14 HOUSING COMMENTARY It looks like the housing market is starting to rebalance itself.

16 NZS TOP BROKERS Find out who are some of New Zealand's top brokers and what makes them successful.

28 PROFILE Meet the new PAA chief executive Rod Severn.

30 PERSONAL LENDING Susan Edmunds explains what peer-to-peer lending is and what it means to brokers.

04 EDITORIAL Brokering the mould

05 NEWS Trail commissions make the news in this issue. Also we have an update on SBSs plans for brokers, more changes from the Reserve Bank and the introduction of a Responsible Lending Guide.

13 PEOPLE ON THE MOvE The latest appointments

FEATURES

CONTENTS

COLUMNS

UPFRONT

13

23 INSURANCE Steve Wrights takes a look at TPD and trauma cover.

24 SALES AND MARKETING Paul Watkins on how to build a trusted relationship with clients.

26 INTEREST RATES Chris Tennent-Brown from ASB updates mortgage advisers on interest rates and where they maybe heading.

32 LEGAL Our resident legal expert Jonathan Flaws tells you how to make things clear and concise.

16

TMM presents its first-ever list of top brokers in New Zealand. We name 30 of the biggest writers in the business and get their latest thoughts on the world of mortgage advice. Tracey Warner

" The evidenceis that many arestarting to move

towards fixed rates,but there is plenty

of anecdotalevidence to suggest

many people arestill sitting ontheir hands."

Brokering the mould

Putting together this issue's lead story on New Zealands TopBrokers has been a fascinatingexercise as it has generated lotsof other ideas and illustrates thediversity in the mortgage advice world.

The piece isnt designed to be a ra-ra article.Rather, the goal is to show you who are someof the biggest writers in the business and howthey do it. Hopefully, you will pick up somegood ideas you can use in your business.Its not a totally definitive list as some peopledeclined to take part because they didnt likethe measure of volume.

As we tried to explain to these peoplevolume is important. With the way the banksremunerate mortgage advisers you needvolume to generate revenue.

Its also a quantifiable measure.However, there are plenty of people whoarent trying to write big volumes of businessand have other models. Weve tried to capturethis in some of our interviews.

We acknowledge there are others whorun businesses which are not so focused onvolume and we plan to bring you their storiesin future issues.

One of these has been the number ofadvisers who have embraced risk and havenow made it a significant part of their business.

Also thanks to all those brokers who choseto take part in our first-ever New ZealandsTop Brokers feature. Its our goal to make this

a regular piece and to continue to celebratesuccess within the mortgage advisory industry.

After many tough years it seems thatmortgage broking is moving into a fairhappier space. With rising interest ratesborrowers sitting on floating rate mortgagesneed to revisit their position.

The evidence is that many are starting tomove towards fixed rates, but there is plentyof anecdotal evidence to suggest manypeople are still sitting on their hands.This has to be an opportunity for advisersto get out their and sell their propositionto the public.

Another piece of good news is that banksare starting to consider low equity loans again.

The latest Reserve Bank numbers show thatlow equity lending is only running at abouthalf the level it is allowed.

There is talk that as interest rates rise theReserve Banks speed bump restrictions willbe flattened or removed. Many would say thatis a good thing.

Philip MacalisterPublisher

MANAGING EDITOR AND PUBLISHER:Philip Macalister

SENIOR WRITER: Susan EdmundsShaz Davis

SUB EDITOR:Phil Campbell

CONTRIBUTORS:Paul WatkinsChris Tennent-BrownSteve WrightJonathan Flaws

GRAPHIC DESIGN:Jonathan Harding

ADVERTISING SALES:Sarah Smith Freephone: 0800 345 675sales@goodreturns.co.nz

SUBSCRIPTIONS:Dianne Gordon Phone 0800 345 675

HEAD OFFICE:1448A Hinemoa St, RotoruaPO Box 2011, RotoruaPhone: 07-349 1920 Fax: 07-349 1926editor@mortgagerates.co.nz

The NZ Mortgage Mag is published by Tarawera Publishing Ltd (TPL) in conjunction with the Professional Advisers Association. TPL also publishes online money management magazine Good Returns www.goodreturns.co.nz and ASSET magazine. All contents of The NZ Mortgage Mag are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.

