea Rush says the new measures, along with huge hikes in Auckland values, prompted many to look outside the Auckland region in pursuit of more affordable homes or better rental yields in 2015.

This has led to increased activity and demand in previously slow housing markets in upper and central North Island centres. For example, values in Hamilton City were up 19.5% year on year and they have increased by 6.7% since October. Tauranga values were up 18.2% year on year and, since October, they have gone up by 7.8%.

Rush says values in many other centres, including Wellington and Dunedin, also saw significant value increases in the last three months of 2015. As a result, nationwide values increased by 14.2%, or $69,472, in the year to December 2015. Over the last three months of the year, the average national value increased by 2.9%, leaving values overall 34.7% higher than the 2007 market peak.

REGIONS ON THE RISE QV’s data provided the clearest indication of Auckland’s much-vaunted “halo effect”. But evidence that other regions are benefitting from the maelstrom of the SuperCity’s market could be found in both the realestate.co.nz and the Trade Me Property data.

For example, Trade Me Property’s data revealed that, in December, nearly every region in New Zealand recorded an increase in the average asking price. With a decline of 14.6%, Taranaki was the only region to see a decrease in the average asking price.

Jeffries says the regions with the fastest growth rates were those surrounding Auckland – so Northland was up 11%, Bay of Plenty was up 11.2% and Hawkes Bay was up 7.6%. “Further

south were more modest increases, ranging from 1.2% in Canterbury to 7.5% over on the West Coast.”

However, the Bay of Plenty market was the country’s stand-out performer in December.

Jeffries says it bet out both Wellington and Canterbury to become the first region outside Auckland to break through the $500,000 barrier. “Rising at an annual rate of 11.2%, the Bay of Plenty has seen average asking prices in the region rise by over $50,000 in the past year to hit a new record of $503,550.”

REINZ SALES: DOWN

Sales volumes were down nationwide in December. However, the decline was most dramatic in Auckland

OUTLOOK FOR 2016 CoreLogic director of research Jonno Ingerson says the increased transaction numbers and values outside of Auckland mean the outlook for 2016 looks positive for most of the country.

He expects Auckland values to drop a few percent over the next few months. “However, mortgage interest rates are at historic lows, migration at historic highs, and there is a substantial shortage of housing in Auckland.

These are strong factors putting upward pressure on Auckland prices and, as a result, any drop in values is likely to be shallow and short-lived.”

Auckland may be taking a breather, but the surrounding areas are likely to continue to rise, driven both by local demand and

by Aucklanders choosing to move to more affordable locations, Ingerson says.

But the value growth in Hamilton was likely to become more moderate and the outlook further south was more variable as the effect of Auckland is far less. “Wellington values have been accelerating from the past few months and that will continue in a market where current demand is outstripping supply.

Dunedin will also continue to increase, while Christchurch is more likely to stay flat.”

REALISTIC MARKET RETURNS Ups and downs aside, some believe New Zealand’s property market is simply becoming a more realistic market again.

Century 21 New Zealand national manager Geoff Barnett says auction clearance numbers are generally falling, average selling times are lengthening out, and median house prices are not rising as steeply, particularly in Auckland.

“However, this was always inevitable and, in fact, it is a lot more realistic and sustainable.”

In his view, the market will be relatively strong in 2016 – given the regions are performing well, interest rates remain low, and Auckland’s population continues to grow. “Rest assured, Auckland will keep trucking along. The market eased back in the last quarter of 2015, people will soon get used to new rules and just work with them.”

But he thinks apartments will be this year’s property market story – due to their more affordable entry point. “At the same time, the quality of construction and the overall living environment has improved dramatically in many of the new apartment developments now coming on stream. That also ensures stronger capital gain prospects with banks now more willing to lend more on them.” ✚

INTEREST RATES: DOWN

Interest rates are still at record lows.

OCR: DOWN

The Reserve Bank cut the OCR to 2.50% in December. [Next OCR announcement = Jan 28]

IMMIGRATION: UP

Migration continues to hit record highs, according to Statistics NZ’s latest data.

BUILDING CONSENTS: UP

Building consents were up nationwide in November, says Statistics NZ. However, Auckland building activity needs to pick up further to address the supply shortage.

MORTGAGE APPROVALS: UP

Reserve Bank data shows lending strengthened in December, after a dip in November.

RENTS: UP

Rents were up slightly in markets nationwide in November. This included Auckland - but SuperCity rents are still not keeping pace with prices..

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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 news and events in each issue of the magazine.

Excessive costs Building and Housing Minister Nick Smith said the Bill aimed to make houses warmer, drier and safer for New Zealanders who rent, without imposing excessive costs on landlords.

It also enables the MBIE to take direct action against landlords for breaking tenancy laws which risk tenant health and safety; strengthens protection for tenants who take such issues to the Tenancy Tribunal; and create a fast-track re-tenanting process for abandoned properties.

But others say a WOF for all rental The Bill has prompted much debate. The NZ properties should be introduced.

Property Investors Federation supports it.

Feeling the heat Summer holiday mode hit New Zealand over December and January. But while it may have slowed the property market, there was still plenty of newsworthy activity.

Law changes requiring insulation and smoke alarms in residential rental properties moved closer to reality. Consultation on the Residential Tenancies Amendment Bill passed its first reading in Parliament in early December – is now underway.

If it becomes law, insulation will be required in social housing from July 1, 2016 and in other rental properties from July 1, 2019 although there are exemptions. Smoke alarms will need to be installed in all residential rentals by next July.

Agencies taken to court Some Thirteen real estate agencies are being prosecuted by the Commerce Commission for price fixing and anti-competitive behaviour.

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The commission filed charges against them, in the Auckland High Court, in mid-December.

Those charged include the head offices of real estate giants Barfoot and Thompson, Harcourts, LJ Hooker, Ray White and Bayley Corporation Limited, and regional groups in Hamilton and Manawatu. Property Page was also charged, as were three individuals.

The commission alleges that, in 2013 and 2014, the agencies breached the Commerce Act by agreeing on a planned industry response to Trade Me’s changed pricing model. Property Page is alleged to have aided and abetted the agencies in establishing and implementing the agreement.

Allegations that some real estate agencies were boycotting advertising properties on Trade Me in response to the changes to its pricing model prompted the commission to investigate.

On top of the charges, the commission issued a further eight Manawatu agencies

with warnings for their role in the affair. The commission also reached settlements with Bayleys and Unique Realty Limited in Manawatu over their conduct.

Zoning windfall for investors Auckland investors may find the value of their portfolios increases sharply – thanks to proposed zoning changes under the Unitary Plan.

Just before Christmas, the Auckland Council revealed its plans to rezone parts of the eastern and central Auckland suburbs, and South Auckland, for more townhouses and apartments. This will boost the value of land in those areas.

Many areas will lose their single house zoning, which requires just one house per section and instead become mixed housing urban zones, allowing more dense construction up to three storeys. Over 75% of the city will continue to be limited to two storeys.

Deputy mayor Penny Hulse acknowledged this will bump up land values in areas where owners are able to build more houses on their sections. But she said the increase in land made available for higher-density developments should lead to more affordable housing in the long term.

The proposals have drawn heated opposition. But others say intensification is necessary to address Auckland’s housing supply and affordability issues. Hearings on the zoning proposals will be held in March and April. No decisions will be made until at least August.

Cheaper rates reduce affordability Housing affordability in New Zealand has improved by 5.7% in recently, according to the latest Massey University Home Affordability Report. It also shows an overall annual improvement in national affordability of 8.7%.

Even Auckland recorded a small quarterly improvement of 1.4%, and affordability is now deteriorating at a much slower pace. Despite this, housing in Auckland is 59% less affordable than the rest of New Zealand.

Report author Dr Susan Flint-Hartle said there is a real possibility of deterioration once again. “Recent reductions in borrowing costs and positive sentiment about a two-year hiatus in interest rises hold the potential to keep pushing house prices higher”.

Interest rates have continued to fall and the historically low official cash rate of 2.5% may fall even further, she said. “This may encourage more people, into the market increasing demand and putting upward pressure on prices.”

Red tape key problem Claims that residential construction regulations are to blame for Auckland’s housing crisis are

Investor alert: key 2016 issues After a year of dramatic highs and lows for investors, NZ Property Investors’ Federation executive officer Andrew King recommended two key issues for investors to keep an eye on in 2016.

