TMM - The NZ Mortgage Mag Issue 5 2014

Issue

05

2014

Return of trails changes the adviser model INCREASE REFERRALS AND GROW YOUR BUSINESS

RATES NEWSS

A HIKE AND A PAUSE

CUSTOMER SURVEYS TOP TIPS AND ADVICE

CONTENTS UPFRONT 04 EDITORIAL

We live in interesting times.

05 NEWS

The catch in cash backs, an update on P2P lending and businesses on the growth path.

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

28

16

Westpac is the first large lender to bring back trail commissions in New Zealand. TMM brings you all the details.

FEATURES

Richard Stevens

COLUMNS

14 HOUSING COMMENTARY

22 PAA NEWS

16 LEAD FEATURE

24 SALES AND MARKETING

The housing market is in winter mode. Susan Edmunds tells us more.

Philip Macalister brings you an exclusive report on Westpac’s reintroduction of trail commissions and more.

28 MY BUSINESS:

RICHARD STEVENS

Phil Campbell catches up with Wellington-based mortgage adviser Richard Stevens, who reflects on his 30 years in the finance industry.

30 REFERRALS

TMM brings you some top tips to help increase business referrals.

Several advisers share their thoughts on the importance of listening and communication skills.

Paul Watkins explains how to use surveys to solicit valuable feedback from customers.

26 INTEREST RATES

ABS’s Chris Tennent-Brown brings you the latest interest rate information and looks at future movements.

32 LEGAL

Our resident legal expert Jonathan Flaws looks at the Credit Contracts and Consumer Finance Act and what it means.

34 INSURANCE

Steve Wright addresses the popular misconception that insurance companies don’t pay out on claims.

EDITOR’S LETTER

We live in interesting times

T

he well-known saying: “May you live in interesting times” is reputed to be the English translation of an ancient Chinese proverb – one that sounds like a blessing, but is intended as a curse, wishing trouble and disorder into a person’s life.

Interestingly enough, the saying gained traction in the 1930s and probably originated either with the Irish, the Scots, or in the US. According to the Yale Book of Quotations no authentic Chinese translation of this curse has been found, while others suggest “Better to live as a dog in peaceful times, than live as a man in turbulent (or chaotic) times” is the closest verifiable translation from a Chinese source.

Regardless of the origins, we are certainly living through interesting times in the mortgage broking industry. Westpac has joined Sovereign and RESIMAC as the only lenders (so far) to offer trail commissions to advisers.

This is obviously not a curse, but good news for mortgage advisers. Trail commissions potentially increase advisers’ earning potentials over the life of each client’s mortgage with Westpac offering a 20 basis point trail commission, versus the current $150, for each loan advisers help to re-fix for a period of two years.

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Trail commissions should also be good news for Westpac (why else would they reintroduce them?) and help to improve customer retention and reduce churn in the market – while recognising the actual value of the work advisers do to help retain this business.

Westpac’s move is, however, one that the other major banks are probably cursing. It will force them to seriously consider whether to introduce trail commissions and bring the industry on a par with Australia. Westpac hopes to “redefine the mortgage adviser market in New Zealand” with this move – and it has the potential to do so.

For this issue of TMM, publisher Philip Macalister secured an exclusive interview with Westpac’s director of third-party banking, Kylie Kneale. We take a closer look at trail commissions and ask Westpac about their plans (see our lead article on P16).

Other factors also make for interesting times in the industry. The LVR restrictions affecting new entrants; the longer-term prospect of rising interest rates affecting all players in the market; and low rental yields, relative to other investment opportunities, affecting the attractiveness of certain investment properties (see P11 for more on this last point).

Another Chinese saying: “Heroes (or leaders) are made during turbulent times” puts it nicely into perspective. Advisers can either see these interesting times as a curse – or they can choose a more positive outlook and view them as challenges that, if approached intelligently, could become a competitive advantage.

The trick to thriving during interesting times is to change your game plan accordingly. You should find this issue of TMM full of useful information to help you do just that. We focus on the importance of communication skills (see P22), provide some tips to increase wordof-mouth referrals (see P30) and Paul Watkins explains how to use surveys to get feedback from clients to improve your business (see P24).

May you make the most of these interesting times!

Sharon Davis

Editor

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

NEWS

THE CATCH WITH CASH BACKS C

ash contributions, the popular incentive offered by banks to attract new home loan clients, has been widely criticised for encouraging churn in the market.

To counter this a number of banks now ask customers to sign an acknowledgement form, in which they agree to pay back the cash contribution if they move their business elsewhere within a particular period – generally two years.

From the beginning of July this year, Westpac introduced a two-year deed of acknowledgement for customers who qualified for their $3,000 cash back offer.

ASB introduced this requirement soon thereafter for clients accepting a cash contribution of $3,000 or more. An ASB bank spokesperson confirmed: “Consistent

with industry practice, effective 21 July, cash contributions of $3,000 will require customers to agree to maintain their main banking relationship with ASB for a period of two years from the date of the loan.”

But the practice is not as consistently applied across the major banks. A spokesperson for ANZ said the bank “may require customers to sign a deed of acknowledgement for the contribution we provide them. Like with other banks, this deed of acknowledgement would require customers to repay the contribution if they move their banking and home lending from ANZ to another bank within a specified period.”

BNZ told TMM: “The use of an agreement to pay back a loyalty payment is not standard at BNZ but we do ask customers to sign this type of document in some circumstances.” ✚

NEWS

HEARTLAND’S REVERSE EQUITY MORTGAGE POSITIONED TO TAKE OFF I

n a recent earnings update Heartland announced that its newly acquired New Zealand and Australian home equity release mortgage businesses, Seniors Money International Limited, contributed approximately $1m of its anticipated $36m net profit after tax.

“We recently bought the businesses – three months ago – so it’s early days in terms of its performance,” says Simon Owen Heartland’s CFO. “Net profit after tax is around $1-million; that includes $1.2-million in acquisition costs, so there’s a once-off cost in that piece.”

Heartland’s new lifetime mortgage business had not been writing new business for a couple of years before the purchase. After arranging new funding Heartland has recently started

advertising and marketing. “We’re just starting to turn the businesses around now,” says Owen.

“We acquired the book in April and have been up and running for three months. It is a fantastic business that will come into its own in terms of the aging demographic,” says Heartland’s head of retail, Chris Flood.

“We’re focused on growth, and the New Zealand book grew for the first time last month.

Because the product has not been promoted since the global financial crisis there is a backlog of interest in the product.”

Seniors Money International has already received some referrals from brokers and runs an accreditation programme to bring advisers up to speed on the product. ✚

P2P LENDING PROGRESS UPDATE T

here has been little movement in peer-to-peer licences since our report in the last issue of TMM. The Financial Markets Authority (FMA) has received two applications so far.

“Harmoney was recently granted a peer-topeer lending licence, and there is one other application,” says Johanna Bennett, senior communications adviser for the FMA. “The other applicant has still to provide the information required to progress their application.”

The FMA has granted two equity crowdfunding licenses, to PledgeMe and Snowball Effect, and says that as far as peer-to-peer licenses go there are half a dozen potential applicants at any one time. “The situation is fluid, as people can express an interest but then not necessarily follow up with an actual application,” says Bennett. ✚

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" The situation is fluid, as people can express an interest but then not necessarily follow up with an actual application."

The median income for NZ retirees is just $20,228 per annum*.

At Heartland Bank we set out to solve a problem – many retirees aged 65 or over who own their own homes have a lot of money tied up in their property, but little left over once the day-to-day bills are paid for.

A Heartland Home Equity Loan** works by allowing your clients to borrow against the equity in their home without having to sell it.

It’s simply a mortgage with no need to make regular repayments – designed specifically for seniors. * Statistics New Zealand – New Zealand Income Survey: June 2013 Quarter ** Heartland Bank Limited’s lending criteria, conditions, fees and charges apply.

To find out more and explore how a Heartland Home Equity Loan** could work for your clients, try our online calculator at www.heartland.co.nz or call us on 0800 488 740.

NEWS

LIME GROUP ON THE EXPANSION PATH T

he Lime Group, based in Cambridge in the Waikato region, has plans to position itself as the top mortgage company in the Bay of Plenty / Waikato region.

They opened a new office in Hamilton in June this year and now have a team of five brokers and five support staff.

The Waikato market is very buoyant, helped by the new Velodrome construction and the high-performance athletes now attracted to the area says Phil Caldwell, one of the Group’s directors.

He attributes their growth and success to a client-centric focus and their unique straighttalking, down-to-earth professional approach, “whilst always maintaining a service level second to none.” ✚

" The Waikato market is very buoyant, helped by the new Velodrome construction and the high-performance athletes now attracted to the area."

Phil Caldwell

S&P POSITIVE OUTLOOK SUPPORTS AVANTI’S SLOW AND STEADY GROWTH PLANS S

tandard and Poors (S&P) recently revised the outlook on Avanti Finance Limited from stable to positive on the strength of the finance company’s decision to diversify into lower-risk prime residential mortgages as well as it’s prudent expansion plans based on borrowed funds from Westpac.

Avanti’s BB/B rating was affirmed. Although Avanti specialises in lending to high-risk retail customers S&P says the Auckland-based company has a more stable credit risk profile relative to most of its domestic peers, and expects key credit-quality metrics to improve with the move into residential mortgage .market.

"We believe the new initiatives should improve business stability, and that it is supportive of a higher rating if the finance company’s financial profile – particularly

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its credit metrics and capital level – are maintained,” says S&P credit analyst Harry Hu. “Standard and Poors has been rating us for the past four years, so this is a confirmation that our slow and steady growth plan is on the right track,” says Glenn Hawkins, Avanti Finance’s director. “We’ve always done first loans and bridging finance, but we recently restructured our financing and can now offer longer-term loans and financial solutions to our clients.”

The key to Avanti developing a broader finance business has been restructuring its finance with Westpac. “We’ve always planned strategically, secured the financing and then made it happen. Now we have a securitisation facility with Westpac, which is similar to what the larger finance companies have in place,” says Hawkins. ✚

NEW BOARD FOR HARMONEY

Tracey Jones

cks

David Fla

A

uckland-based Harmoney, the first company to receive a peer-to-peer licence from the FMA, has appointed the following board members: Bell Gully partner, David Flacks, who is also on the board of Vero Insurance New Zealand; technology entrepreneur and current chief executive of Localist, Christina Domecq; and Tracey Jones, CFO/COO of Tappenden Holdings Limited, one of New Zealand’s largest private investment portfolios.