The NZ Mortgage Mag welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in The NZ Mortgage Mag, or on other issues, please send your comments to: editor@mortgagerates.co.nz

EDITORS LETTER

04

NZFSG director Bruce Patten

RETURN OF TRAIL GOOD FOR EVERYONESpeculation continues to build that one of the big banks will reintroduce trail commission to the broker market.

If that does happen it would be a good thing for mortgage brokers and lenders, NZFSG director Bruce Patten says.The reality is there is scope there to do it, he

says. It would be a real benefit to everybody.Patten says banks made a drastic error in

taking (trail commission) away.I just dont think the New Zealand banks

really understood trail and I dont think New Zealand brokers treated it the way it should have been treated.

Patten has no idea what form trail commissions may look like if they are reintroduced. However, he sees benefit for brokers and banks.

It will stop churn and it will help grow businesses.

The smart ones will get on board and really be able to grow some significant levels of business out of it. They will be able to grow their teams.

I just that hope they get it right this time, he says.

Currently the only lenders paying trail are Sovereign and RESIMAC. ANZ chief executive David Hisco said in the previous issue of TMM that he was not looking at reintroducing it. Meanwhile, outgoing SBS chief executive Ross Smith says he doesnt see the need for trail commission. (See story page 6).

NEWS

NEWS

AUCKLAND BRANCH BASED IN INVERCARGILL

06

Ross Smith

SBS is committed to the broker market, but dont expect it to start paying trail commissions.

Outgoing chief executive Ross Smith says the bank has made a significant commitment to the Auckland market as that is where it will grow its business.

Auckland has one third of the countrys population but is responsible for two-thirds of the markets growth, he says, so the bank has to be active in this market.

Smith says because SBS has no branches in Auckland it has to use the broker market for distribution. His experience is that generally the bank doesnt get a lot of broker business in areas where it has branches.

SBS is also putting mobile managers into the Auckland market.

Initially an Auckland regional manager was appointed to service mortgage brokers in the Auckland area.

However the success of this move prompted the establishment of a centralised lending

unit based in Invercargill. The unit is a virtual SBS branch and now provides support to all mortgage brokers throughout New Zealand, Smith said.

He wont disclose how much business SBS is getting from Auckland brokers but he is happy with the volume.

We are certainly getting our share of the market up there.

Smith says trail commission isnt something SBS would introduce.

I dont see the value in it, he said. I think (brokers) are very well-rewarded at the moment.

Smith, who will be stepping down as CEO at the end of July after 22 years at the helm, said he was proud to be leaving SBS in the hands of a great team and in far better shape than when he came on board in 1992.

Heartland is pleased with the amount of enquiry it is getting for its home equity release product.The bank acquired the former Sentinel

business earlier this year and has been promoting it mainly via television ads. However, it is now working with the broker channel and with third parties to distribute the product.

Sentinel chief executive Vaughan Underwood says Heartland is building

HER DEMAND APPARENTinfrastructure so mortgage brokers and advisers can refer business back to the company.

He says there will be three different ways advisers can use the product, ranging from a straight referral model where the bank pays for leads to one where advises are fully accredited to sell the product.

Underwood says demand is strong, however he is noticing a different approach from consumers, compared to when Sentinel was last active in the market.

"Consumers are a little more conservative," he says.

He says an important part of the process is that potential clients receive good, sound advice about home equity release products and the various outcomes possible.

Currently the only other players in the HER space are ASB, which takes a very low profile, SBS, which earlier this year acquired the Property Finance Securities book, and Tauranga-based First Mortgage Trust.

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.

** Heartland Bank Limiteds lending criteria, conditions, fees and charges apply. * Statistics New Zealand New Zealand Income Survey: June 2013 Quarter

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.