One is the government’s new minimum standards for rental properties, which require insulation and smoke alarms. The other key issue will be the Reserve Bank’s efforts to control the housing market King said the RBNZ has shown it is prepared to target specific areas if they believe house prices are rising too fast. “They have done this to Auckland and might do it to other

making waves again.

Following the Fitch Ratings Housing Report, which said Auckland’s supply issues are being exacerbated by lagging construction, Property Council chief executive Connal Townsend pointed to planning and regulations as the major issue.

Meanwhile, Auckland mayoral candidate Stephen Berry said the blame for the hyperinflation in the SuperCity’s housing market lies squarely at the feet of left wing central planners.

A ban on residential construction outside of the Metropolitan Urban Limit has created an artificial land shortage in a city with plenty of room to build, he said. “Further, the cost of complying with Council regulations and obtaining permission to build or make alterations is also excessively expensive.”

According to the council, the issues are more complex.

Auckland Council general manager building control Ian McCormick said that building a home was a more complicated business today than it once was. Assurance that the work has been

areas now, as prices are rising in some provincial areas.”

Also, the RBNZ is looking at introducing loan to income restrictions to reduce the amount of money people can borrow, he said. “If provincial property prices rise sharply this is likely to be the next weapon they introduce.”

completed to a compliant standard was very important, he said.

“For example, a range of building products and systems require careful consideration about how they will work together."

“You cannot assume that all products available in the marketplace are necessarily code compliant either for a given application.”

Many initiatives were under way, to improve the system and streamline regulatory processes, McCormick added.

Auckland Council general manager plans and places John Duguid said that, in the proposed Auckland Unitary Plan, the Rural Urban Boundary (RUB) would replace the Metropolitan Urban Limit. “It does not ban residential development outside the RUB, as you can still build a house on your land,” Duguid said.

However, the council is aiming for up to 70% of residential development in the existing urban area and up to 40% in new greenfield areas, rural areas and satellite towns,with infrastructure considerations key reasons.

No let up in housing market After a hectic 2015, advisers are looking forward to a quieter 2016. But 2016 could be just as busy, as first home buyers enter the market.

By Susan Edmunds

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C

aught your breath yet?

For many mortgage advisers, 2015 was their biggest, busiest year.

The Auckland property market was powering ahead and other regions around the country started to pick up as house prices in the biggest city, and new lending rules, drove people to look for properties further afield.

First-home buyers started to return to the market in 2015 and low interest rates made borrowing appealing.

The good news for advisers is that no one is expecting the brakes to go on sharply in 2016.

While some expect a slowdown, most expect it to be gradual and only to the still-busy level of 2014.

Many adviser businesses say this will be a year to make sure that processes and systems are sound and that the service delivered to clients is top-notch, not just box-ticking to negotiate deals in time.

Full Steam Ahead Dave Windler, of the Mortgage Supply Co, is one looking forward to a slightly gentler pace this year, after a hectic 2015 left his team exhausted.

He said it would be unrealistic to expect to maintain the level of traffic the company had experienced last year through this year, too.

But even a drop from 2015’s rate of business was likely to be a good year, he said.

“If you look at 2016 compared to 2015 and feel it has dropped off, you’re not reflecting on it properly,” Windler said.

“2015 was far and away the best year we’ve had. But we’d be quite happy to have a year like we had in 2014, that’s still good. It’s just whether your glass is half-full or half-empty.”

Another Auckland adviser, Karen Tatterson from Loan Market, said she was seeing more first-home buyers entering the market, which she expected to continue through the year.

Investors were still active, she said.

Most were primarily focusing on areas outside Auckland, while keeping a watchful eye on any developments that made an Auckland purchase appealing.

“They are keeping an eye out for opportunities in Auckland. There is a lot of new building in South Auckland, Takanini area. There’s potential for them to look at that area as well.”

John Bolton, of Squirrel, one of Auckland’s biggest mortgage broking firms, said he expected a strong first half of the year for the city.

“I’m expecting a busy summer and for that to extend through May and June, similar to last year. It is unclear what the rest of the year will look like,” he said.

What happened subsequently would depend a lot on the international outlook.

He said if things became more tumultuous internationally, the latter half of 2016 could look “more interesting”.

" I’m expecting a busy summer and for that to extend through May and June, similar to last year. It is unclear what the rest of the year will look like."

– JOHN BOLTON

Volumes sliding The Auckland market had looked to be slowing down before Christmas, with the December Real Estate Institute median price only up slightly on the month before and sales volumes sliding.

But Bolton and another Loan Market adviser, Bruce Patten, said there were signs since that the lull had been short-lived.

Patten said he usually tried to take January off work but the phone had been steadily ringing and business picked up as the month went on.

His firm wrote $95 million in the six months to the end of 2015, up from $65 million in the six to the end of 2014.

“I was talking to an agent in Royal Oak who said he had 38 people through an open home in the first weekend, which was a surprise,” Patten said. “For him, the year has kicked off with a hiss and a roar. We are certainly seeing the same in east Auckland.”

Bolton said the improvement in the Auckland market post Christmas was based on a settling down after the November tweak to the loan-to-value rules, first-home buyers gaining confidence and Chinese investors returning to the market.

Since November, Auckland investors have had to have at least a 30% deposit to buy a property in Auckland.

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Chance to regroup

" We are really busy at the moment. It’s great but we’ve got to be a bit careful.

I’m trying to temper that with the knowledge that the market could slow at any minute and very quickly.."

Dave Windler said while he was expecting the heat to come off a bit, that would be welcome relief from the intensity of last year.

“It will allow us to work on our focus on quality. We’re looking to take stock and look at our processes and the quality of what we do and improve our service proposition. Hopefully we will have a bit more time to do that,” he said.

He said when it was as busy as it had been last year, it was hard to maintain quality because of the pressure of deadlines and the need to move things through quickly.

“It will be quality not quantity and that will help us feel better about what we do. It’s easy to get transactional in this industry. As a result, we will maintain our volume because when you do a better job, people feel better about the service and are more likely to refer you.”

Interest rates static Interest rates are still hovering around historic lows and the official cash rate (OCR) seems firmly planted at 2.5%.

John Bolton said he did not expect much movement in interest rates this year. Given international upheaval and low inflation, it was unlikely that they would increase, he said.

“I would have said this is the absolute bottom

– BRUCE PATTEN

Outside Auckland, there are no specific restrictions on investors and banks have been allowed to lend slightly more of their new loans to people with a deposit of 20% - they can lend up to 15% of loans to these borrowers, from 10% before.

That caused a spike of lower-deposit lending in November.

Reserve Bank data shows $530 million was lent in November, up from $476 million in October and $441 million in November 2014.

“We are really busy at the moment. It’s great but we’ve got to be a bit careful. I’m trying to temper that with the knowledge that the market could slow at any minute and very quickly. At some point in the next couple of years I’m fairly sure there will be some sort of market correction,” Bolton said.

He said that meant he was being careful about where money was invested in his business. The focus was on being more productive to deal with increased client demand, rather than hiring a lot of new advisers.

He has a team of 45 and said that was about the limit he wanted to expand to at the moment.

“Anything we do, we’ve got to live with if the market corrects. The last thing I ever want to do is let anyone go because the housing market slows down.”

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" Existing clients are also buying rental properties using the equity in their homes and starting to think about retirement."

– KAREN MOONEY

but with what’s been happening over the past four-to-six weeks, with sharemarkets moving into bear territory and oil below US$30 a barrel, lower growth forecast around the world, it could send the OCR even lower. It’s a balance of probability.”

He rated an OCR cut about a 30% chance this year.

Windler said he expected interest rates to finish the year at a similar point to that at which they started. “It is difficult to predict where rates will go so it’s more important now than ever to give advice that is relevant to the client’s circumstances rather than what you are guessing at with the economic circumstances,” Windler said.

“You 100% know the client’s situation but you can only guess at the future economic situation.”

Patten said bank competition was keeping a lid on rates. BNZ and SBS fired the first shots in 2016’s mortgage rate war.

Regions rise Glen McLeod, of Edge Mortgages, said he expected the loan-to-value restrictions could start putting more pressure on regional New Zealand this year.