“The new board appointments bring together three disciplines that are essential to the success of any peer to peer lending platform,” says Neil Roberts Harmoney’s founder, director and chief executive. “Funds management to ensure investor returns, the passion for delivering best practice technology and strong legal compliance especially in this newly enabled industry that will be closely monitored by the Financial Markets Authority. All are key areas that will define and shape Harmoney’s performance.”

The new board joins former GPG chairman, Rob Campbell, who is Harmoney’s chairman.

Harmoney is currently fine tuning systems and operating policies and expects begin trading very soon.

Product manager, Dan York, says that Harmoney "will be launching soon with a personal loan product, lending up to $35k." ✚

09

NEWS

MORTGAGE BOOK GROWTH HELPS DRIVE PROFITS FOR ANZ, ASB N

et profit increased by 21% to $1.26-billion for ANZ Bank New Zealand Limited, for the nine months to the end of June, in part due to an increase in home loans.

The lender increased its mortgage loan book by $3.71-billion year-on-year to $51.54-billion. Non-housing loans increased by $1.31-billion to $39,24-billion and credit card advances rose marginally from $1.44-billion to $1.55-billion for the same period. ANZ also improved the quality of its loan book with a $26-million impairment release, down on $45-million for the previous year.

The local unit of the Melbourne-based bank, which includes all of ANZ’s local operations, increased cash profit by 19% to $1.27-billion for

the nine months to 30 June.

ASB increased its cash profit by 11% year-onyear to $776-million for the full year to the end of June, also in part due to a boost to its mortgage business.

The New Zealand banking unit of parent Commonwealth Bank of Australia increased its mortgage loan book by $1.27-billion year-on-year to $41.58-billion to the end of June, and recorded a $1.27-billion increase in business and rural lending to $17.56-billion for the 12 months reported. Customer deposits also increased, rising by $2.43-billion to $40.15-billion at the end of June.

ASBs impaired loans remained unchanged at $56-million. ✚

GROWTH IN CHINESE PROPERTY OWNERSHIP EXPECTED T

he arrival of two of the big four state-owned Chinese banks in New Zealand combined with the relaxation of capital controls in China has set the stage for a potential growth in Chinese property ownership.

Chinese state-owned banking giant, Industrial and Commercial Bank of China (ICBC), was the first Chinese bank to be licenced to open a New Zealand arm. ICBC New Zealand, a fully-owned subsidiary of China’s biggest bank, was officially registered in November last year. ICBC offers both corporate and personal

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banking services, including home loans.

On 15 July this year China Construction Bank (New Zealand) Limited, a fully-owned subsidiary of state-owned China Construction Bank (CCB), became the second Chinese bank to receive its registration from the RBNZ. CCB will focus on establishing its wholesale banking services over the first two years, before expanding into retail banking. New Zealand’s twentyfourth bank also plans to participate in largescale infrastructure projects, including the rebuild in Christchurch. ✚

RENTS FALL HOSTAGE TO INFLATION

Rodney Dickens

S

hamubeel Eaqub is moving to Auckland in September. But don’t expect to see him in a real estate agent’s office, trying to buy a home.

The NZIER principal economist is scathing about Auckland house prices.

“I’ll be renting because rental yields are so low,” he says.

It doesn’t make sense for him to buy the house he’ll live in, he says, and he suggests the same could be said for would-be landlords in the country’s biggest city.

“Investors have to weigh up rental yields relative to their outgoings. In many parts of New Zealand, that still makes a good investment case, but in many parts of Auckland, it doesn’t.

There are still pockets of value but Auckland is very, very expensive.”

But while Auckland investors do not get the rental yields they might if they put their money into properties in other parts of the country, the capital gains they have experienced over the past seven years leave the other regions in the dust.

Real Estate Institute statistics for July show just how much Auckland’s prices have soared compared to the rest of the country. Its data compared regions’ June 2014 median price

to their median price in June 2007.

Auckland’s price has increased 35% over that period to $600,000, from just over $400,000.

Quake-hit Canterbury’s increased by 34%, to just over $400,000 from less than $300,000.

Many of the other regions are reporting very similar median prices to 2007’s, or even price falls. Manawatu/Wanganui, Southland and Northland were all still down on their 2007 medians. Waikato/Bay of Plenty, Wellington, Otago and Hawke’s Bay were only fractionally above.

Commentator Rodney Dickens, of Strategic Risk Analysis, said the Government’s housing initiatives could be a game changer for Auckland, if they made a difference to the number of homes available.

The Government is negotiating housing accords with councils around the country, to fast track development. Sixty-three special housing areas for 33,500 homes have already been established under the Auckland Housing Accord.

Dickens says: “The key thing in Auckland’s price rise has been a lack of supply of sections, and rising section prices. The Government initiatives are designed to change that quite dramatically.”

He says interest rates moving back to more normal levels after years of historic lows, could also expose affordability problems. “Two of the major things that drove the boom are going in the opposite direction.”

Auckland landlords should look at increasing their rents to offset rising interest rates and combat the falling yields that kept people like Eaqub on the renting side of the equation, he says.

“One of the great puzzles over the last decade has been the yawning gap that has opened up between the national average house price and the national average annual gross rental income.”

Dickens says rental inflation had become a hostage of low general inflation as slow income growth made it harder to increase rents.

“For investors, there’s the issue of getting squeezed, not being able to get rent increases to offset interest rates. [There’s the question of] whether yields are high enough to stack up, especially in Auckland. There’s the possibility of falling prices, negative cash flow – it could be a challenging couple of years.” ✚

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PEOPLE

PEOPLE ON THE MOVE be. “With so many pitfalls along the way, it’s important to have someone on your side to help you through the process. I believe in keeping my clients informed every step of the way, ensuring they have a clear understanding of the situation,” she says.

A local Christchurch resident, well-known for her honesty and integrity, Hobill is easy to talk to and prides herself on a transparent approach. She has a genuine interest and concern in finding a solution that fits her clients’ needs, and believes her role is an important link in the lending process.

Stuart Matheson's personal assistant and has extended her duties to loan writing.

She has more than 20 years experience in the financial services industry including working as a former mortgage adviser and winning the Regional Mortgage Broker of the Year title in 2003.

Peter Linford Phil Caldwell

Mortgage Express adds two advisers

Mortgage Express has appointed Peter Linford as a mortgage and insurance adviser covering South and East Auckland.

Originaly from the UK, Linford is a former business owner, an experienced mortgage adviser, and a self-proclaimed problem solver, tackling complex problems head-on. “Finding a solution to a complicated mortgage case is particularly rewarding. I thrive on complex problem-solving, using my initiative and thinking outside the square to find a solution for my clients,” he says.

“We’re really pleased to have Peter join our team,” says Mortgage Express GM, Sarah Johnston. “He brings a wealth of experience and an outstanding customer service ethos.”

Along with mortgage advice for home loans and commercial loans, and insurance advice including income protection and critical illness, Linford specialises in difficult to place cases; in particular clients who have had issues in the past and require credit history clean up.

The company has also appointed Prue Hobill, as a mortgage adviser in Christchurch. As a former salesperson and manager within a lending environment, she brings more than 26 years’ experience to the team at Mortgage Express.

A hard worker who believes in putting her clients’ best interests first, Hobill understands just how tough the mortgage process can

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Top broker omission

Sam Hawke

Four advisers join the Loan Market team

Megin Wilton joins Loan Market as part of Bruce Patten's team in East Auckland.

Wilton has more than 12 years experience in the financial industry. She has recently returned from Australia where she worked as a successful mortgage adviser for Loan Market for past fiveand-a-half years.

Wendy Wang is another addition to the East Auckland team. After six months as a personal assistant in the growing migrant team, Wang has upskilled and moved into loan writing.

Straight out of university, Sam Hawke is a new entrant to the industry in Dunedin. Having served his six-month apprenticeship under Gary Beattie and Sally Thomson he is now fully accredited as an RFA and writing his own deals.

Auckland-based Cherie Matches has also joined the company. Matches works as

We accidentally overlooked one entry for TMM’s Top Broker awards, published in our last issue.

Phil Caldwell, from the Lime Group in Waikato, personally originated $73.5m in the 2014 financial year – which would have seen him in sixth place in the Top Broker awards.

The Lime Group, as a whole, wrote a total of $141.1m for the period with two of the group’s brokers, Matt Edwards and Gareth King, also in contention for places amongst the Top 30 Brokers.

Caldwell has been a mortgage adviser since July 2003, and the highest loan writer in the region since 2004. He is confident of growth in the industry over the coming year, and expects some exciting times ahead as lenders “place themselves to compete with Westpac’s trail commission model, assuming they want to play in that space and attract more business.

“I am personally extremely happy with the reintroduction of trail commission, as this will recognise the service systems that my company has had in place for many years - to re-fix and review all clients’ home loons when their fixed rates are up for review. We are now going to be rewarded for retaining the banks existing business, rather than making efforts to refinance them to a new lender if there appears to be the potential opportunity or desire from the client to do so,” says Caldwell.

Maria Thackwell

Advanced Mortgage Solutions adds two new staff members Christchurch mortgage broking company, Advanced Mortgage Solutions (AMS), has moved into growth mode after successfully trading through one of New Zealand’s most

challenging property and lending markets after earthquakes hit the city in 2010 and 2011.

Maria Thackwell has joined the team as a mortgage adviser. She has 26 years experience in corporate banking, and was one of Westpac’s top mobile mortgage managers in the country.

Thackwell ran her own successful broking business for three years before joining Advanced Mortgage Solutions and brings a wealth of experience to the business.

“My approach might be friendly, casual and outgoing, but I take my job very seriously.

My customers are incredibly important to me,” says Thackwell.

Risk insurance specialist Brennen Lewis, a registered financial adviser, has also recently joined the team. Advanced Insurance Solutions Ltd has been established and will operate alongside AMS to provide existing and new clients with comprehensive insurance solutions as well as ongoing expert financial and insurance advice.

“I have built Advanced Mortgage Solutions, since 2006, to what it is today and it is exciting to be adding to the team. Both Maria and Brennen have years of experience in the industry and

Brennen Lewis are a good fit, as they have bubbly personalities and are very focused on customer satisfaction.