Its simply a mortgage with no need to make regular repayments designed specifically for seniors.

your business, your future, your choice

Independent thinking for advisers by advisers

Advocacy at the highest level (Government)

CPD portal, with structured learning capacity

Business training for advisers

PAA Friendly Guides for Advisers

ASSET magazine and Mortgage Mag (monthly)

Industry updates

Development Days 2014: South Island 24 June; North Island 27 June

National Roadshows

Professional Indemnity Programme and Group Life Cover

Holiday homes

Professsional Advisers Association Inc,

PO Box 911 335,

Victoria Street West, Auckland 1142

Phone: 0800 275 722, Fax: 0800 275 712

Email: admin@paa.co.nz

Website: www.paa.co.nz

And a dedicated team to assist you

NEWS

PAA'S THREE PILLARS

08

President Bruce Cortesi says the association has come through a period of change and is now starting off on a new stage in its evolution.

He says there are three key pillars to its growth. These are professional development and education; advocacy and consumer awareness.

It has already started on the education and professional development changes with the appointment of Angi Mann as its Development and Learning Manager.

Her focus is on delivering training that helps advisers drive business.

"Regulation has necessarily been a key focus over the past few years. However, it is now timely to complement this with more choice in the business training available for members, she says.

Cortesi says the PAA has been actively engaging with organisations like the Financial Markets Authority on issues that impact its members.

He says there is a good relationship and that the PAA is working well with other industry associations.

Public awareness is one area Cortesi is excited about but warns it is quite difficult.

Cortesi says consumers are more savvy these days and spend time shopping around for products and services.

The PAA wants to build its presence so consumers have more information about advice and what is available.

President Bruce Cortesi

The Professional Advisers Association says it is about to embark on a new period of growth and it has three key areas it will focus on.

Currently consumers are not really aware of either the role advisers play or of the value of advice, he says.

The PAA wants to look at platforms like social media, but also wants to use advisers to help communicate the messages.

It also wants to try and leverage off other organisations like Sorted and Consumer.

While the association has three pillars to its development its benefits, such as the holiday homes, group insurance and professional indemnity cover, are still important.

BAWDEN CALLS FOR ASSOCIATION MIA

09

Bawden says since the NZMBA was merged into the Professional Advisers Association it has done well in some areas but not others.The good bits have been around compliance and training

where it has done an excellent job. However, he remains strongly of the view however that the industry has suffered in three key areas. They are that of lobbying, profile building and providing a conduit to bring key stakeholders together.

He admits he was a relatively outspoken critic of the merger and decided to give it time to work. However, after attending the Mortgage Finance Association of Australia conference recently he now has the view that MFAA should work with mortgage advisers in New Zealand.

Of the MFAA convention he says: I watched in awe as the Industry proudly boasted 50% market share and stakeholders worked closely together for the ongoing benefit of third party distribution.

Bawden says there maybe an issue that the PAA has struggled in some areas partly due to the desire to please both its traditional risk advisers and more the newer arrivals, mortgage brokers.

He would like to see a discussion about the future of the mortgage industry and he has support from the MFAA for their involvement in New Zealand.

My vision is for a dedicated mortgage industry association closely aligned to a sister association in Australia so that we can share synergies and best practice and work closely together for a common objective.

Bawden has contacted key industry figures in New Zealand for their feedback.

PAA president Bruce Cortesi says it good to have people showing theyre passionate.

He says PAA have been working on their strategy and its plan addresses the issues raised by Bawden.

President Bruce Cortesi

Former NZ Mortgage Brokers Association president Geoff Bawden is calling for a dedicated industry body which would be closely aligned to a sister group in Australia.

RBNZ PUSHES BACK FIVE PLUS RULES

NEWS

010

The Reserve Bank has pushed back the start date for new capital requirements for bank lending on residential property.It wants lenders to hold a greater about of

capital for borrowers who own five or more investment properties.

These changes have the potential to hit property investors with increased interest costs.

Under the new rules a bank will not be able to classify a loan as a residential mortgage loan (in retail asset class) if it is aware that the borrower owns more than five properties that it gains rental income from.

These loans are to be classified in the SME

Landlords with five or more investment properties have been given some grace.