In Blenheim, Karen Mooney said things had started to pick up a lot. “There’s certainly a lot of movement in the market and we’re expecting a lot more of that in the coming year,” Mooney said. “The only thing to be mindful of is the turbulence globally.”

A lot of first-home buyers were buying, she said, and people were taking the opportunity to trade up to bigger properties or building new. Lifestyle blocks were also becoming more popular.

“Existing clients are also buying rental properties using the equity in their homes and starting to think about retirement.”

Auckland buyers - “particularly young couples” - were also moving into Blenheim, she said.

She said she had encountered people who were buying a family home in Blenheim and then flying to Auckland weekly for work.

BNZ chief economist Tony Alexander has said he expected the regional parts of New Zealand to easily outperform Auckland this year.

He said some regions could be in for price growth of up to 20% through 2016.

Patten said he was doing a lot of loans for people buying in Tauranga, Hamilton and Whangarei. “They are benefitting from the changes in Auckland. The regions have all been picking up over the last six months” Real Estate Institute data shows Whangarei City’s median house price was up 17% in December 2015 compared with the same month in 2014.

In Hamilton, the increase was 18.3% and in Tauranga it was 15.8%.

But those high house prices are not always good news for the people living there.

Some brokers said it could mean that firsthome buyers who had found it relatively easy to buy in their hometowns around the country suddenly found they were facing battles that

were more similar to those of Auckland buyers.

McLeod said he was already hearing frustration in places such as Hamilton, Tauranga and Whangarei that house prices were being pushed up out of line with the usual income ratios. “Auckland is in a better position to earn more in theory than some provinces, they are not going to have that same ability. I don’t know if that has been though through fully but we will see more of that this year.”

Rule changes It is likely that the revised Financial Adviser Act, due for reform this year, will tighten

" We need to get our market share up to 40% or 50%.

Moves from a financial legislation point of view are going to help us."

– GLEN McLEOD

the requirements on non-authorised financial advisers.

At present, only authorised financial advisers, who are mostly those who deal with investments, have to meet standards for qualifications and ongoing training, offer full disclosure and report on the suitability of their advice for clients.

Becoming authorised is an option for mortgage brokers but most have not taken it up because it is not compulsory and comes with higher associated costs.

But McLeod said it could be a good thing for mortgage brokers if it increased the standards in the industry and gave them a point of difference.

“I get frustrated when I hear things like an ad saying ‘we have more home loan experts than anyone else’ but none of them can give advice.”

If all advisers were required to operate at authorised financial adviser level, it would put the industry in a much stronger position, he said.

“We need to get our market share up to 40%

or 50%,” McLeod said. “Moves from a financial legislation point of view are going to help us.”

Banks would need to rely on brokers more if they wanted to increase their margins, he said, because it was one of the few ways they could cut their operating costs.

McLeod said his firm had hit its January sales target within two weeks. “It’s a little bit more patchy but I’m talking to contacts all the time.”

He was not worried at how many customers he would deal with over the year. “When I’m not busy I pick up the phone and as soon as I pick up the phone, I’m busy again.”

As for Patten, trying in vain for a holiday, he still had his phone diverted to the office through the end of January and was doing his best to switch off. Whether it worked was another question.

“But it’s started off quite quickly, there’s a lot going on. I don’t know if it’s because a lot of people returned to work because of the bad weather but the year is certainly starting off with a hiss and a roar.” ✚

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SPECIALIST LENDING

By Miriam Bell

Thinking outside the

square

Advisers who are looking for new avenues to expand their business could benefit from an exploration of the specialist lending market, says Miriam Bell.

S

pecialist lending – it sounds like a space for niche, highly specific lending. And, in a sense, it is. But the reality is more straight-forward than it sounds. Once known as non-conforming lending, specialist lending is non-bank lending to those who don’t meet the conventional criteria of the banks.

Such lending gained a bad reputation in the wake of the GFC, but the market has changed.

There is a new wave of specialist lenders who provide viable products and solutions. They may seem an unknown quantity, but the specialist lending market is one that offers new business opportunities to advisers in the know.

WHAT IS A SPECIALIST LOAN? Adrienne Church is general manager mortgages NZ at non-bank lender Resimac. She says specialist lending has entered a new era and is no longer limited to clients with poor credit ratings and troubled or stretched backgrounds.

“There have been so many changes and new regulations that the banks are stricter and they decline more loans. In fact, banks decline about one in 10 loans, but the reasons for that can vary… That is where specialist lenders come in.”

The definition of what qualifies as a specialist

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loan is more about what it is not, then what it is, agrees Avanti Finance CEO Mark Mountcastle.

“Most of banks have a well-defined list of strict criteria that they use to manage risk across their portfolio, which means they won’t lend on lots of things. It might be to do with the purpose of the loan, a borrower’s credit impairment, or the nature of the borrower’s overall portfolio.

Specialist lenders will lend in situations that banks won’t – to a degree.”

Basically, specialist lenders offer a variety of loans to those who don’t meet bank criteria.

This includes low deposit home loans, low doc mortgages for the self-employed, mortgage or tax arrears loans, lending to the credit impaired, short term loans for such things as debt consolidation, and bridging finance.

HABITUAL BORROWERS NEEDN’T APPLY Most advisers will be able to easily identify one category of borrowers for whom specialist lending is the best options. They are the ones who have already been declined by a bank.

Church says such borrowers will often have credit issues, but are not necessarily from a lower socio-economic demographic. It pays to remember that a poor credit record can be

due to a range of life events – like a divorce or a business failure - which someone hasn’t got back on track from but can.

“Whatever the case, advisers have to ask why the bank has declined. And then they need to consider whether there is an opportunity for the client. Specialist lenders need to know the client’s story. We ask clients to tell us why their situation is different. So if someone has adverse credit, we ask why? And what has changed?

How will you do things differently?”

It is worth noting that specialist lenders are not looking for habitual borrowers. They do not operate like loan sharks and loan to repossess.

Rather they take the Responsible Lending Code seriously and abide by it strictly.

IDENTIFYING SPECIALIST CLIENTS However, times have changed and specialist lending is no longer the province of those with bad credit records. There are other, less obvious borrowers who are prime candidates for specialist lending.

The biggest category of such potential clients are people who are self-employed or who have an irregular income source because, for example, they do contract work. Another category is people who have lower deposits than required under the LVR restrictions.

This includes those wanting to invest in Auckland property and first home buyers.

Spec builders and smaller scale developers are another category.

General Finance executive director William Cairns says these days a typical example of a specialist lending client is someone who is selfemployed. “They may have enough income to

for any mortgage transaction will determine if such a client can access a loan, although there may be additional requirements to determine whether an individual client can make payments, he said.

“But that’s where we think we can add value.

We can help advisers think about solutions that they may not have thought about before and come up with a solution for their clients. We would encourage advisers to find a specialist lender they feel comfortable with and talk through situations with them.”

ON THE CASE In Church’s view, it is all about the correct positioning of a product for a client. For which a client’s genuine story is necessary. Advisers need to get that story and a specialist lender can then help them come up with the best solution for the client.

“Once we know the story, we’ll tell the client what they can afford, what their repayments will be, and how long they’ll have to pay them for. Our products have a stepdown rate of 25bp, but we will be grooming the client back into the mainstream borrowing environment.”

There can be high client management, for the lender, at the back end, Church adds. “For example, if they miss a payment, we’ll get on to it right away. We’ll send them a text, then call, and find out what is going on, and then see what we can do about it.”

service a mortgage but that income is irregular or from different sources. Getting a loan from a specialist lender allows them to get into the market and prove they can service a mortgage.”

Under the Responsible Lending Code, specialist lenders are required to ensure that the borrower can afford to repay the loan.

But they establish a client’s ability to service a loan by employing alternative ways of calculating income to the way the banks do.

For example, where as a bank will ask to see two years’ worth of financials, a specialist lender will look at bank statements and GST returns.

MARKET SIZE

MANAGEMENT REQUIRED The process of managing a specialist client can require more time and work on the part of both advisers and lenders. This is because the client’s situation is often more complicated. In turn, this impacts on the initial application and subsequent management of the loan.

Advisers may also have to educate their clients on what specialist lending entails. For example, clients need to know that specialist lenders are a bit more expensive than banks – and that their rates can take into account a range of factors, including borrower risk. Client’s should also be informed that specialist lending is considered to be a short-term solution.