The company is looking to expand further and recruiting Maria and Brennen makes for a great start,” says AMS director and registered financial adviser, Scott Miller. ✚

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HOUSING COMMENTARY

By Susan Edmunds

Housing market in winter mode Will the low listing and muted activity last?

S

ales turnover is down and houses are sitting on the market for weeks when they might previously have been snapped up in days.

Prices are still increasing and the rate of inflation is slowing. But with migration soaring to record levels, and building activity not keeping pace, how persistent will this slowdown be?

ASB chief economist Nick Tuffley said house price growth was unlikely to pick up significantly until the Reserve Bank cuts interest rates again. He said things would probably be quite flat until 2016, despite supply shortages in Auckland and Christchurch.

“There’s further to cool because interest rates have not reached their peak yet, “he said. “The big picture is that in a place like Auckland, house prices are very stretched compared to people’s incomes. You do need to go through a period

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where prices are pretty flat so incomes get a chance to catch up over a period of years. It’s a real constraint on price growth in a market like Auckland because of the fact prices have got so stretched compared to incomes.”

That constraint started to hit in the last tightening cycle as interest rates hit their peak, he said, and debt servicing costs pushed buying out of more people’s reach.

The same would happen again over the next tightening cycle. "It’s going to change the affordability equation a lot more, even once the LVR restrictions are removed… particularly at the entry level where buyers have smaller deposits.”

REINZ statistics show the 5893 homes sold in July was up 2.3% on June this year but down 13% on July last year. The national median price was $416,000 for the month, down $11,250, or 2.6% on June but up $31,000 on July 2013.

Chief executive Helen O’Sullivan said the market was “firmly in winter mode”, with low listings and muted activity. “Sales volumes picked up a little in July compared to last month but this is about in line with the normal seasonal pattern.”

LVR restrictions were having a big impact on regional New Zealand in particular, she said.

“The reported lack of able buyers is filtering up the price points and on to vendor behaviour. In this context it is worth noting that Auckland and Canterbury/Westland accounted for more than 100% of the increase in the national median price between July this year and July last year, a further indication that the ‘national price’ is being driven by these two regions alone.”

The chief executive of the country’s biggest real estate agency, Harcourts, said it had seen the impact of the rules on the regions, too.

Hayden Duncan said written sales were down

REINZ SALES: DOWN Turnover is down 13% on the same time last year.

"Construction in Auckland and Christchurch is desperately needed to ease demand and ease rising prices.

The market elsewhere can only be helped by a removal of the LVR restrictions."

– Hayden Duncan in the central, Wellington and South Island provincial regions, although average prices had not been affected. “This indicates it is buyers at the lower end of market who are unable to make a purchase.”

Sales had also dropped in Auckland, he said, but that was more because of a hesitation from vendors, who were worried they would not be able to find another property to buy.

“Construction in Auckland and Christchurch is desperately needed to ease demand and ease rising prices. The market elsewhere can only be helped by a removal of the LVR restrictions, allowing first-home buyers the freedom to step on to the property ladder,” Duncan said.

Quotable Value’s July statistics showed year-on-year price growth had slowed to 7.6%, down from 10% in December.

Auckland’s annual growth was 11.7%.

National spokeswoman Andrea Rush said: “The Auckland region, as a whole, has seen values rise over the past three months but some areas of the super city are now showing a slight decline in values.”

Central Auckland had a 1.2% decrease in prices over the past three months, Auckland City East was down 1.3% and North Shore/North Harbour was down 0.9%.

Valuer Bruce Wiggins said: “This is the first ‘normal’ winter the Auckland property market has

seen in a few years, where we are seeing reduced house sales and fewer attendees at open homes.

Some properties are sitting around for several weeks with no offers, or below expectation offers, which could be due to a disconnect between buyer and seller expectations, especially where the property requires some form of maintenance or upgrading.”

Still, Westpac chief economist Dominick Stephens said he expected a brief resurgence in the market before a more pervasive downturn happened.

He said house prices were on track to rise about 5% this year, compared to 10% last year.

More price rises are likely because migration is expected to hit an all-time high of 50,000 people in a year, he said. “Our research indicates that net migration usually plays only a relatively small role in determining house prices. But sheer weight of numbers means that even that small role will translate into a reasonable boost to house prices over the year ahead.”

But he said that would not last. By the second half of the decade, Stephens predicted a recovering Australian economy would attract New Zealanders back across the ditch.

He said the bank’s Investment Value of Housing model had been a good predictor of house price movements. It estimates the value to an investor of the median house, based on current rents, interest rates, inflation rates and tax treatment.

“When the Investment Value gets out of whack with actual house prices, it is a pretty good signal that the market is going to change.”

Stephens said the Investment Value was sitting at a roughly neutral level. “But that is set to change. Over the coming years rising mortgage rates will become a major impediment to the housing market. If the two-year fixed mortgage rate rises to 7%, as we expect, the Investment Value would drop well below the current level of house prices – indicating that prices could fall.”

Auckland Property Investors Association president Andrew Bruce said winter was never a buoyant time for the property market. But he said interest rates were having an undeniable effect this year. “If you’ve got a $400,000 loan and it goes up by 1%, that’s going to hurt.

That’s about $80 a week that has to come out of your back pocket.”

But he said there were always new investors coming into the market. A lot of people bought their first investment property because their own circumstances allowed them to, he said, rather than because they thought the market was right for it. “The key thing is getting informed advice. If you’re making the numbers stack up there are certain times of the market that are easier than other times but there are always opportunities out there.

They’re not always easy to find, it can take a bit of time.” ✚

INTEREST RATES: DOWN/NEUTRAL

Interest rates are moving up, but are still at low levels by historic standards and could fall during the pause in the OCR hiking cycle.

OCR: DOWN/NEUTRAL

The OCR is moving up although it may be kept on hold at 3.5% over the coming months.

IMMIGRATION: UP

New Zealand has recorded the highest population growth rate since 2003 and could hit an all-time high by the end of the year.

BUILDING CONSENTS: NEUTRAL/UP

Building activity is picking up but has a way to go to catch up, particularly in Auckland.

MORTGAGE APPROVALS: DOWN/NEUTRAL

The number and value of home loan approvals is down significantly on the same time last year but banks have indicated they are able to increase lending to people with small deposits.

RENTS: NEUTRAL

Rents have not kept pace with house price growth, particularly in Auckland and Christchurch.

Ministry of Business, Innovation and Employment data shows the national median rent was $330 a week in July, down from $350 in June.

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Westpac moves to support

third-party channels Westpac has changed how it deals with mortgage advisers and reintroduced trail commission, but the change is far bigger than that. Philip Macalister explains why.

T

here is little doubt that champagne corks popped recently, when Westpac announced it was to resume paying trail commissions on home loan business.

The announcement put an end to months of speculation that the bank was going to change the way it remunerated its third-party distribution channel.

Arguably the biggest change is not to remuneration, but the acknowledgment that the bank would treat this channel the same way as it treats its branches and mobile mortgage managers. But since remuneration is the big talking point it is worth looking at this in detail.

Banks stopped paying trail commission back in 2005, saying that trails were unsustainable.

Advisers, through the NZ Mortgage Brokers Association, fought this change but lost the battle. Ironically the parent companies of all these banks paid trail commission in their home market, Australia.

Interestingly the banks moved together when they removed trail commissions.

Westpac has now broken the status quo, which reigned amongst the three big banks that work with mortgage advisers for nine years.

It plans to pay a 45 basis point upfront commission when a loan is drawn down and a monthly 20 basis point trail commission for the duration of the loan. This trail commission will

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When it comes down to who to support, “it’s not just about trail”.

There are a lot of factors that come into play...

- Glen Mcleod -

start after the loan has been in force for 12 months and will be based on the average loan balance of the preceding month.

Several other changes Westpac is making show its commitment to working with mortgage advisers. Under the current model it pays just $150 for a re-fix, but under the new model a 20 basis point trail commission will be paid on loans of two years or more.

It has also changed remuneration for significant restructures of debt. In the past any commission was discretionary. Now it is looking to pay 45 basis points upfront and a

20 basis point trail commission.

Westpac intends to pay an additional 15 basis point commission to groups as a "volume and conversion” reward. However, not all the aggregation groups will get this bonus commission.

Westpac has a number of goals behind its changes. One is to “reshape” the mortgage advisory industry and build what it calls “sustainable partnerships” with its third-party distribution channels.

The second is to regain market share in the third-party channel. Everyone acknowledges ANZ is doing very well across the lending market and has more than its natural share of business.

While the initial headlines were about the return of trail commission, the most important element is how Westpac wants to change its relationship with advisers. “It’s not back to the future,” Edge Mortgages principal Glen McLeod says. “It is our future.”

Both McLeod and NZ Financial Services Group director Bruce Patten agree that the changes will help advisers, like themselves, grow their businesses.

As McLeod says, we will “finally be doing what we want to do,” namely build up a book of clients and look after them. He says under the old model, which the other banks use, brokers just had to load the front end with new clients, which he likens to continuously stoking the fire with more coal to keep things going.

Patten describes the change as “really exciting”.

“It’s a start to getting the business to a place where it needs to be from the bank’s perspective and our perspective.” In the past business had been “too transactional”.

With trail it’s a “looking after the client for life philosophy,” he says.

Advisers can’t just collect trial and not be prepared to do anything extra. Patten describes the change as Westpac treating advisers as partners and letting advisers be more involved in dealing with client.

“Previously when they paid trails they didn’t want us to look after customers. They thought they were theirs.” Patten says trail wasn’t well understood previously and warns that advisers have to use it properly this time or they will lose it again.

Patten says advisers have to make sure they are doing their job. He thinks that some intermediaries have probably been a bit slack with follow-up work, doing reviews and looking after refinances.

Glen Mcleod

Now they will have to have processes in place to ensure these things are done and show the bank they are earning the trail commission.

But there is more to what Westpac is doing.

It has flagged the development of tools to make life easier for mortgage advisers.

This includes technology to allow mortgage advisers to lodge applications online and provide advisers with more information about their performance and how they are doing, compared to other advisers.

Westpac plans to develop an online portal which will give advisers access to these tools as well as help advisers understand Westpac’s products and close sales.

One change that has excited mortgage

advisers is the bank’s attitude to refinances.

Currently there is huge competition amongst lenders to encourage borrowers to switch lenders using discounts, cash and other incentives.