An economic think tank supports loan-to-income restrictions on borrowers rather than the LVR restraints imposed by the Reserve Bank.

retail or corporate asset class.While the plans are likely to have a big

impact on investors surprisingly there were only nine submissions, six were from banks, two from representative organisations and one was a private submission.

The Reserve Bank summary included the argument that by not being in the retail asset class, customers would have to be managed on an individual basis which required the bank to obtain more detailed information. That and the higher risk weights could lead to a higher pricing of those loans.

The two submissions from parties involved in

property investment activity also highlighted concerns about the potential for an increase in the cost of residential property loans for investors with five or more properties.

Most of the arguments raised however were around the technical difficulties banks would have in implementing the rule.

The Reserve Bank has consequently decided to postpone the implementation of the capital treatment of customers who own and let out multiple properties i.e. property investors, until December 2014. Originally the changes were timetabled to come into force from July 1, 2014.

LOAN TO INCOME RESTRICTIONS FAVOURED

The NZ Institute of Economic Research says an idea floated by the Bank of England to manage financial stability would be better than the approach taken by the Reserve Bank in New Zealand.

"We like the Bank of Englands proposed restrictions on high loan-to-income (LTI) mortgages better than New Zealands LVR restrictions. NZIER principal economist Kirdan Lees says.

Restrictions on high loan to income mortgages directly address the risk that the Bank of England is worried about: that very high

household debt could cause a sharp economic correction in the future.

High LVR mortgages only tell you that house purchases are made without much collateral. But LVR restrictions do not take into account households long-term ability to service debt.

The Bank of England has a policy solution to a well-defined problem: stopping soaring household debt that sits at the heart of financial stability risks. Controlling house prices is not part of the Bank of Englands problem.

LVR restrictions will constrain risky lending, but the gains look to be limited and the policy

carries some unintended consequences. We should look at LTI restrictions, as they are better targeted at the risk of financial instability created when many people cannot repay their debt.

HARMONEY GETS FIRST P2P LICENCE

011

An economic think tank supports loan-to-income restrictions on borrowers rather than the LVR restraints imposed by the Reserve Bank.

Harmoney is headed and controlled by Neil Roberts who previously was head of sales and business development at Flexigroup, and was general manager at Pacific Retail Finance, which was bought by GE Finance and Insurance in 2006.

This is a new service for New Zealand that brings new opportunities for lenders and borrowers. Peer-to-peer lending has already proved popular in Europe and US, and weve been able to build on that experience, FMA Director of Compliance Elaine Campbell says.

Licensing peer-to-peer lending services forms part of FMAs brief to facilitate new capital-raising opportunities in New Zealand.

FMAs role is to regulate the companies providing peer-to-peer lending services. The service has great potential but lenders should also realise the risks are greater than putting money in a bank. Lenders can lose money or not get the interest they expect if borrowers fail to repay the loans.

Peer-to-peer lending involves an intermediary, the peer-to-peer lending service, bringing borrowers and lenders together, and charging a fee for the service.

To meet the required standards, service providers must provide clear disclosure for lenders and have fair, orderly and transparent processes around how they deliver their service. Applicants must also demonstrate theyll meet minimum standards of conduct. We are available during the process to help potential licensees understand their obligations, Campbell said.

Harmoney has shown itself capable of delivering the service and demonstrated how it intends to comply with its obligations as a licensee.

Under the regulations, borrowers are limited to raising no more than $2 million in any 12-month period through peer-to-peer lending services. This limit applies to both business and consumer borrowers although individual service providers may impose lower limits on the amount that may be borrowed. The regulations dont impose any limits on the amount lenders can lend, although some service providers may impose limits. Lenders should remember they may not be able to withdraw their money at short notice.

FMAs role involves both licensing peer-to-peer lending services and monitoring their ongoing compliance with their legal obligations and licence conditions.

Borrowers using the service will not be individually checked by FMA, but the FMCA prohibits borrowers from making false or misleading statements, or unsubstantiated claims. Peer-to-peer lending services must exclude borrowers from using the service if they have reason to believe the borrower is in breach of these obligations.

For more on P2P lending got to page 30.

Auckland-based Harmoney is the first provider to be granted a peer-to-peer lending licence.