Mountcastle says there is no one size fits all for specialist clients as they all have bespoke, one-off situations. “Sometimes there can be a bit more work involved in understanding what structure is required. But it’s more about the package and the structure of the loans than it is about the client information required.”

The same type of information that is required

" Once we know the story, we’ll tell the client what they can afford, what their repayments will be, and how long they’ll have to pay them for."

– ADRIENNE CHURCH

Overall, New Zealand’s mortgage market is huge – and booming. Further, the mainstream banks are highly competitive in the current low interest rate environment.

Specialist lenders make up a relatively small subset of the broader market.

Prior to the GFC, specialist lenders made up a bigger slice of the market. There were some large-scale players active in the market and some estimate that up to 30% of lending was specialist lending. When the GFC hit, those lenders left the market and it dried up.

But there are now a number of specialist lenders – including the big three: Resimac, Avanti, and Liberty Financial - in the New Zealand market again.

Not only are there lenders out there, but growing numbers of clients too.

Church says that if you combine the clients who have been declined by banks with those who are self-employed, you probably have about 20% of borrowers who would be open to specialist lending. On top of this, there are the people who want to buy property but have deposits lower than required by the LVR restrictions.

“This means there are opportunities for advisers in this space. Yet, too often, banks decline a client so advisers think they can’t do it and the clients think they can’t get a loan – and it will just be left at that.”

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Adviser

advocates

who could go to any bank for a loan.

“Working with someone who has been declined, and may have been close to giving up, and then providing a solution for them – that’s just fantastic.”

" Therefore advisers who focus on specialist lending have a strong client base and high levels of repeat business."

– MARK MOUNTCASTLE

RAISING AWARENESS She believes that advisers shouldn’t just accept that they can’t help a client if their application is turned down by a bank. “They are there to help their clients, but there is not enough awareness of specialist lenders and the products and solutions available among advisers.”

This means educating advisers, and potential clients, on specialist lending options is important. “The problem is that, at the moment, everyone is so busy they are not looking for new business. They can focus on the clients that are easy and haven’t been declined by banks.

But advisers shouldn’t decline those clients. We want to help them understand that they can help people.”

Mountcastle agrees. He thinks there is often a reluctance on the part of advisers to pick up to contact specialist lenders because it is in an area they are not familiar with.

For most advisers, unless they specialise in the area, specialist lending is going to be a subset of their business, he says. “So we don’t expect them to be experienced in this area. But we want to work with them and help them find solutions for their clients.”

Advisers should also know that specialist lending clients tend to be very loyal, Mountcastle adds. “This is because they are getting a level of service that goes beyond the provision of a loan - and they recognise that.

Therefore advisers who focus on specialist lending have a strong client base and high levels of repeat business.”

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Jeff Royle: iLender’s Jeff Royle has a focus on specialist lending. He says most advisers avoid it because they don’t understand it and think it is almost second rate. “That is an attitude thing – and I benefit from it as I have a steady stream of clients who have been turned down by advisers, as well as banks.”

Managing specialist loan clients is more complex and requires greater involvement on the part of an adviser, he says. “There is more pressure on the adviser to put the deal together, to monitor it, and also to keep ongoing checks on getting them out. Also, some clients can be more difficult as they don’t like the advice they are given.”

But Royle loves working in the specialist lending space – and he always has. He’s been doing it since 1991, back in the UK when it was still essentially private money. Back then he constructed mortgage products and ran a mortgage packaging business, he says. “It allowed you to sit down in almost any situation and create a solution for a customer.”

That’s what it is all about – finding solutions for clients who have few options, he emphasises. “I often get told that I am a client’s last resort.

Because they have been declined so many times.”

Royle says there is always a tremendous level of gratitude from such clients, especially in comparison to the response an adviser will get from working with someone

Kris Pedersen: Kris Pedersen, of Kris Pedersen Mortgages, has a background in nonbank lending. He worked for General Finance before he became a broker.

There is not as much strength in the specialist lending sector this cycle, as compared to the last, he says.

But the LVR restrictions are changing the market and there is a space in the Auckland market for the 70-80% investor group. “There is high market potential because specialist lenders can be more nimble. They don’t have the policy that the banks do, they have their ears closer to the ground, and they are more adaptable.”

The current lending climate means banks tend to be his first point of call from a cost perspective. “Yet it is possible to get deals over the line with a non-bank lender that wouldn’t be possible with a bank. If you can’t get a deal for a client with a bank, then you should definitely go to a non-bank lender.”

However, Pedersen cautions that some specialist clients can be difficult - because they are in trouble. “Often they will shop around more, so you need to have a system to make sure you are not wasting time. Also, you need to try and ensure that you have heard the full story and have the truth of the matter.”

SALES & MARKETING LEGAL

By Paul Watkins

YOU NEED TO BUY LOVE FOR YOUR BRAND The power is with the consumer, the people, despite the ‘influencer market’, writes Paul Watkins.

N

ike paid a reported US$500 million to sign LeBron James for a lifetime, meaning that he can’t endorse any other brand. In 2014 Nike sold US$340 million of LeBron signature shoes. Forbes magazine estimated that at that sales level, the LeBron’s lifetime deal will have paid for itself in just three years.

According to Nielsen, 84% of consumers trust peer recommendations above any other method to make a buying decision (Nielsen, 2015). We all know that referrals are the lifeblood of any professional service firm and this has now gained importance like never before. There is

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a new marketing method being talked about called “Influencer Marketing”.

Influencer marketing is exactly what it sounds like. An “influencer” is an individual or brand that has a significant amount of credibility within a specific segment of the market. They exist in almost all hobbies, industries and aspect of life. Another extreme example is Youtuber ‘PewDiePie’, who provides commentary over walkthroughs of video games. In 2014, Forbes reported that he made US$10 million from the 10 billion plus views of his posted videos. He can hugely influence the games purchased by gamers. (Youtube pay for views of your videos)

Saturated Media Why has influencer marketing exploded in the last five to seven years? According to research firm Yankelovich, the average person in the western world is exposed to 5,000 advertisements a day. Even if that number is exaggerated, it’s still a lot that you see, hear and are told about. AdBlock, Netflix and Spotify Premium, are all examples of services that take ads out of traditionally advertising-saturated media and are exploding in popularity.

We simply don’t trust advertising anymore and as any radio or press rep will tell you, selling advertising in those traditional mediums is

❝ MDG Advertising,

have said that 70% of internet users want to learn about a product through content rather than through traditional advertising. In other words, they search for information on the product or service and are prepared to read credible text and reviews about it. ❞ getting very hard to do. The reason? They are losing their effectiveness. We read the press online and if we think the radio has too many ads, we just connect our phone to play music through the Bluetooth enabled car speakers. No ads.

There is no need to tell you that the internet now rules everything we do. We live our lives on our phones, tablets and laptops. TV has taken a backseat to the smaller screens that dominate our lives. While you can advertise successfully online through banner ads on other sites, a new term called “banner blindness” has emerged.

Credible text, reviews We don’t let our brains see them and American ad agency, MDG Advertising, have said that 70% of internet users want to learn about a product through content rather than through traditional advertising. In other words, they search for information on the product or service and are prepared to read credible text and reviews about it. But here is the issue. What do they search for?

They do not search for your website.

When you book a hotel in a far off land, you will most likely go to TripAdvisor or Trivago or any of the myriad of other sites that are packed with ratings and comments from users. When you think of renting or going to see a movie, millions of people immediately call up www.IMDB.com and see its rating. I have been standing in a video store and the girl next to me was reading from her phone. She said to her friend, “It only got 5.5 on IMDB, forget it.” The completely anonymous people that rated that movie a collective 5.5 online had an immediate and total impact on that girl, such that she wouldn’t give the movie in question a chance.

Before going on, I am not advocating buying the services of a famous influential person such as LeBron James to endorse you for many thousands of dollars. There is a much cheaper way, as the IMDB experience demonstrated.

Here is an example of a much more modest

effort to influence sales using social media. Lord & Taylor is an online fashion retailer. They chose 50 high user Instagrammers and paid them to wear a particular dress and feature it on their own Instagram pages on the same day. The dress sold out within three days. Thousands of women were influenced by the number of times they saw this one dress being modelled in various locations and situations by apparently influential Instagrammers.

Consumer judgement It should be clear what my message is by now.