By changing the remuneration model and rewarding advisers for keeping the business on the bank’s books there is likely to be less churn. McLeod says ending churn is a major issue and it also requires a change in customers’ behaviour.

Implementing trail Westpac director of Third-Party Banking Kylie Kneale says Westpac has looked at other markets, including Australia and Canada, to learn lessons.

She says while the changes bring Westpac closer to the Australian model, it’s not the same.

A good example is how the life insurance business works in New Zealand. While it has a high upfront commission element, which is largely responsible for churning, some life companies have moved to remuneration models with a reduced upfront commission and increased trail commission.

Companies such as Asteron Life and Fidelity Life have hybrid models where the amounts vary. However the key point is that advisers build more value in their business by using trial commissions, and these encourage persistency.

Westpac’s changes aren’t focused so much on persistency, and have more emphasis on

Proposed residential trail commission model SCENARIO

OLD

NEW

PAID

New loan draw down

70bps

45bps

Upfront weekly

None

20bps

Monthly for the duration of the loan

Starts after 12 months; based on the average loan balance of the preceding month

Fixed Rate Rollover on an Existing loan

$150

20bps

Trail beginning at point of Fixed Rate Roll Over

For loans >2yrs old

Revolving credit

70 bps paid monthly on progressive drawdown

45bps

Upfront paid on the full amount of the loan

If not fully drawn down within 12 months may be subject to clawback.

None

20bps

Monthly for the duration of the loan

Starts after 12 months; based on the average loan balance of the preceding month

Discretionary

45bps Upfront

Upfront weekly

On loan increase amount

20bps Trail

Trail beginning at point of restructure

Increase in lending greater than $50K and for loans >2yrs old

Up to 15bps

Upfront, in addition to the standard upfront commission on each individual loan

Made available to Head Groups at Westpac’s discretion. Will be assessed at individual advisor level

15bps bonus

Significant Restructure

Volume and Conversion Commission

Upfront weekly

n/a

Proposed Clawback conditions as at 7th August 2014

018

CONDITION

0-6 months

100%

100%

7-12 months

50%

75%

13-18 months

25%

50%

"Fundamentally it will change the broking industry if other banks decide to go down that path."

- Bruce Patten -

converting applications successfully.

Two other lenders in New Zealand pay mortgage advisers trail commission. One is non-bank lender RESIMAC and the other is ASB-owned Sovereign.

If trail commission was the Holy Grail to success for a lender then these two organisations should be blowing the lights out in terms of volume.

Neither lender provides information about their volumes so it is hard to know how well they are doing. However, RESIMAC has clearly made big gains in the non-bank lending space since it arrived on the scene two years ago.

Sovereign’s numbers are included in ASB’s financials and not formally disclosed.

However TMM understands that it wrote more than $1 billion in home loans last year and currently has a book sitting at around the $6 billion mark.

When it comes down to who to support, McLeod says “it’s not just about trail”. There are a lot of factors that come into play, such as product, brand, and other requirements such as insurance or the use of revolving credit facilities.

Sovereign gets a good chunk of his business, he says.

However, Patten isn’t such a big supporter.

His reasons include brand. A lot of clients want to stay with their bank and don’t necessarily want to move to an insurance company.

He is also not a fan of revolving credit home loans. “They are one of the worst products ever developed.“ Patten says the change will probably mean he writes more business for Westpac. He already does a lot of work with the bank, as he is a former Westpac employee.

“I would be lying if I said: No, I’m not going to put more business with Westpac.” However he says that it has to be right for the customer.

“I would be quite open with my clients about it and say that Westpac pays me to look after you on an on-going basis.”

He says fundamentally people are happy with their lender and aren’t looking to change.

“People don’t see brokers to change, but for advice and to make sure they are getting a good deal.”

Will other big banks follow?

A question now being asked is will ASB and ANZ follow Westpac’s move?

So far they have been coy, with ASB chief executive Barbara Chapman saying she is watching what’s happening. The bank argues it offers mortgage advisers the two options through ASB and Sovereign and that its model is sustainable.

ANZ still has failed to provide a response.

However TMM put chief executive David Hisco

on the record earlier this year on the subject.

In that interview he showed little interest in resuming trail commission payments.

However, if Westpac sees a significant lift in business volumes there is little doubt its competitors will follow suit.

Patten says of Westpac’s moves: “Fundamentally it will change the broking industry if other banks decide to go down that path.” He says Westpac has done its bit to help reshape the advisory world. Now it is up to the other banks and advisers to give it some impact.

“It is now completely in their hands if this becomes a long term sustainable opportunity for brokers and bank. We need to support the lender that supports us the best,” he says.

Bruce Patten

Westpac's

partnership plan Westpac’s plans to reshape the mortgage advisory business are so big TMM decided to find out more.

Westpac director of third-party banking Kylie Kneale answers questions from TMM publisher Philip Macalister TMM: I see you are now calling mortgage brokers mortgage advisers.

What does that signal?

Kylie: Advice is what they are providing.

For many it is the biggest purchase of their life and that advice should be of the highest quality possible. For us that is part of why we are raising the bar on the qualifications of the advisers we work with.

TMM: How much does the growth of thirdparty lending overseas influence Westpac?

Kylie: It’s important to look to other markets and that’s what we did; we looked to Canada and saw that they’re hitting nearly 30% of all of their retail lending volumes through third parties, the UK is at 60% and Australia is at 50% and they’re all rising.

I think New Zealand can take some really good learning’s out of those markets and then in our own way do it even better.

TMM: What can we learn from Australia?

Kylie:The big thing about trail is that it’s a fee for service. We’ve got to be able to provide mortgage advisers with the ability to service our customers, and that’s the mutual ‘our’ customers, on an ongoing basis and technology is a way of doing that. So, for example, what’s working very well in Australia is self-service portals for mortgage advisers we want to look at how we can do that.

Electronic lodgement is one that benefits both parties; so online applications, direct connections from CRMs and systems, such as the My CRM, into lending platforms is a great way to improve turnaround, increase quality, and drive a lot more operational efficiencies in both of our businesses.

TMM: So Westpac will develop more of an electronic portal for advisers?

Kylie: Absolutely. I think the big learning for me prior to announcing trail, and one

❝As an

organisation we need to have our internal business aligned to operate in a really positive and productive way with mortgage advisers. ❞ thing that I’m really proud we did, was to invest in analytics. That investment in analytics has given us insights that we’ve never had before in our business; it helps us make really solid business cases - such as how to implement trail.

Then as we’re getting that data we’ll be able to share that now with the head groups and advisers and some of this is very exciting.

We can see right down, not only to the conversion rates, we can see the volumes, the margins, the run-off and where that run-off is going to, which bank it is going to; so this is pretty exciting.

TMM: How do you think the advisers will take this on board?

Kylie: During this process we’ve used various advisers to help test some of this and give their initial thoughts to help us fine tune

things. We’ve had really positive feedback.

There was a bit of nervousness. There is natural competition amongst mortgage advisers; “How am I doing compared to my peers? I know I run a good business but it’s great to see that I do.”

I think there is a desire for recognition for great work and this is where you’ll see Westpac heading - really recognising those advisers that give us great business.

TMM: This is a game changer for the mortgage advisory industry and it’s taking it into a whole new world. Is that how you guys see it?

Kylie: Absolutely; I think we want to set the foundations for building long-term partnerships. Our end customer comes to us to build a relationship for the long term and it’s important that we do that with our third parties as well. So this is about enabling them to invest in their business; to build platforms, whether it’s technology and CRM themselves, whether that’s sales and admin support, whether that’s just risk management practices to put into their business.

It’s all good healthy changes for the whole industry. It’s about rewarding mortgage advisers for the ongoing investment they have with their customers and their ongoing relationship.

TMM: Mortgage advisers worry that they are seen as just an acquisition channel and that the bank thinks they own the advisers’ clients. How does this change under your new model?

Kylie: We are adjusting some of the things we do in our network to reduce the conflict with our third-party channel so they are more complementary and everyone knows their role. It makes senses to have our internal business aligned to operate in a really positive and productive way with mortgage advisers.

This has gone a long way to reduce the channel conflict; to see the third-party banking channel as equal in acquisition to our other channels, such as branch or mobile mortgage managers.

As an organisation we need to have our internal business aligned to operate in a really positive and productive way with mortgage advisers.

TMM: One of the big issues in the third party channel is that the conversion rate of applications is quite low. What’s the rate at the moment and what do you expect it to move to?

Kylie: What we’re seeing in the market is some trends around applications submitted for price shopping and that’s really what we want to get away from. We’ve got some advisers up in the 90s and some in the 20s, regardless of volume. So conversion is a really big focus for us. With our new commission structure we will have commission incentives for higher conversion and those thresholds will be at around the 60% mark to start with.

TMM: The guys who have only got 20% conversion; what do they have to do to get that higher?

Kylie: There’s a couple of things: We’re finding that the value proposition they’re delivering is on price, and I think advisers are better than that. I think to create a sustainable business themselves mortgage advisers also need to focus on the product and value propositions for customers, and which is the right one.

We’ve also found that some mortgage advisers just need help on how to close the deal; so again I’ve got a great team of experienced business development managers around the country, and part of their role is to coach, again with the head groups, on helping advisers close the deal.

So it depends; we don’t assume the worst with low conversion but it’s around putting a plan in place to lift that.

TMM: With your commission structure do you want to outline how that’s going to work?

Kylie: The challenge for us was not the new business coming in, because the model allows for that. The challenge was looking at the back book. With new business we’re offering 45 basis points up front and then a 20 basis points trail, which starts in year one.

On top of that, to selected firms, we are offering an additional incentive which will be up to 15 basis points more and that is recognising both volume and/or conversion.

TMM: Will production targets be placed on advisers?

Kylie: For me, if there were no draw downs in a year I

would start to get a bit nervous, thinking do you know our product, do you know our processes?

Are you able to offer the right advice? I guess forcing advisers to do a minimum of a couple of deals a quarter, that’s a big call to do, and the reason I do say that is because mortgage advisers need to be independent, to select an offering that best suits their client; not how many deals they’ve got to get through this month to maintain accreditation with a lender.

So that’s an interesting one for me.

I think that there are going to be tools, such as electronic lodgement, that will enable us to manage low volume lenders and keep the quality up down the track.

TMM: How will you remunerate advisers with existing books of Westpac business?