NEWS

ADVISERS RESOLVING COMPLAINTS: FSCL

Financial Services Complaints Ltd said the number of inquiries and complaints it received over 2013/2014 financial year was up 85% on the year before from 1259 to 3159.

But the number of complaints it had to formally investigate was only up 24%.

Of the 202 cases that were investigated, more than half, 109, were settled soon after the investigation started, through conciliation with a FSCL staff member, or by a recommendation suggesting the participant pay compensation. Only four cases required a formal ruling.

A total of $786,372 was paid out in compensation over the year, up from $514,785,62 the previous year.

Chief executive Susan Taylor said consumers were becoming more

Financial advisers are dealing well with customer complaints, usually resolving them before any external investigation is needed,one of the external disputes resolution service says.

empowered to seek help when things went wrong, but providers were doing a good job putting things right.

She said the number of complaints about advisers was relatively few. Most complaints were about consumer credit, at 44, followed by travel insurance, at 42.

The government are recently amended the rules around the dispute resolution schemes and given them the ability to deal with a wider range of complaints, including matters relating to the upcoming credit reforms.

The schemes can now also share information about systematic breaches of credit law with the Commerce Commission, Commerce Minister Craig Foss says.

Of the formal complaints to FSCL about advisers, most were about insurance advisers, Taylorsaid. There were 17 relating to insurance

RESPONSIBLE LENDING CODE COMING

The requirement for a code is a requirement of the recently implemented Credit Contracts and Consumer Finance Amendment Act.

Under the act lenders must now operate with skill, care and diligence in all dealings with a borrower throughout the life of a credit contract.

The changes are expected to have a big impact on all lenders, most noticeably

The government is asking for feedback from lenders, borrowers and brokers to help write a Responsible Lending Code.

the non-bank sector.All lenders must comply with

the lender responsibility principles outlined in the Act, including:

Helping a borrower reach an informed decision about whether to agree to a loan.

Making reasonable enquiries to ensure the borrower can make repayments without suffering substantial hardship.

Treating borrowers and their property reasonably, with respect and in an ethical manner.

Ensuring the terms of the agreement and the exercise of powers by the lender are not oppressive.

Meeting all legal obligations to the borrower.

Submissions close on August 13, and the code is expected to be in place by March 2015.

advisers, two against mortgage advisers and four against financial advisers.

Those complaints came out of 294 inquiries received about insurance advisers, 177 about investment advisers and 47 about mortgage brokers.

Taylor said that showed problems were being dealt with well. People are doing a good job of resolving complaints at the first instance.

She said some members were finding FSCLs Give Us A Call service useful, where they could call to discuss how to deal with a complaint. But she said the number using it was not high.

FSCL will cut its member fee by 12.5% for the 2014/2015 year. Taylor said increased efficiencies made a reduction possible for the second year in a row.

The government has also formally disestablished the reserve dispute resolution scheme. It is no longer required as there are a range of other schemes covering all types of financial service providers," the minister said.

PEOPLE

PEOPLE ON THE MOVE

Tracey Warner (middle)

RESIMAC adds more peopleTracey Warner has recently joined RESIMAC Home Loans having had more than 10 years experience in the finance industry. Her previous roles were with specialist lenders Liberty Financial and Bluestone Mortgages as well as working for a mortgage adviser.

During her extensive overseas travel she has worked for a large commercial insurer, a Saudi Arabian oil company and completed her UK Mortgage Qualification - CeMAP. Upon returning home Warner joined Toyota Financial Services team looking after Lease Terminations and Credit for European Financial Services before rejoining the mortgage industry.

At RESIMAC her role is a eBDM.Raewyn Robertson started as an underwriter

at RESIMAC in April. She brings with her more than 20 years' experience which includes frontline lending, finance company and bank credit team lending. Robertson more recently was with LMI provider QBE. While at QBE LMI she underwrote applications for both their New Zealand and Australian customers.

013

A winter chill has descended over the New Zealand property market but commentators say it may be short-lived. The latest releases of statistics show a continuing drop in turnover and a decrease in the rate of price acceleration. According to the Real Estate Institute (REINZ), fewer houses sold in May this year in every part of the country, compared with the same time the year before. REINZ data comes from unconditional agreements.