While you may still be getting some traction out of traditional advertising mediums, it’s not the future. Scott Cook, the founder and CEO of Intuit, said, “A brand is no longer what we tell the consumer it is. It is what consumers tell each other it is.” So if this is the case, you need to make sure that clients tell others what you want them to. So how can you do this?

First and foremost in going down the influencer marketing track is to make yourself referable. I know that this has been said over and over again but it’s the basis of any referral.

To put it another way: your service must be ‘remarkable’, as in able to be remarked about. In the last edition of the magazine, I wrote about how ignoring the digital age is no longer an option. Clients do pass judgment more than you probably realise.

So let’s assume that you are comfortable that your service is remarkable. The trick now is to get influencers to endorse you. Going back to the Nielsen report, “Two-thirds (66%) say they trust consumer opinions posted online.” That’s why the girl in the video shop was so influenced by the rating online for that movie. They mean any consumer, not just famous ones. The consumers in this case combine their opinions to offer a collective influence.

Genuine names You can orchestrate this for your own business.

Just like Trademe has the comments section below, why not have a section like that on your web site. Have clients rate you out of 5 and post their opinions. They can just use initials and not full names, but never make them up, they must be genuine. If I found a broker’s web site with say 50 client ratings and comments about the service, including a few average ones, I would be very impressed and highly likely to call them.

This is because I can feel that I know them a little before engaging their services. I can hear from others who used your services and how they found the experience. Note that if I read 50 comments that were all 5 out of 5, I might be a little unwilling to believe them, so a few ones that rate you less than 5 just make you more real and credible.

Other influencers, which we have discussed in the past, are real estate agents, housing companies, accountants and lawyers. All of these will have a huge influence on their clients choosing you over other brokers. The power is now with the people, not the cute messages in your advertising – use it to your advantage. ✚ Paul Watkins writes blog content and newsletters for financial advisers.

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MY BUSINESS

By Dana Kinita

From mechanics to mortgages A former apprentice mechanic now mortgage broker with her own business, Vanessa Belton talks about how she never hesitates to roll her sleeves up and get the job done.

WHAT DID YOU DO BEFORE ENTERING THE MORTGAGE INDUSTRY? While I was at school my family owned a garage, and quite often I would go and spend some time there and like it; it was really interesting and a bit of a challenge and it was good that it was a bit of a challenge.

My sister broke her car, which she often did, and my friend and I decided to take it to bits and try to make it work and it went from there.

I really enjoyed the industry and the variety, the fact that something wasn’t working and fix it - it was a lot of fun.

I had about 10 years in the industry in the automotive field and when my son was born needed to go to something with more flexible hours so I went to work for what was then Telecom in telecommunications and my boss at the time asked me to come across to AMP, she moved over there in a call centre and basically we were selling mortgages over the phone from start to finish we never met the client.

I had about two years of that before HSBC bought out the bank and shut down the call centre so that was the only experience I had; I was pretty much a blank canvas. I didn’t have much knowledge at all apart from what I learned there in the call centre.

We had notice of redundancies from AMP Bank and had just read an ad from Mortgage Express and thought that looks all right. Went to see Andrew L’Almont [former Mortgage Express chief executive], that was the first time I met him and it kind of went from there.

WHAT ATTRACTED YOU ABOUT MORTGAGE BROKERING? First and foremost it was whether it could fit around family. That was the first approach towards the business but also when we bought our house we used a mortgage broker and

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❝ People will

always give you opinions and some of them I would listen to and, especially when times were hard, I think I should have listened to myself more. ❞ it just seemed really interesting; I was really interested when we were buying our own house. Once again there were lots of variety. It looked something that could be fun and have flexibility and at the time in the industry, the money looked really good as well. That was the last on the list but also appealing I guess. Mainly just to get stuck into something and finding a solution for things; I always liked doing that.

STARTING YOUR OWN BUSINESS IS A BRAVE STEP. WERE THERE ANY HESITATIONS? There probably should have been since we had just moved into a new house and had doubled, almost tripled, our mortgage and my son had just started school. It was a bit crazy really to do it. But, no, maybe I was a bit younger then and didn’t have fear. But Andrew was very good and encouraging and the market there were already

signs that it was going to take off and I guess I had that faith and was carried along with it. For the first couple of years, I kind of got stuck in and gave it a go.

DID YOU HAVE ANY MENTORS IN THE INDUSTRY? Starting in the industry I had advice from Andrew at the time at Mortgage Express. I guess I found my way through experience and also other brokers at Mortgage Express, I talked to them at the time and they were always giving with advice and I’m the type of person where I never hesitate to ask other people for advice or I like them telling me if I’m not doing something right. I always take it on board and have had that kind of attitude of not being too much of a know it all has helped because I’ve really learnt a lot from other people. I just on everything I could and learnt everything I could.

WHAT WERE SOME OF THE CHALLENGES OF STARTING YOU OWN MORTGAGE BROKERING BUSINESS? I think it was initially not knowing what I was doing I guess. I was particular in doing a good job in business and was quite hard on myself and was always challenging myself. There was no way I wasn’t going to give the client the best service and advice possible. Just getting my head around that and learning things while also learning the importance the internal relationships with the banks as well even though it got really frustrating. I’ve learned new things every year but some of the challenges were getting to grips with all the criteria because I didn’t have that knowledge and the unpredictability of the income was a little bit hard as well. Not knowing what was coming in and when. Knowing clients could be unpredictable as well, they could change

WHAT’S SOME OF THE BEST AND WORST ADVICE YOU’VE RECEIVED? When times got tough a lot of people really believed in me and they told me to, ‘Hang in’ when I almost left and they helped me make that decision. A couple were brokers and a couple were in the industry and they helped me make that decision to stay put and back myself and have more faith in myself to get through the hard times. For me personally, that’s some of the best advice I’ve had.

People will always give you opinions and some of them I would listen to and, especially when times were hard, I think I should have listened to myself more. But I don’t think I’ve had really bad business advice, I don’t think I seek it from the type of person who may be like that.

But I think you need to make sure you listen to yourself, when someone gives you advice and you know it’s not quite right you make sure you listen to yourself.

Vanessa Belton

Sole owner, operator of Greenlight Mortgages, Kumeu, Auckland Family: Husband Brian and their 17-year-old son Interests outside of work: My husband and I are scout leaders.

We manage our local group area. I also volunteer at the MOTAT Aviation Display Hall and run a women’s tramping group. I also do a little bit of volunteer group for the RSA and also started a little bit of volunteer work for Outdoor Training New Zealand, which is like mountain safety.

Favorite Movie: Braveheart is the

first one that springs to mind, I really enjoyed that when I first saw it.

Professional Recognition • PLAN award (Professional Lenders network) for number 24 broker in New Zealand on their network 2008-9 • PLAN Sales Master Award Bronze, April 1 2008-Sept 2009 • Mortgage Express Top Performing Mobile Mortgage Manager Northern Region - October 2004 – March 2007 • Mortgage express $75 Million settled Home Loans award March 2007 • Member of the New Zealand Mortgage Brokers Association (NZMBA)

their mind and they could also be extremely demanding when buying a house as well so that was a little bit to get used to.

do a really good job because it almost comes as second nature now, so that’s been nice in the last few years.

WHAT’S BEEN SOME OF THE BEST TIMES IN BUSINESS? Every year has been a bit different, so it’s hard to say. But I think when I reached that point, probably in the last few years where I’ve had that real loyal client base and it hasn’t been really hard to get clients. Pretty much everything comes from repeat business or recommendations. So that’s been really nice.

And also knowing I’ve helped other brokers who have started up, to give opinions to people in the industry that they do value and take on board as well has been nice. I feel like I’ve reached that point where I can help others and

MOST DIFFICULT TIMES? Every year teaches you something but 2008 to 2010 was really tough and frustrating because there were a lot of grey areas in the lending criteria and you just couldn’t really put your thumb on what banks would do and wouldn’t do. [Some] people were getting disillusioned and frustrated in the industry and it was sad I guess because good people left the industry. I almost left it a few times; I was offered a couple of good jobs but I also learned having downtime was really good and that kind of re-established my life a little bit.