Kylie: The big piece for our mortgage advisers is the back book, or the lending that they’ve got with us at the moment. There is no precedent for rolling out trail and this was the piece that took us a long time; it was the harder bit to model so we’ve made a bit of a call here.

We have recognised that advisers' loans that are over two years old and require servicing, such as significant restructures or refixes that’s when we will look at paying on trail on the entire amount of the existing loan.

This is going to be interesting to manage and we’ll be working with the market to ensure that it's implemented as smoothly as possible.

But we’ve made that call because it enables the mortgage adviser.

We’ve recognised they’ve gone from having 70 basis points up front to 45 up front, and the trail is going to take a bit to kick in, but offering this piece for loans that are older than two years helps supplement

the income during that transitionary period.

TMM: How important have mortgage advisers been in shaping this strategy?

Kylie: Mortgage advisers have told us exactly what we need to do and they’ve helped us shape our strategy. We haven’t gone: “We’re going to do everything Australia has done,” and we haven’t gone, “We’re going to have some internal think tank sessions”. We’ve gone out to market and asked our customers what we need to do to win in this market and I think one thing about mortgage advisers is that they are very open - candid - and give you some really good, direct feedback and that’s what we need to act on and drive this business. ✚

PAA LEGAL

The importance of listening and talking – making each moment count

W

hat makes a successful conversation with your client? How would you describe a conversation worthy of a professional

mortgage adviser?

For Heather Samu at Mortgage People, one key component is going the extra mile in the information provided to clients.

“You have to give clients more information than you think they need,” Samu says.

“Because we deal with these things every day, we run the risk of thinking people know, but often they don’t. It’s about taking a step back and considering

022

how the client is perceiving what you’re telling them, and checking in to see they understand everything.”

It might seem straight forward – and in theory it is – but as all mortgage advisers know, getting client conversations right for their needs demands real focus and attention on the softer skills.

We asked mortgage advisers and other industry experts their thoughts on the importance of what we say and how we say it and how this affects the services we provide and the relationships we build.

“Verbal communication is hugely important as it is often the first point of contact you have

with a potential client,” says Angi Mann, PAA learning and development manager.

“In that first moment, a client is subconsciously determining whether you’ve got something in common and if you’re somebody they’re going to be able to trust.”

Lisa Meredith from Loan Market agrees: “It’s the old saying: The client doesn’t care how much you know until they know how much you care. So it’s about getting to know what their needs are and where they’re at.

“And obviously listening plays a huge role.

It’s like anything really – how can you offer someone a service until you know what the need is? You really have to listen out for what is

Angi Mann

❝ It’s an adviser’s

job to tailor their communication style to their client, not the other way around. ❞ important to them, specifically what drives them, and what their needs are.”

Meanwhile John Bolton from Squirrel likes to kick off a conversation with a new client with one simple question: “Have you started looking at property yet?

“The conversation just flows from there; listening to your clients’ experiences is the best way to gauge their emotional perspective – and you need to understand what their emotional ledger looks like because that’s how you connect with people.”

Clarity is also the key to successful communication – which means giving jargon a wide berth. Years in the profession can naturally lead to using mortgage lingo without realising it, but for many clients this can cause confusion, or worse, may make them feel uncomfortable to ask questions.

“It’s about being really clear on what the terminology means but at the same time not using that terminology,” says Meredith.

“Keeping it simple – there is so much jargon, which people can find daunting. It can also make them feel stupid, which is the last thing you want a client to feel.”

Similarly, the more experienced we become the quicker we do things, and as brokers we must remember that our clients are unlikely to have had these kinds of discussions before.

“You may have encountered the scenario a hundred times, but for the client, it’s possibly the first time they’ve been asked that question,” says Mann. “That’s why listening and giving the client time to process what they want to say is so important.

“A client’s silence doesn’t mean that they’re

not going to answer; they just need some time.

It’s a natural human reaction to talk, but the adviser’s role – especially in that first meeting – is to listen 90% of the time and to let the client speak as much as possible.

“Asking questions and giving your client the chance to participate more actively means they leave the experience feeling listened to and confident that you understand their needs.”

With a growing family and house renovation project under way, Meredith agrees that feeling listened to and understood is fundamental.

“It’s important to me that my adviser really gets me and my needs and is succinct in the way they converse – no waffle. If I feel they haven’t put any thought into how the conversation needs to work for me or if I feel I am just being sold to, I lose interest pretty quickly.

“Basically, I need to feel they have a genuine interest in helping find solutions for my situation.”

Something Ajay Kumar from Global Financial Services believes is imperative to providing good service.

“Communications is a vital part of our service to clients,” says Kumar. “It absolutely has to be effective and by that I mean you must try to really understand the needs of your customer and keep the information you provide concise and to the point.

“Listening is the most important part.

If you don’t listen, you can’t understand.”

Mann agrees: “It’s an adviser’s job to tailor their communication style to their client, not the other way around.

“It’s about listening for understanding – not listening to reply.”

With this in mind, professional communication is perhaps not a skill that can be ticked off the training list, but something that should constantly evolve and develop with every client interaction.

That's something Bolton learnt early on: “I remember years ago when I first started out, a couple chose to interview a number of brokers before going with the one they thought best, and I was absolutely gutted when they didn’t choose me. I asked for feedback and what they said was really interesting – my conversation with them was too unstructured. They went with an adviser who presented them with lots of graphs and focused on the numbers. It really emphasised the point that everyone’s communication skills are different and you have to understand your client first before you can tailor your communication to them.”

How we communicate doesn’t just affect our client relationships but the profession as a whole.

“Advisers do such a critical job for clients and our community,” says Mann. “It’s really important that the value of our profession is not diminished by how we communicate.”

Are your client conversations a good representation of your expertise, client care and advice? What does professional communication mean for you? ✚

023

SALES & MARKETING LEGAL

By Paul Watkins

Effective surveys provide valuable feedback about your broker business.

Find out how to use surveys to ask for customer feedback.

“I

f I had asked people what they wanted, they would have said faster horses.”

This famous quote from Henry Ford illustrates that he didn’t believe that customers knew what they wanted. He couldn’t see how they could share his vision because they couldn’t imagine it. However his view changed a few years later as the Ford Motor Company grew and competitors appeared in droves.

Did they want forward or backward opening doors? Colours other than black?

Six cylinders or eight? How important was speed compared to comfort? When they eventually got around to asking customers what they wanted, it was easier to work out what to offer and predict demand.

You also need to ask your clients for their opinion of your service. Are they happy?

Are they disappointed? Are they impressed enough to tell others? Few brokers ask, as they don’t know how to. Fortunately, with the help of technology, it’s now very easy - but you still need to know what questions to ask.

One easy way to do this is to use Survey Monkey (www.surverymonkey.com). I won’t go into the process, but it is not hard at all.

You could teach yourself in a few hours (or engage a smart high school kid).

Survey Monkey is an email survey tool. Surveys are emailed to recipients and a link takes them to a web site to answer the questions. The pricing is not high, with 100 or fewer surveyed free.

ASK THE RIGHT QUESTIONS The key to any survey is in the questions you ask. Note that no matter what you do, research has shown that there will always be a small minority who will lie on your survey, but statistically you can still get meaningful results.

So here are some rules to keep in mind.

First, remember the KISS principle – Keep It Simple Stupid! The trick is to think of the shortest way to ask a meaningful question.

Avoid telling a story and get straight to the point. Make it unambiguous. Perhaps test the questions on five friends and if there is any hint of confusion or ambiguity then change it.

Keep the full questionnaire short. If it takes twenty minutes to complete, you will get few willing participants. Five minutes is a good guide.

Only ask questions that give you insight and meaningful actionable results. Some questions will be superfluous and offer dubious answers.

An example would be: “Where did you hear about us?” You really should already know where all your clients come from and if they have been a client for some time, they won’t remember anyway. And depending on the survey’s purpose, it may not matter how a

❝ Some say that

offering a small reward can increase responses by between 5 and 25% ❞ client first came in contact with you.

Some questions will never give you new insights due to how respondents recall information – and advertising recall is generally very poor. An example is a firm I have worked with (not a mortgage broker in this case) who asked customers how they found out about that service. Over 10% said they saw the TV advertising, yet the firm had never done any TV advertising.

Promotional recall is very difficult. They may have seen you in two press items, a real estate magazine and driven past your sign 50 times.

Therefore, which one was the deciding factor?

On this point, the only way to work out which promotional vehicle works best for you, is to ask them at the time of first contact, as something must have triggered that phone call or email.

INCLUE SOME OPEN ENDED QUESTIONS You will know what an open-ended question is. It is tempting to stick with multiple choice queries and scales (1 to 10) but some of your most insightful feedback will come from questions that allow clients to voice their real thoughts on the page.

Having said that, it is a good idea make your first few questions multiple choice, to get them into the survey. Then when they strike a text box to fill in on, say, question 4, they will be more likely to fill it in. Questions could read: “Rate this on a scale of 1 to 6” followed by a text box headed up “Why do you feel this way?”

KEEP THE SCALES CONSISTENT Make the scales consistent. The 1 might be “Of no importance to me whatsoever” and the 6 “A critical factor”. Or they could be 1 for “Strongly disagree” and 6 “Strongly agree”.

Whatever you decide, stick to that throughout the survey to avoid confusion.

AVOID LEADING QUESTIONS Avoid loaded or leading questions.

Questions that lead a respondent to a certain answer are meaningless. Here’s an example that Survey Monkey uses to illustrate this:

“We have recently upgraded Survey Monkey’s features to become a first-class tool. What are your thoughts on the new site?” This question already puts the words, ‘world class’ into the respondents mind. A better way would be to ask for comments on some specific upgrades to the service.

Another example is: “Should banks insist that you place all your insurance through them when taking out a mortgage?”

This implies that banks will always insist on this and that it is therefore a negative factor in considering going directly to a bank.

And the answer will invariably be no.

So what have you learnt?

Remember that the purpose of a survey is to get honest feedback from your customers so you can improve your service levels or find a competitive advantage. It is not an advertisement for your service.

DON’T USE ACRONYMS Avoid acronyms and industry jargon. If you ask if the ‘LVR ratio’ had an impact on you, or even spelling out the individual words, will the respondent understand this? You are better to ask if the required 20% deposit made a difference. Technical terms, even if you use them every day, can be quite meaningless to a respondent.