There were 6572 sales in May, down 14.8% on May 2013. The national median price was $430,000 in the month.

Chief executive Helen OSullivan said: The easing trend in the number of sales continues, with all regions recording a decline in sales volume in May compared with 12 months ago.

Quotable Value, which takes its data from settled sales, showed the rate of increase in property values had slowed to an annual 8.2%

in May, down from a 10% annual rate of increase reported in December. Values had risen 0.7% nationwide over the past three months, it said.

Aucklands rate of increase had also slowed, from 13.9% year-on-year in April to 13.1% year-on-year in May.

Spokeswoman Andrea Rush said: While values in all the main centres have increased to varying levels, some areas within the cities are showing decreases and values in many of the smaller regions are flat or decreasing.

She said sales volumes were 10% to 15% lower than the same time last year, which could be a precursor to values dropping.

QV valuer Bruce Wiggins said the Auckland the picture was mixed.

Were seeing some strong prices achieved at auctions, Wiggins said. Of note are some recent sales in the southern Auckland suburbs of Mangere Bridge and Greenlane.

More traditionally sought-after suburbs had seen softening, he said. Properties in

the inner-city suburbs such as Grey Lynn and Ponsonby are often not achieving vendors price expectations.

Aucklands largest real estate agency, Barfoot and Thompson, reported an average sales price for the month of $702,966, 1% down on Aprils average. Turnover was down 14% on May 2013.

Managing director Peter Thompson said new listings at 1318 were the lowest in three months, and down 19% on those in April. At the end of May, we had 3498 properties on our books, the second-lowest number in May for more than 10 years.

Thompson said he expected the market to slow further over the coming months. But he said good properties priced well were still selling quickly.

Auckland loan adviser Bruce Patten, of Loan Market, said it was not time to panic. Its certainly a bit tighter than it has been, Patten said. We put that down to a more traditional winter, and three factors rising

LATE RUSHSHOULD PERK MARKET INERTIAIs the NZ property market rebalancing? Commentators say it will pick up late this year or by this time next year.

014

HOUSING COMMENTARY

By Susan Edmunds

interest rates, the loan-to-value restrictions, and an election coming up.

He expected the next three months to be more subdued. Leading into frantic end-of-year madness. That tends to happen in election year. People think the world is going to end, then realise it isnt.

While there wasnt the frenzied pace that had been seen in March, there was still activity, he said, and investors were still looking for deals.

Were seeing a significant amount of inquiry from people wanting to invest. Theres still a relatively good amount of interest from people who have two properties and want one more or who are buying their first investment.

Property commentator Alistair Helm said the market was going through a rebalancing period, brought about by the loan-to-value restrictions and rising interest rates. I suspect this time next year itll pick up again.

He said the drop in price acceleration indicated a better balance between demand and supply. Underlying the property market is the issue of migration and economic growth. Those are big issues that will affect the property market particularly over the next three years.

Sales and price increases would slow right down, then an adjustment would happen over summer before sales volumes picked up again, followed by prices, he said. They cant continue falling forever.

Helm said he thought the loan-to-value restrictions would be in place for some time yet.

The Reserve Bank has hinted that it could move towards removing them at the end of the year but Helm said that it was more likely to relax the threshold than remove them entirely.

He said, rather than the current restriction of no more than 10% of loans to borrowers with a deposit of less than 20%, banks might be allowed to lend up to 15% to 20% of new lending to those borrowers. Theyll do that

before theyll ever think of removing the LVRs. Its easier to tweak them when theyre in than to remove them and then put them back.

Westpac economist Michael Gordon said the bank was still expecting a small revival in house prices through the middle of the year, once the market adjusted to the Reserve Banks loan-to-value restrictions.

But he said it was hard to see whether that was happening yet. Rather than the post-Easter rebound in house sales that had been expected, there was a further dip in sales in May.