WHAT’S THE BIGGEST CHALLENGE? Possibly regulations. It’s not knowing really what’s coming in regards to that. There could be a downturn, a little bit in the economy but then I’ve been through a few of those now. As far as regulations go, I’m not too worried about the challenges because I’m lucky enough to be part of a great segregation group, Prosper, they’re really, really good. Not only in supporting me but keep me informed with what I need to do. I make sure I keep records of everything and make sure I cover my backside. If someone gives me a verbal answer over the phone, I make triple sure I have that from them in writing and that they fully understand.

WHAT’S YOUR BEST BUSINESS BOOK YOU’VE READ? I did like The Magic of Thinking Big [by David J. Schwartz]. I read that a while ago but even if you don’t plan to having a massive business, just trying to think big and say, ‘Okay, whatever goals I want for me are possible. It doesn’t matter what the next person has done. Just believe in yourself.’

What have been some of the reactions when you’ve helped someone having a mortgage approved?

I’ve had them burst into tears. I’ve had one have an asthma attack, because she was excited. I’ve had people look like stunned mullets but mostly I’ve had people that want to give you a big hug because they’re so grateful.

I did a loan recently for a lady [and her friend].

Both were older; they never thought they would get their own home and it was difficult but we did it. They found a house and they were really nervous the whole time but we got there. I could hear in her voice how important it was to her and that’s the real buzz I get out of business.

I really do love how it can change people’s lives, not necessarily getting their own home but it just brings people together and can help them.

BUSINESS GOALS? I would really like to build a strong trail book. It’s getting there. Also continue on systems and set a good example in the industry to encourage more people to join to have a really good, strong, ethical industry. ✚

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INTEREST RATES Kim Mundy

Mixed pressures on mortgage rates this year

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ASB economist Kim Mundy runs a rule over the interest rate environment and provides some thoughts on what may happen this year.

T

he Reserve Bank has cut

the Official Cash Rate (OCR) by 1% since June 2015, taking it back to a historical low of 2.50%. We now expect two additional cuts of 25 basis points each over the second half of 2016, taking the OCR to a new low of 2%.

We expect the RBNZ to cut interest rates because inflation remains incredibly low, and the downside risks to an already benign inflation outlook have been growing recently.

If the OCR is reduced to 2%, as we are expecting, we are likely to see the floating mortgage rate and short-term fixed rates decline further. The floating mortgage rate generally moves in lock-step with each cash rate move.

If we are correct in our view that the RBNZ will reduce the OCR two more times, it should mean we see floating mortgage rates move roughly 0.5% lower within the next 12 months.

The six-month mortgage rate is also very heavily influenced by where the OCR is sitting.

While the 6-month rate has already fallen, it should reduce slightly more if the OCR is cut further.

Meanwhile, we expect longer term rates to rise modestly over 2016. Longer-term mortgage rates (particularly the 5-year rate) are influenced by offshore developments, particularly in the United States.

And, as widely anticipated, the US Federal Reserve raised interest rates in December. In fact, since this development we have already seen longer-term mortgage rates (both carded and specials) increase slightly.

However, these rates remain low by historical standards, around 2% below long-term

"On top of trying to minimise interest payments, a good mortgage strategy also needs to take into account an individual borrower’s cash flows, tolerance for uncertainty, and ability to deal with changes.”

averages. If US rates continue lifting in 2016 and long-term bond yields keep rising, we would expect to see further upward pressure flow through to New Zealand longer term fixed mortgage rates.

But right now, the combination of the RBNZ’s recent rate cuts, expectations of more easing and the relatively low global interest rates are helping keep all fixed carded and “special” offers below the floating rates. For example, at the time of writing, the one-year fixed special rate is 4.39% is one of the lowest recorded since 1998 and roughly 1.4% lower than the floating rate.

IDENTIFYING THE BEST STRATEGY As a borrower it is important to assess the likely path for interest rates, the risks to that outlook, and personal preferences for certainty and flexibility. That’s a lot to consider, but despite all the variables, there are still a number of things that we can identify. Here are some general points when considering short term rates vs longer term rates: The one- to two-year fixed rates are the cheapest rates at most main banks right now, around 1% below the floating rate. So borrowers can create some certainty, and obtain a lower rate by fixing for short terms rather than floating. Based off our assumption the RBNZ will cut rates further this year, there is some scope for floating and some short-term rates to be lower later this year.

However, if the RBNZ does not cut interest rates further (as the RBNZ signalled in the December MPS) short- term rates may rise from these levels.

All fixed rates are well below their longrun (10-year) average and the floating rate.

So by this simple measure, the fixed terms are reasonable value. Longer-term rates are influenced by the RBNZ, but are also at the mercy of global interest rates. And as mentioned, on balance we expect longer-term rates will rise from current levels.

When choosing a mortgage, it’s not just about finding the cheapest rate. One characteristic of floating mortgages borrowers enjoy is flexibility of repayments. Splitting the mortgage into different terms, or a mix of fixed and floating mortgages, are strategies for keeping some flexibility while locking in some interest rate certainty.

THE RBNZ’S LVR LENDING RESTRICTIONS AND BORROWERS The RBNZ introduced tighter loan-to-value (LVR) lending restrictions for Auckland property investors on November 1, 2015. LVRs were left unchanged for Auckland owner-occupiers, and

Source: ANZ Property Focus.

were eased outside of Auckland.

The practice of offering “specials” or lower rates on lending with equity in excess of the LVR restriction is likely to remain in place. Borrowers should monitor these “specials” when deciding what to do with their mortgage.

FINAL THOUGHTS The only certainty about the future is it is uncertain. Which mortgage rate turns out to be the ‘best’ will only be known in hindsight.

On top of trying to minimise interest payments, a good mortgage strategy also needs to take into account an individual borrower’s cash flows, tolerance for uncertainty, and ability to deal with changes in future mortgage payments as interest rates change. Borrower’s financial circumstances can changes too, and this needs to be taken into account.

Overall, it is important for borrowers to weigh up their own priorities and make the mortgage choice that looks best aligned with them. ✚ Kim Mundy is an economist at ASB Bank.

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PAA LEGAL

Clarifying qualification confusion

N

ot sure what the introduction of the New Zealand Certificate of Financial Services (NZCFS) means for your qualification standing or options? In simple terms, the New Zealand Certificate of Financial Services is an updated iteration of the National Certificate of Financial Services (NCFS).

Similar in name and similar in outcomes, they are both recognised as AFA minimum competency standards (of four available) but with two key differences: (1) the NZCFS incorporates new competency requirements including legislative changes both generally and for each strand of advice, and (2) the NZCFS can be completed and a full qualification awarded without completing the Financial Advice module (or Set B and C) for advisers choosing not to apply to be an AFA. See the table below.

the latest, most up-to-date qualification of the two, so if you have only dipped your toe in, it is likely that transferring to the NZCFS is the most straight-forward path. Here are a few options to consider and guidelines on what the transfer would involve.

Part way through the National Certificate?

Either continue and complete the other Standard Sets in the NCFS, or complete the bridging programme to the Core Knowledge module (likely an online multiple choice test),

You have options, which may or may not include switching to the NZCFS. On balance, it is

1. Completed more than half of the NCFS Complete the qualification.

2. Only completed Set E residential property lending Either continue and complete the other Standard Sets in the NCFS, or complete the bridging programme to the Mortgage Advice option (likely an online multiple choice test), and complete the Core Knowledge module.

3. Only completed set A core knowledge

The old to the new: How the qualifications differ in structure *Dark blue denotes compulsory papers; light blue denotes options Competency Core Knowledge Financial Advice

Investment Advice Mortgage Advice

Insurance Advice Trustees Banking Personal Lending

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NCSF

NZCFS

Set A – Core Knowledge Set B - Capstone Knowledge Set C - Professional Practise

Core Knowledge

Set D – Investment Specialist Set E – Residential Property Lending Specialist Set E – Insurance Specialist

Investment

Financial Advice Compulsory for advisers who wish to apply to be an AFA (Code Committee requirement)

Mortgage Advice

Insurance Life & Health Insurance Fire & General Trustees Banking Personal Lending

and complete your specialty strand module, i.e. mortgage adviser.

4. Completed either set B or Set C, or both Choose between transferring to the NZCFS using a bridging programme to complete the Financial Advice module (likely an exam and review of client files to assess against additional competency requirements) and your specialty strand module; or continue with the other Standard Sets you need to complete the NCFS.

*Bridging programmes will differ between training providers – get in touch with ProfessionalIQ or Strategi for more information.