TIMING IS IMPORTANT Timing of the survey can be a contributing factor to its success. A study in the US found that the highest survey open and click-through rates occurred on Monday, Friday and Sunday respectively. There is apparently no discernible difference between the response quality gathered on weekdays versus weekends.

So the conclusion is to aim for a Monday or wait until the weekend.

On this point, as a matter of interest, in a recent radio interview with the chief of TradeMe, he noted that higher prices and higher sales results were found on a Monday night compared with any other night of the week. I am sure that there is an explanation of this, but it’s not known at present.

CONSIDER INCENTIVES Do you incentivise respondents? This is a frequently asked question. Some say that offering a small reward can increase responses by between 5% and 25%. The incentive could be to go into a draw for, say, a $500 shopping voucher or a small individual gift. As you can’t discount your service on price, the voucher draw could be the best option. This also means that they are obliged to send you their name and contact number. This adds validity to the results as they have been prepared to put their name to their comments.

Well-constructed surveys definitely provide value and input into your decision making when it comes to enhancing your service or finding an edge. If you want to do one, take the time to put together well thought through questions and test them before sending them out in bulk. It is worth it and the results may surprise you. ✚

025

INTEREST RATES Chris Tennent-Brown

A hike and a pause signal Expect a pause in OCR hikes until March and a peak of around 4.5% in the second half of 2015.

T

he RBNZ lifted the official

cash rate (OCR) by another 0.25% in July, but also gave a clear signal that it intends to pause for a period to assess the impact of the four OCR increases made to date.

Given that rate increases only started back in March, the impacts will take a while yet to show through more clearly. A pause from now had been widely expected, though the RBNZ was a little bit more explicit than we thought it would be, given the real risk of an explicit pause signal triggering an unwanted drop in wholesale rates.

In the wake of the RBNZ’s 0.25% OCR increase, the interest rates on floating rate mortgages lifted by a similar amount to around 6.75% at most of the major banks. Shorter-term fixed rates like the six-month and one-year rate would typically be in line for some upward adjustment too, but these rates have been subject to a mixture of influences over recent months.

RBNZ July meeting Although the RBNZ’s decision to lift the OCR in July was expected, the accompanying statement contained a few surprises, namely the RBNZ’s explicit pause signal. We thought that the RBNZ would shy away from clearly signalling a pause for fear of causing a stampede lower in wholesale rates and – consequently – in fixed-term mortgage rates.

Heading into the June MPS the RBNZ was very sensitive to the run of declines in fixedterm mortgage rates that were undermining its efforts to transmit the rising OCR to lending rates in the economy. Back in June

026

" Floating rates should be fairly steady while the RBNZ remain on hold, but are still set to rise the most.’" the RBNZ delivered a “hawkish” statement that prodded term interest rates back up. But in the statement that accompanied the July OCR increase, the RBNZ was clear that it intends to pause, albeit for an undetermined period.

In being so clear the RBNZ is running the risk of provoking a sharp drop in wholesale interest rates - and rates have indeed softened.

But, in giving that signal, the RBNZ has been very transparent about its own views on where the OCR will be set in the near term.

The second surprise was the big swing the RBNZ took at the New Zealand dollar, which had been extremely strong in the weeks prior to the July OCR review. The RBNZ has moved back to describing the NZD’s strength as “unjustified”, “unsustainable” and at risk of a substantial fall. These comments increased speculation that RBNZ would intervene in the currency market.

In terms of the outlook for the OCR, we now expect the RBNZ to pause until March 2015, recommencing, at that point, a far more gradual tightening cycle than seen in recent

months. We expect the second phase of the tightening cycle will take the OCR to a peak of 4.5% in the second half of 2015.

What does it mean for future mortgage rates?

We continue to expect the RBNZ will lift the OCR to 4.5% around September 2015, another 1% or four 0.25% hikes above the current level.

Mortgage increases will be greatest for rates of up to two years maturity: These terms will steadily reflect the effect of the rising OCR. In contrast, longer-term rates have less to move as their time periods mean that for some time they have been increasingly factoring in the tightening cycle. Our peak OCR forecast of 4.5% implies the variable mortgage rate will reach around 7.75% (reflecting a fairly direct transmission of the 1% in expected OCR hikes).

We expect short-term fixed rates to eventually settle near 7% and the five-year rate to settle around 0.5% higher, between 7.5-8%.

Recently, fixed-term mortgage rates have been held down and have at times dipped, partly because of a decline in global interest rates. Bank competition has also been fierce and margins have been tightened to lower some of the fixed rates on offer. Both of these influences contributed to relatively low one- to thee-year fixed rate specials at times over recent months. It has actually been possible for borrowers to sometimes access fixed-term rates that were lower than when the RBNZ began raising rates back in March.

It is impossible to predict whether we will see another similar mix of bank competition, and strong downward pressure on local wholesale rates stemming from offshore

% 11

% 11

Home Loan Rates

10

10

9

9 5 year rate

8

8

2 year rate 1 year rate

7

7

6 5

6 Source: ASB

Jan 07

% 9

VARIABLE RATE

Jul 08

Jan 10

Jul 11

5

Jan 13 Jan 14

Home Loan Rates

8

% 9

Two year ahead

8

10 -year average

7

7 One year ahead

Current

6

6 June 2013

5

Source: ASB

Variable Rate

5 1-year Rate

3-year Rate

5-year Rate

interest rate markets. But at the margin, the RBNZ’s signal to pause increases the possibility, and for now is helping keep the six-month and some one-year rates on offer under 6%, significantly below the floating rates.

Identifying the best strategy Without the benefit of 20/20 hindsight, the best choice to make as a borrower right now will involve assessing the likely path for interest rates, the various risks to that outlook, and personal preferences for certainty and flexibility.

Despite all these variables, there are still a number of things that we can identify.

Firstly, floating rates are not the cheapest rates right now (the six-month rate is) so borrowers can create some certainty, and obtain a lower rate than floating by fixing for short terms. In fact, many of the carded rates at the main banks, out to around 36 months, are lower than floating rates at the time of writing.

Secondly, all fixed rates are still below their long-run (10-year) average. So by this simple measure, the fixed terms are reasonable value, as shown in the charts.

We can also use our forecasts to calculate the expected cost of other strategies such as rolling six-month or one-year terms for the next five years, and compare the interest rate expense to the interest rate of the fixed terms available today for longer terms. Based on our forecasts, rolling these shorter terms is still a cheaper strategy than locking in the longer terms such as the four-year to five-year rates.

But this really hinges on our view that the RBNZ’s next phase of its tightening cycle will be far more drawn out than the phase just completed, and the OCR will peak at 4.5%.

We stress that if the RBNZ hikes more aggressively than we expect (i.e. more hikes early on in the cycle and/or lifts the OCR higher than 4.5%), then these shorter-term rates will lift more than we are forecasting, making this strategy more expensive than the longer-term rates on offer today.

To illustrate, we can estimate what would happen to mortgages if the RBNZ lifts the OCR to 5% (in line with its June forecasts, rather than our 4.5% peak). We would expect the variable rate to eventually lift to around 8.25%, and fixed-term rates to be up around 8% too, rather than the 7-7.6% peak levels we are currently forecasting.

With this in mind, a key thought is that fixing for longer terms now does give extra insurance against stronger OCR increases than we are expecting. Depending on borrowers’ risk appetite, that insurance may be worth taking. And the cost of some added certainty is actually not high, based on current mortgage rates.

This can be illustrated with an example: ➤ The carded floating rate is between 6.50% 6.75% at the main banks at the time of writing.

If the RBNZ lifts the OCR again in March 2015, as we are forecasting, the floating rate will likely end the year around 7%. ➤ A borrower can fix a one-year mortgage around 6%, and a two-year mortgage for around 6.5% at the time of writing. In other words, a borrower can lock in a fixed-term rate that is lower than the floating rate now, and significantly lower than what we expect floating rates to cost by the end of the year.

As always, there are risks to the assumptions behind our forecasts. And this means New Zealand interest rates could be higher or lower than our forecasts. But with the economy growing well, and the RBNZ’s tightening cycle underway, we think it is safe to assume the RBNZ will resume lifting the OCR early next year, and it is prudent to plan for more mortgage rate increases from today’s level over the next year.

Fix a mix More interest rate increases should be expected over the next two years. Borrowers can at present lock in some certainty and pay a lower rate than current floating rates. Floating rates should be fairly steady while the RBNZ remain on hold, but are still set to rise the most out of all the mortgage rates over the next year. One of the characteristics of floating mortgages that borrowers have enjoyed has been the flexibility of repayments that floating offers. Splitting the mortgage into different terms, or a mix of fixed and floating mortgages can be a good strategy for keeping a bit of flexibility while locking in some interest rate certainty.

Ultimately the best mortgage strategy is one that also takes into account an individual borrower’s cash flows, tolerance for uncertainty, and ability to deal with changes in future mortgage payments as interest rates change. It is always important for borrowers to weigh up their own priorities and make the mortgage choice that looks the best aligned with them: There is more to it than just picking the lowest interest rate. ✚

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MY BUSINESS

By Phil Campbell

Doing right by yourclients

A mortgage broker in the Lower Hutt/Wellington region for many years, Richard Stevens, reflects on the changing mores of his profession.

ns e v e t S d Richar

Lower Hutt has a widely-spread population, encompassing rich and lower socio-economical elements.

Predominantly, which sector forms the greater part of your customer base?

People who work in the professional sector would form the greater part of my customer base.

What of industry? Has growth in the area affected greater return for mortgage agents?

Not in my experience. Bonuses from the banks and product diversification are where I have experienced some growth.

In your 30 years in finance, mortgage brokerage has been subject to regular/ subtle industry/government adjustments.

How has the industry, or you, coped?

Yes. Change and compliance has tended to bring a better all over quality of service to our industry. Hopefully, people who have stayed in the industry are there for the right reasons of doing the best for their clients first and foremost.

I believe the industry is stronger for it and has coped admirably. Being here after 12 years in the industry suggests that I am doing things right by my clients.

Have recent changes - limits on new borrowings - affected the rate of applications?

It has not affected me very much. Perhaps the various individual lenders would have a different view on things!

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In Auckland, house prices are reportedly climbing at $360 per day.

What is the relevant Lower Hutt/central Wellington equivalent?