Quick takeaways to know

▶ If you choose to complete the National Certificate (NCSF), enrol in the required papers sooner rather than later. While the qualification can be completed until December 31, 2017 it is likely that training providers will remove it from their offering before this deadline. ▶ Compulsory for AFAs and Best Practice for all advisers, your CPD plan should incorporate additional competency requirements as qualifications are updated; i.e. a 2016 qualification will include new competency requirements which were not covered by the same qualification in previous years. It’s a good idea to find out about the latest updates to your qualification in order to identify areas your qualification may not have covered, and ways to close the gap. Training providers have a growing range of options for addressing competency gaps, and there are plenty of in-industry options also. Think laterally and just ask the PAA if you need assistance. ▶ For existing registered AFAs, there is no need to complete the new qualification or bridging programme. However, from 1 January 2018, a calendar mishap resulting in an authorisation lapse will mean that you if you want to apply again for authorisation, you will need to complete the bridging programme and attain the NZCFS. Another reason to stay on top of your AFA Renewal date (the five year anniversary of which is coming up for many this year). ▶ Similarly, after January 1, 2018 new AFAs will only be eligible for authorisation if they have attained the NZFSC. ▶ Training providers – Professional IQ, Strategi and others – will be providing a range of bridging programmes, for both those who would like to transfer from the NCFS to the NZCFS, and for AFAs who would like to demonstrate that they have maintained their competency in line with minimum standards post 2017.

For more information please contact the PAA Learning and Development team on 09 600 5174 or visit paa.co.nz. ✚

INSURANCE

By Steve Wright

With different types of insurance cover available, taking the time to understand the detail will not be wasted.

I

ncome cover types: indemnity, loss-of-earnings, agreed value – what’s the difference?

Income cover comes in several different types. The difference between them centres mainly on how the benefits are calculated on disability, how they are taxed and how much clients can insure.

This is important because the different benefit calculations could result in a big difference in the amount your client receives at claim time. Then again it may make no significant difference; it all depends on the client’s circumstances at claim time. None of us has a reliable crystal ball so this uncertainty makes it tricky sometimes to settle on a recommendation. Don’t be surprised to feel like it’s more a question of selecting the lesser evil.

For these purposes we will concentrate on how the disability benefit is calculated but please be aware some providers may include other differences between the different types of income cover they offer.

Indemnity cover: As the name suggests, indemnity income cover pays benefits based on the client’s income at claim time (predisability income). This pre-disability income is defined in the policy wording and typically (but not always) defined as the average monthly income earned for the best 12 consecutive months during the previous three years. Other definitions include the monthly average for the last year or last three years for example. How the pre-disability income is calculated, along with

030

Assume, for example, the client’s sum insured and pre-disability monthly income is $6,000 and offsets are $4,000. The totally disabled client will receive $500 from their income cover policy ($6,000 x 75% = $4,500 - $4000 = $500).

If the client’s pre-disability income is less than their income cover sum insured their benefit will still be 75% of actual pre-disability income even though this is less than what they have been paying for – this is the nature of ‘indemnity’ insurance, you can be over insured! If the client’s pre-disability income is greater than their income cover sum insured their benefit will be limited to a maximum of their sum insured even though this may be less than 75% of their pre-disability income – this is the nature of insurance. You can never get more than what you pay a premium for – the sum insured!.

❝ There is a widely

held misconception that loss-ofearnings style products may pay more than the sum insured if incomes have gone up, but I have yet to see policy wordings that allow this. ❞ what ‘income’ means and what income offsets apply, are important matters, so you should take the time to understand them as they will differ between providers.

The disability benefit formula is typically: 75% of the client’s pre-disability income less any offsets (ACC weekly compensation for example). Offsets will also be provided for in the policy wording). In other words: A x 75% - B (where A is pre-disability income as calculated per the policy definition and B are the permissible offsets).

Loss-of-earnings cover: This is also an indemnity style product in that benefits are also calculated typically as 75% of the client’s actual pre-disability earnings as defined (so could be less than the sum insured if income has gone down over time) and limited to a maximum of the sum insured. (There is a widely held misconception that loss-of-earnings style products may pay more than the sum insured if incomes have gone up, but I have yet to see policy wordings that allow this!).

The main difference between loss-ofearnings, and let’s call them ‘pure indemnity’ products, is the way offsets are dealt with. If there are no offsets, loss-of-earnings contracts will generally pay the same as Indemnity contracts, namely 75% of pre-disability income.

The disability benefit formula for loss-ofearnings looks something like this: (A-B) x 75% (where A is pre-disability income as calculated per the policy definition and B are the permissible offsets). Using our previous example (client’s sum insured and pre-disability monthly income is $6,000 and offsets are $4,000) the client will receive $1,500 from their income cover policy ($6,000-$4,000=$2,000x75%=$1,500). For this reason, loss-of-earnings contracts are usually a bit more expensive than ‘pure indemnity’ contracts.

Agreed value: As the name suggests, agreed value income cover does not base the disability benefit on actual pre-disability income. The benefit paid on total disability is the sum insured, the ‘agreed benefit’, less offsets (yes, offsets do apply with agreed value income cover contracts too). This means that if the client’s income has gone down and is less than the sum insured when they become disabled, their disability benefit will still be based on the sum insured even though this is higher than their actual pre-disability income.

This certainty of benefit is valuable, particularly for people whose incomes fluctuate, like those who are self-employed for instance. Please note that with some agreed value contracts partial disability benefits effectively become ‘indemnity’ in nature.

The tax situation: My understanding of the tax laws and how the IRD interpret them currently is as follows: where primary income cover benefits paid are based on actual earnings at claim time, the benefit is taxable. Accordingly, indemnity and loss-of-earnings disability benefits are taxable. Agreed Value benefits, being based on the ‘agreed’ sum insured, not pre-disability income, are not taxable (and for this reason premiums are not deductible). Advisers must take care to warn their clients on disability claim with indemnity and loss-of-earnings contracts that claim benefits are probably taxable. Insurance companies paying income cover benefits do not deduct the tax due, so clients on disability claim under indemnity and loss-of-earnings policies must make their own arrangements to file a tax return and pay any tax due. Clients who are not accustomed to filing tax returns will be particularly at risk of failing to do this and winding up with a knock at the door from the IRD. Sums insured limits: To avoid the moral hazard that replacing 100% of income brings, insurers generally allow no more than a proportion of the client’s income to be insured (called the replacement ratio). For indemnity and loss-ofearnings policies this limit is 75% of income. For agreed value, because the benefits paid are not taxed (and to result in a similar ‘after tax’ benefit) the replacement ratio limit is lower, typically around 62.5% and sometimes down to 55% at higher incomes.

Financial justification: Before you start thinking that agreed value must therefore always be the way to go, insurance companies generally require clients to prove continuity of income before they will allow agreed value cover. Proof of income (typically financial accounts for the last three years for selfemployed) will often be required.

Best of both worlds? A relatively recent development is income cover that combines the loss-of-earnings approach with agreed value. Clients typically get the benefit calculation which delivers the higher benefit to a maximum of the sum insured. This brings certainty of benefit regardless of pre-disability income but does make the product more expensive. As this income cover type provides a combination loss-of-earning and agreed value benefit, financial justification is required and the benefits appear to be taxable (allowing the insurers to offer a 75% replacement ratio).

Which should you recommend? As with all insurance products, your advice should be based on what is most appropriate for your client and their specific circumstances. All the various pros and cons of the different types, including all the other income cover benefits we haven’t discussed here, inflation indexing, additional critical illness, specific injury, TPD benefits, and so on must all be considered and weighed-up. ✚ 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

All Power to you – dealing with attorneys Power of attorney works in various ways. But it is problematic that signing by another person under a power of attorney can always be relied on, writes Jonathan Flaws.

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P

eople move around a lot and are often absent from the place where they are engaging in business activities.

Some people don’t move around a lot but still engage in business activities in places where they are not physically present.

If the business activity is required to be recorded in writing and the parties have not consented to electronic signing, the absence of the person wishing to be bound does not prevent the signing of the written record of their intention to be bond, if the person has appointed someone to sign on their behalf.

We call that other person an attorney and the document that legally empowers them to act on behalf of another person is called a power of attorney. But can signing by another person under a power of attorney always be relied upon to legally bind the named person assuming the liability or obligation?

TYPES OF POWERS OF ATTORNEY There are several types of powers of attorney: 1. General power of attorney.

2. General power of attorney and delegation of trustee powers.

3. Specific power of attorney.

4. Irrevocable power of attorney.

5. Enduring power of attorney for property.

6. Enduring power of attorney for care and welfare.

The most common is the general power of attorney and the most common form of this document is the Auckland District Law Society form that incorporates the delegation of trustee powers. This form does not specify the activities that the attorney can engage in on behalf of the donor (the name given to the person who appoints the attorney). It also permits the attorney to exercise any powers that the donor has as a trustee of a trust.

The general power will continue to operate until it is revoked by the donor – either by the donor’s death or incapacity or by the donor revoking the appointment in writing.

The specific power of attorney is used when the donor wishes to limit the activities of the attorney or limit the period during which the powers can apply. Often a company will grant a specific power to enable a specific transaction to proceed within a specific time frame.

An irrevocable power of attorney is one that is given as part of a commercial transaction under which consideration has flowed. The best example of this is the power granted in a loan agreement secured by a caveat. This power enables the lender to sign and register a mortgage to replace the caveat.

It is irrevocable because the attorney is the party to the loan transaction and has only provided the loan funds on the condition that it be granted the security it has given consideration for the power.

Unlike the other types of powers of attorney,

enduring powers of attorney are specifically provided for by legislation – the Protection of Personal Property Rights Act 1988. They are reburied to follow a prescribed form and be signed in a particular manner, namely before a solicitor who is required to confirm the advice given and that the donor understood or appeared to understand the advice.

Unlike a general power of attorney, the enduring power is not revoked when the donor lacks legal competency. You will find that most powers of attorney given by seniors are of the enduring power variety.

THINGS TO WATCH OUT FOR So if all powers are not created equal, what are the traps that you can fall into if you allow an attorney to sign on behalf of another person? ▶ Attorneys can’t act as a director Attorneys can’t do everything the donor can do. For example if I, as a solicitor give a person who is not a solicitor my power of attorney then they cannot act as a solicitor in my place. That’s obvious because to act as a solicitor you need to be qualified and hold a practising certificate.

Not so obvious is that my attorney can’t also act in my place as a director of a company.

For much the same reason. A director is also a creature of statute and the Companies Act only permits a person who has been appointed a director by the company in accordance with the Act or the company’s constitution to act as a director.

The way to overcome this issue is to appoint the attorney as an alternate director or have the company appoint the attorney as an attorney of the company. ▶Revocation of power General powers of attorney can be revoked.

So can an enduring power of attorney if the donor still has legal capacity.

For this reason it is customary to ask the attorney to also sign a certificate of nonrevocation at the same time as signing the document on behalf of the other person.

Section 20 of the Property Law Act 2007 provides that a person dealing with an attorney can rely upon a certificate of nonrevocation in the prescribed form provided the person is dealing in good faith and has no actual notice of revocation. For example, death revokes a general power of attorney so if you know that the donor is dead, you cannot rely upon the certificate of non-revocation. ▶ Limitation within the power You need to check the wording of the power of attorney to ensure that there are no words of limitation that make the exercise conditional upon certain events. For example, powers will often state that they are only exercisable if the donor is overseas. If the donor is not overseas then the power is not valid.

This is a common trap where the attorney is acting under the delegation of trustee powers provision.

Enduring powers of attorney may state

that they are not effective until the donor loses capacity. The loss of capacity is to be determined by an appropriate medical practitioner. Enduring powers can be exercisable for property or for personal care and welfare – or both. If the power is only for personal care and welfare, you may not be able to rely upon it for property dealings.

If the enduring power of attorney for property is given to two attorneys who must act jointly and one of them dies – the power is revoked and the other cannot act alone.

OVERRIDING DUTY OF CARE – RESPONSIBLE LENDING If you look for the word “attorney” in the Credit Contracts and Consumer Finance Act 2003, or in the responsible lending code, you are unlikely to find it.

This means that the duty of care that is owed to the borrower and guarantor by the lender is owed to that person. It is arguably not owed to that person’s attorney.

A responsible lender and a mortgage broker dealing with an attorney will therefore need to be satisfied that the attorney is acting on the instructions of the donor for the lender owes a duty of care to act responsibly to that donor.

This doesn’t mean that you have to meet with the donor – this could be impossible if the person is overseas – but it does mean that you need to be satisfied that the donor is aware of and behind the activity. The Act requires you to assist the borrower to make an informed decision. If you are providing the assistance or advice to the attorney, you need to be satisfied that the information is being passed through to the donor.

Each case may well be different and the lengths you need to go to get comfortable on these matters will differ case by case. You should always document and record what these are.

MULTIPLE BORROWERS WITH ONE ACTING AS THE .ATTORNEY OF THE OTHER – .CONFLICT OF INTEREST A common example of the use of powers of attorney occurs where there are multiple borrowers and one of the borrowers is overseas. In this case it is likely that you will be dealing with the local party borrowing and that party may well hold a power of attorney from the other.

Ask yourself what actions you should take to ensure that the overseas borrower is aware of the transaction and really is behind it and understands what is happening. If that person does not understand English have you taken sufficient steps to assist that donor to understand and is it sufficient to rely upon comments from the attorney who, as the other borrower, has a slight conflict of interest? ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.

033

Intelligence

Slowing signs in property market ANZ provides an independent appraisal of recent developments in the property market.

W

hile we expect solid growth over 2016, the risk profile is elevated. Global nuances and signals are poor, with China and commodity prices at the epicentre. The risk profile remains skewed towards the OCR falling further still.

REGIONAL HOUSE PRICES (figure 1) House prices are falling in Auckland (-2.4% quarter on quarter seasonally adjusted on the REINZ stratified measure), as affordability constraints and the impact of new taxation criteria and tighter speed limits to slow investor demand hit home. Low mortgage interest rates, high net immigration and the ‘ripple effect’ of stronger Auckland house prices have supported other regional areas. Annual house price inflation has strengthened to 7.9% in Wellington and 14.9% year on year in other North Island areas over the last 12 months. Double-digit increases in median sales prices were evident in the upper North Island and Hawke’s Bay. Christchurch prices were up close to 6% over 2015, with prices in the remainder of the South Island up 11% year on year.

MORTGAGE INTEREST RATES AND RENTAL YIELDS (figure 2) Nationwide rental yields (expressed as the ratio of annual rental payments to house sales prices) have trended lower since the early 1990s, and are hovering around record lows.

The nationwide rental yield is around 4%, around half what it was in the early 1990s. The fall in yields has coincided with a shift lower in nominal mortgage interest rates, which has helped households to service more debt.

Auckland yields are below the nationwide average, whilst yields are generally above the nationwide average for other regions, including Canterbury.

MORTGAGE APPROVALS & HOUSING CREDIT (figure 3) Weekly housing loan approval figures are published by the RBNZ. These tend to provide leading information on the state of household credit and housing market activity. The mid-2015 surge in approvals preceded the strengthening in mortgage borrowing and housing market lift as investors rushed to get into the market prior to the looming Government and RBNZ changes. Approval values have essentially flat-lined over recent months and signal a plateauing in housing credit growth, albeit at reasonably elevated levels.

034

* Figure 1: REGIONAL HOUSE PRICES

* Figure 2: MORTGAGE INTEREST RATES AND RENTAL YIELDS

* Figure 3: MORTGAGE APPROVALS & HOUSING CREDIT

A MUST-READ FOR ALL PROPERTY INVESTORS

T

o be a successful property investor you don't just have to buy well. You have to manage your property and its tenants well too.

One of the best tools to help property investors is this book: The Complete Guide to Land-lording .

It is written by Brian Kerr.

Brian is a successful investor in his own right, but after spending 16 years as a mediator, he is also highly experienced in the workings of the Tenancy Tribunal.

This book is a must-have for all investors. If you have a problem or a question around managing tenants then it's likely The Complete Guide to Land-lording will have the answer for you.

The book has brilliant tips and case studies are plentiful.

TMM Mortgage Adviser Special offer

If you would like to give this book to your property investor clients contact us to arrange special pricing

To arrange a special order for your clients call Dianne on

0800-345675 To buy individual copies of the book call or go to www.intelligentinvestor.co.nz