In both cities there are pockets of properties where demand is greater than supply therefore premium prices tend to be paid for these, while there are other areas where there is a gradual increase in prices. Wellington city is where the greater demand is at present and prices reflect that greater demand. I would not be able to suggest relevant figures as each suburb has a different makeup of properties and services.

Keeping the customer satisfied is an old refrain, from a song; how true is it in your business?

It is a high priority for me. I like to think I can take a lot of stress out of whatever the client has asked me to do for them.

"Service with integrity" is my personal stance.

Are you favoured by return investors?

Yes I am.

After the initiation of a first home, are repeat buyers savvier, easy to deal with?

For me, each situation is different; some require more work than others, though in the main repeat buyers return because they are happy with the service provided the first time around. A relationship has been established, so it is a good experience, though not necessarily easier than the first time.

Service with integrity is my personal stance.

Is it difficult dealing with earnest people who have the desire, but just fall short in the financial aspect?

It can be a challenge. However, by talking things through with them, in many cases they see their situation more clearly and understand some strategies to put in place to guide them to where they want to be in the future.

Any deals which have given ultimate satisfaction?

Sure. Especially since KiwiSaver funds have been able to be used. Couples who thought they might never have been able to have a property of their own and find that they can!

Despite modern checks and balances, does the odd awkward would-be homeowner slip through?

Not in my experience. Some clients give me more challenges than others; however, that is the nature of the job and at the end of the day one has to feel comfortable with the outcomes arrived at.

Can you recall instances where unsavoury elements are not referred to the banks, if so are the banks grateful?

I don’t think I have come across anything of that nature. I do recall pulling an application when it had been approved, as on reflection it would have put the client in a worse position that they were at the time!

You have a diverse background – rugby refereeing (to which level?), job skills facilitator and community services – where do you find the time?

I receive National Super now. However, since I have been in this business it has been more of a lifestyle choice so it has never been all that I do.

I did referee rugby to 1st XV level in my early 60s.

However I do not do it now. Just prior to being a mortgage broker, I was involved in facilitating job skills courses for new immigrants so that they became job ready. I continued this for around five years and assisted more than 180 new immigrants in this process. It was very satisfying.

I served as a volunteer at the 2011 Rugby World Cup and also at Warbirds Over Wanaka a couple of times. I am also a leader within my local church community. ✚

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SALES & MARKETING

By Sharon Davis

5 Ways

to increase customer referrals

The cheapest and most effective form of advertising for any business is a referral from an existing customer. Sharon Davis highlights five effective ways to increase referrals – and your bottom line.

R

eferrals from satisfied customers are an important source of new business for brokers in the mortgage industry. Customer referrals account for about 70% of all new business for a significant number of leading brokers in New Zealand – and may be the single most important source of new business.

It is easy to see why. That personal recommendation from a friend, colleague or acquaintance helps to build trust and does a lot of the hard selling, before the client walks through the door – with little or no cost to the broker. And the referral is usually made when the potential client has a need, providing brokers with a customer who is looking for his or her services now.

Most brokers interviewed by TMM rated customer referrals as “highly important”, “hugely important” or “absolutely critical”.

Ajay Kumar from Global Financial Services Limited in Auckland is one of several brokers who generate 70% of new business from customer referrals. He rates these referrals as “most important” because they are low cost, but produce the best results.

Brokers also said that they rely on customer referrals to an increasing degree,

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as their business reputation and customer base grow over time. Bruce Patten from Loan Market in Auckland says: “Without word-of-mouth referrals, we wouldn’t have a business.”

Early on in his broker career referrals from real estate agents accounted for 70% of new business, “however, as time has gone on it is word-ofmouth referrals that account for 70% now”.

Mark Puller from Roost Mortgage Brokers in Arrowtown has also become less reliant on referrals from estate agents and other industry professionals. “The vast majority of referrals are now from my existing client base,” he says.

Auckland-based David Windler from The Mortgage Supply Company agrees: “The longer you are in the job [as a mortgage broker] the more referrals you get. The trust has already been handed on – you don’t need to convince them to deal with you.”

“Word of mouth referrals have become my most successful source of referrals. This was not always the case,” says Jason Hurdle from Beyond Mortgages Limited. Customer referrals now make up 40% of his new business.

So how do you increase customer referrals and grow your business? Here are five keys things to do to ensure that your business flourishes.

Provide an exceptional service

➊ The most effective way to get your

customers to talk about your business, and to refer your services to their friends, is to provide an exceptional service. It is fairly obvious that people will only recommend a good service, but they are also far more likely to remember, and recommend, someone who provided a service the exceeded their expectations or provided additional value.

“Word of mouth referrals are the best referrals you can get,” says Wellington-based Hurdle. “They only come about by you going that extra mile for a client. People refer you because of that value you add, not because of a cash referral fee.”

To provide an exceptional service you will need a thorough understanding of the mortgage industry, have up-to-date market information at your fingertips – and to put all that to good use, in the best interests of your clients. In addition a focus on customer service can also help to bring in much-wanted referrals.

“I have a customer care manager as a part of my team to ensure that we give our clients the best possible service and follow up.

We also have a referral programme for our clients because we see this as extremely

important,” says Glen McLeod from Edge Mortgages. For McLeod, 20% of his new business comes from customer referrals and 40% is from existing customers.

Build trust

➋Show your customers that they can trust your professionalism and your advice.

People will refer business your way far more readily if they believe you know what you are doing and can be trusted.

It is also worth remembering that trust takes time to build, but can be easily lost with one rash promise that you fail to follow through on.

And, it goes without saying that word of mouth works both ways. Shake that trust – and word will get out. “Never give an assurance that is not possible to fulfil,” says Kumar.

Use promotional giveaways

➌Build up a range of personalised

promotional giveaways, such as note pads, pens, or magnetised shopping lists for the fridge.

The idea is to personalise or brand something that will be used (or seen) often and to give these to your clients as a token thank you in appreciation for their business. Select items that will work well as a subtle reminder of who you are and what you do.

A branded USB drive, pen holder, business card holder, or novelty coffee mug could help to keep you top of mind, and on the top of your clients’ referral lists. Try to come up with new and innovative ideas to help you stand out, such as a magazine subscription that comes with a personalised “courtesy of” sticker to remind the recipient who it is from.

❝ It’s important

to recognise your top clients and top referrers and keep in touch with them on a regular basis. ❞ - Krish Krishna -

Keep in touch

➍Find meaningful ways to keep in touch with your customers and build on your relationship.

Simple examples, like a monthly newsletter with useful information, or a birthday card, can help to build rapport and trust, and keep your name foremost in your customers mind.

“It’s important to recognise your top clients and top referrers and keep in touch with them on a regular basis,” says Krish Krishna from Mortgage Suite Limited. This helps to encourage both repeat business and referrals.

Social media also provides new avenues to keep in touch – with Facebook pages and YouTube channels two popular examples.

Invite your customers to follow you on social media but be careful to keep the number of promotional posts to a minimum while offering a lot of useful information and posts that encourage people to engage and interact with you.

Virtual referrals

➎

A growing number of people use the internet to source the services they need, or to find out more about a company before they do business with them – which means you also want to maximise your virtual (or online) referrals too.

You could post recommendations from customers on your website, ask people to place a recommendation on LinkedIn, or ask them to review your business on your business Facebook page. These serve as virtual online recommendations and encourage people to choose your business.

Advertising your mortgage business and encouraging people to post reviews on TradeMe would be another example.

For Jeff Royle, from Auckland-based iLender, TradeMe is his best source of referrals. “I've invested a huge amount of time and effort [in TradeMe] and it is certainly paying off.” When asked how effective it is, he says: “It’s hard to give a percentage, but it's significant.”

Word-of-mouth referrals from customers are one of the most effective forms of advertising but it is the type of advertising that is earned, not bought. If you follow these tips, you should reap the rewards of your work.

But it is also makes good business sense to focus on other sources of business. As Kris Pedersen from Kris Pedersen Mortgages points out: “Existing customers referring on new business is definitely our largest source of business, but we also get quite a bit from a number of strategic relationships we have with accountants, solicitors and other property affiliated businesses.” It clearly balances your business risk to maintain other referral sources as well. ✚

LEGAL

By Jonathan Flaws

The Melting Pot Myth Differentiation between types of lending is important when it comes to the application of credit law.

C

ulture Club once suggested that “what we need is a great big melting pot, big enough to take the world and all it’s got, keep it stirring for a hundred years or more and turn out coffee-coloured people by the score.”

By putting people into one pot and stirring, they assumed that uniformity and consistency would be achieved.

Why you would want uniformity is beyond me. It is diversity that makes the world a more interesting place to live.

Meeting and interacting with people who are different is invigorating and stimulating.

The melting pot concept might make a good song but it is neither achievable nor desirable.

The song was a hit but its content is a myth.

Some countries look at credit regulation and assume that the regulation of the business of lending and borrowing is a great big melting pot. But not all borrowers and lenders can be governed by the same rules.

Putting everything into the same pot doesn’t mean that everything melts and blends together. Bits of a consumer credit contract will melt and be governed by the same provisions – such as the sections on oppression – but the key principles that govern consumer credit contracts are separated.

Principles-based approach Fortunately, the credit law in New Zealand is principles-based rather than prescriptive. It is designed to provide a base set of principles that override all lending, and underneath those principles contains another set of principles that override consumer lending. To the extent that the base principles, designed to prevent oppressive conduct, apply to all they are as close as we come to the melting pot concept.

If you think of our credit law, the Credit

❝ The Reserve Bank has now issued a paper detailing its decisions for a review of bank capital adequacy requirements for housing loans. ❞ Contracts and Consumer Finance Act 2003 (CCCFA), as two distinct pieces of legislation, the Credit Contracts Act and the Consumer Finance Act, you can get a better idea of the split between the two sets of principles.

The Credit Contracts Act will apply to all credit contracts, business and consumer, and the Consumer Finance Act applies just to contracts that are consumer credit contracts.

They are in the same legislative melting pot, but they do not melt and blend together.

Why differentiate?

It is easy to be lulled into thinking that the disclosure requirements and provisions governing unreasonable fees in the CCCFA

apply to all contracts when in reality, they only apply-and are only intended to apply-to consumer contracts.

It is easy because most banks and mortgage lenders tend to treat all loans secured over a residential home as consumer credit. That is a conservative, but prudent, approach and in my view the right approach.

It is convenient to split lending into business and home loans and have different sections of the lender look after each type.

But it is also convenient, and compliantly safer, to treat all home loans as consumer loans even if they are not.

Put another way, within the part known as home loans, there can also be a split between consumer and non-consumer lending. Think of home loans as fresh milk, straight from the cow.

Then think of pouring all home loans into a milk separator and applying centrifugal force to split milk into cream and skimmed milk.

Consumer finance is considered the skim milk – the part of the milk to be consumed by the masses to benefit their personal, domestic and household wellbeing. The cream is to be consumed by investors and commercial entities who grow fat and rich from thick and tasty credit.

From a lender's perspective, like cream, a non-consumer loan is likely to be more valuable.

When dealing with it you need only consider the sections of the CCCFA that apply to all credit contracts. You are not restricted in the fees you can charge and need not be concerned if they are outside the scope of the reasonableness tests in the consumer contracts sections.

So long as you are not acting oppressively, your borrowers can look after themselves.

This may be a bit unfair if the borrower is a farmer and the mortgage is over the whole farm, including the home. But a farm loan is

individual and not a company. This is followed up in section 15(1)(c), where it says that if the debtor under a credit contract is a trustee, acting in the capacity as the trustee of a family trust, then the contract is not a consumer credit contract.

Personal, domestic, or household purposes

a business loan and it comes out as cream.

Remarkably, the Blue Chip loans also come out of the non-consumer side of the separator because the contracts were not entered into for consumer purposes – they were entered into to raise money on the home to invest.

The natural consumer Section 11 of the CCCFA defines what is meant by a consumer credit contract. If the contract you are dealing with falls outside this definition, then the consumer credit sections need not apply.

The section states that a credit contract is a consumer credit contract if the specified criteria are present. It follows that if any one of these criteria are not present then it cannot be a consumer credit contract.

One criteria requires that either interest is charged, or credit fees are charged, or a security interest is taken. Another is determined by the status of the creditor as a person in the business of providing credit or if the contract results from an introduction by a paid adviser or broker.

If you are a mortgage broker then you can assume that these will invariably be present.

The first two criteria are, however, critical and if either of them is not present then the contract does not qualify as a consumer credit contract.

The first requirement is that the contract must be entered into by a “natural person”.

Although this term is not defined it is pretty clear what it means – flesh and blood, an

The second criteria currently requires that “the debtor enters into” the contract “primarily” for “personal domestic or household purposes”.

Section 12 of the CCCFA says that investment by the debtor is not personal, domestic or household purposes. Interestingly, in Australia, residential property investment is brought within the ambit of their credit law.

One of the “sleepers” in the Credit Contracts and Consumer Finance Amendment Act 2014 is the change to this criterion. It now requires that the credit is used or is “intended to be used”, wholly or predominantly for personal, domestic or household purposes.

It is a sleeper because it introduces a subjective element into a previous objective determination.

In other words: whereas before you could look at what the money was actually used for, now it is the borrower’s intention that counts.

This is emphasised in a new provision which explains what is meant by the word “predominant”. It is either the purpose for which more than 50% of the credit is intended to be used (i.e. $51,000 for putting into the business and $49,000 for home renovations means the predominant use is business) or if the same goods are to be used for private and business, the purpose for which they are intended to be most used (i.e. a car used 30% for business and 70% for personal means the predominant use is personal).

In the last example the actual use may be more business than personal but if the borrower’s intention was the other way, it is a consumer credit contract.

Presumption and declaration The CCCFA kindly provides that if a person claims that a credit contract is a consumer credit contract then it is assumed that it is a consumer credit contract unless the contrary is established. This just means that the lender has to prove it was not.

The cases show that a company borrower or a trustee borrower cannot magically make the contract a consumer credit contract because of this presumption. When the lender stands up and asks the judge to look at the borrower and if the judge sees a company or a trustee then the presumption falls away.

Another section says that a credit contract is not a consumer credit contract if the debtor makes a declaration before entering into the contract that it is not. The declaration must be a separate form and the borrower must acknowledge that he or she has read and understood the declaration.

But if the loan is a home loan to a natural person for the purposes of refinancing the mortgage on the borrower’s residence, the lender should know or should have known that the declaration was wrong. In this case, the declaration is worthless and the loan is a consumer credit contract.

Bank’s treatment of a loan for capital adequacy The Reserve Bank has now issued a paper detailing its decisions for a review of bank capital adequacy requirements for housing loans. In this it states that later this year, it will require that a bank lending to a customer with more than five properties should classify the loan(s) as an SME retail or corporate asset class.

This will require the bank to hold a greater amount of capital than it would if were just a residential consumer loan.

The Reserve Bank defines a residential mortgage loan as “a first-ranking mortgage over a residential property used primarily for residential purposes either by the mortgagor or a tenant of the mortgagor”.

It then goes on to exclude loans over a farm or commercial property; or where the interest on the loan is serviced from farming or commercial income from the property; or where the bank has recourse to; or is aware of, more than five properties owned and let by the borrower directly or through a company; or any other ownership structure and the loan is predominantly serviced from the rental income.

The bank is required to verify whether the customer has other rental properties that are mortgaged to other lenders.

Clearly this issue has nothing to do with the CCCFA split between consumer and nonconsumer credit. It does, however, provide some very simple, clear and concise language for determining when a mortgage should be a consumer mortgage.

I say “should” be because, in my view, if the result of exercising security for a loan is that a borrower can lose this or her home, then that, surely, must be one of the very reasons we have credit law. If the principle is that every borrower should know what they are doing and the risks they are accepting and be in a position to make an informed decision, then surely this should apply to a mortgage over a person’s home?.

On reflection, it might have been easier for mortgage brokers, and the industry as a whole, if a residential mortgage had been given a separate definition in the CCCFA melting pot. A mortgage could be a consumer credit contract “if it is a first ranking mortgage over a residential property used primarily for residential purposes by the mortgagor regardless of the purpose for which the loan secured by the mortgage is or is intended to be used.”

To the extent that other loans are secured by a second mortgage or by an agreement to mortgage supported by a caveat, the existing definition (as amended by the 2014 Act) could still apply.

Summary Having started out suggesting that our credit law is not like a big melting pot, the reality is that as you work through it, if the security over which a loan is taken is a mortgage of a person’s residential home that is not part of a business (such as a farm), then you should always treat the loan as a consumer credit loan. If you get tricky and try to separate it out and turn it into a commercial or business loan, you might well succeed. Or you might get your fingers and hands burnt by the mythical melting pot. ✚

INSURANCE

By Steve Wright

“They don’t pay claims!”

Time to tackle an industry misconception.

❝ To keep

insurance valuable and affordable for all, insurance companies are obliged to correctly pay valid claims only. ❞

H

ow often have you heard someone in our industry make the bald and usually completely unjustified statement that “they don’t pay claims”? I’m guessing a couple of times at least because, sadly, this does happen. Perhaps more sad, though, is the fact that advisers often don’t treat such statements with the necessary response they deserve. So let’s consider the statement seriously for a moment and dismiss it once and for all as ill-informed (the general public can be forgiven) or self-serving mischief, likely to bring the life insurance industry into disrepute and therefore contrary to the Financial Advisers Act. Life insurance companies generally have no discretion about whether or not they should pay a valid claim and there are really only two reasons why a client who is up-to-date with premium payments can have a claim declined.

These are: ✘ Material non-disclosure; and ✘ No benefit is provided in the policy.

So let’s explore these a bit more.

Material non-disclosure.

Clients applying for insurance have a legal duty to advise an insurance company of any

034

matter that might influence its decision to accept the client’s application. This duty must be complied with in utmost good faith - and being a positive client duty, clients must comply even if the insurer does not ask the specific question. This may seem relatively onerous on clients but is absolutely necessary because the client alone knows the matters requiring disclosure.

Insurance companies are entitled to decline claims and even void a policy from inception because of non-disclosure. It does not matter whether the non-disclosure is fraudulent or inadvertent and a “slip” of memory. This is why it is so important that advisers assist their clients by making sure they disclose fully and accurately when filling out the application forms. Full and accurate disclosure is really up to the client anyway, it’s not something within an insurance company’s ability to bring about, so this is not really an area where insurance companies can engage in “not paying claims”!

No benefit is provided in the policy.

Clients are only entitled to the benefits set out in their policy. Not all policies are equal, so in identical situations one policy might be required to pay while another may not, it

depends on the policy provisions as set out in the policy wordings. The policy wordings are paramount and this is why all advisers should base their advice on policy wordings, not glossy marketing brochures or hearsay from anyone else. Make sure the circumstances in which your client requires benefits to be paid are actually covered by the product you recommend.

A claim being declined because the claim circumstances do not translate into a benefit provided by the policy is something which, if there is a dispute, can be ruled on by a suitably qualified independent person like the courts or the Ombudsman. Accordingly, this too is not an area where insurance companies can incorrectly engage in “not paying claims”.

Why not just pays all claims and keep everyone happy?

Insurance is a very delicate balancing act.

Every claim paid that has not been anticipated and a premium paid for, upsets that delicate balance. Imagine a company that paid claims not provided for in its policies or even where cases of material non-disclosure meant the insurance company did not know the risk it was taking on? Pretty soon it would have to increase its premiums - dramatically. What is worse, this company would soon get a name for being lenient on non-disclosure and so would begin attracting more and more cases: How do you think all its other, diligent, policy holders would feel about that? To keep insurance valuable and affordable for all, insurance companies are obliged to correctly pay valid claims only.

So, in reality, there are only two scenarios where insurance companies can decline claims and both of those are fair and reasonable and important for policyholders and the industry in general.

One final point: In law, insurance contracts are contracts of utmost good faith (uberrima fides) and accordingly, the parties (the policy owner and the insurance company), are held to a much higher standard of legal behavior than is normally the case with contractual relationships. Just as a client who does not fully and accurately disclose material information breaches this standard, so too an insurance company that refuses to pay a claim without proper reason (when evidence of a valid claim is before it) is, in my view, likely to be breaching their obligations. ✚ Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Product at Partners Life.

This article is for information purposes only.

Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008.

It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product.

Tune into mortgagerates.co.nz for the latest update on home loan news and information. Each Monday morning you can listen to a broadcast from TMM editor Philip Macalister reviewing and commenting on the latest news.

Besides giving you a good snap shot on what is happening in the market there Philip provides you with his comments and observations about what's happening and who is doing what.

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