In addition, the average time to sell rose from 34 to 36 days, seasonally-adjusted, an unusually large change in the space of one month. Its possible that there may have been some residual Easter effect houses intended to be sold in May might have had to contend with the combined Easter/Anzac Day lull during their marketing periods. Even so, its clear that at this point were debating monthly variations around a very weak trend.

Gordon said it was becoming increasingly hard to attribute the movement of the property market to migration flows. Net inward migration has accelerated over the year, to the highest level in more than a decade. But housing turnover has fallen at the same time.

And while Auckland and Christchurch are slowing, other parts of the country have never really got going.

Harcourts chief executive Hayden Duncan said regional New Zealand had been badly affected by the loan-to-value restrictions. Harcourts has long said LVR restrictions would not have the intended affect in Auckland and Christchurch, two markets driven by low supply of housing and high demand. The provinces have borne the brunt of the restrictions, which have prevented first-home buyers from achieving home ownership.

Patten said investors seemed to be stepping into the gap that had been created. He was seeing more people interested in buying outside Auckland. Its mainly driven by yields.

Hamilton, Tauranga and Rotorua were popular, he said. People are starting to look at the market and think theyre not going to accept a 3% return. They dont want to have to top up a loan by $300 or $400 a week.

But although they could find properties yielding at least 5% or 6% in other centres, the trade-off was less capital gain.

Patten had worked with one client who had a property in Timaru that had increased in value by just $8000 over seven years. I think most regional areas are going to completely skip this property cycle altogether. They wont pick up until next time around, depending what happens with the Auckland market. The reason theyre not moving is that people there dont have the ability to buy because the LVR restrictions have taken so many people out of the market.

"While there wasnt the

frenzied pace that had been seen in March, there was still activity; investors were

still looking for deals."

Bruce Patten -

015

REINZ SALES: DOWNSales in May were down almost 15% on May 2013.

MORTGAGE APPROVALS:

DOWNThe number of home loan

approvals is down 13.4% when compared to the same 13-

week period the year before, and down 10.5% in value

OCR: DOWN/NEUTRALThe Reserve Bank is clearly planning

to increase the OCR but there are suggestions it may now not happen

as fast as was initially predicted

IMMIGRATION: UPImmigration is at a 10-year high.

BUILDING CONSENTS: NEUTRALMore consents are being

issued but the number is still lagging 2003 levels.

INTEREST RATES: DOWNInterest rates are increasing.

Floating rates are now hovering around 6.5%.

RENTS: UPRents are rising and

commentators say that is likely to become a stronger trend as

fewer first-time buyers are able to purchase their own homes.

TOP 10 BROKERS (10-1)

Company: Edge MortgagesLocation: AucklandSettled: $65mNumber of loans: 150All loans originated by a single broker: YQ: What, if anything, have you done differently this year?A: We have added KiwiSaver and Fire & General to our toolbox for our customers, alongside our Risk offering. All are done by referral to a specialist who completes the work on our behalf. We also offer Risk Advisers a service where they retain the customer ownership and we ring fence their customers for mortgage referrals via The Lending Partnership brand.

Company: Mortgage First NZ LimitedLocation: CanterburySettled: $65mNumber of loans: 263All loans originated by a single broker: YQ: How has this year compared to previous years, and what is your main source of business?A: Similar to previous years, but growing. My two main sources of business are word-of-mouth referrals and repeat business.

Company: Ashkettle Financial Services LimitedLocation: AucklandSettled: $68mNumber of loans: 510All loans originated by a single broker: YQ: How has the year compared with previous years for your business?A: This year would compare favourably with other years and I have not noticed a decline in client numbers. Shortage of housing stock has become an ongoing challenge, but more for my clients than for me.

Company: The Mortgage Supply CompanyLocation: AucklandSettled: $69mNumber of loans: 230All loans originated by a single broker: YQ: What qualities, in your opinion, make for a successful mortgage broker?A: The ability to listen. You need to listen to the client, understand their situation and provide the right solution. This only comes about by listening more than talking. And always doing what you say you are going to do.

David Windler

Robyn Ashkettle Glen Mcloed

Rob Parsons

Company: Roost Mortgage Brokers Location: QueenstownSettled: $73mNumber of loans: 280All loans originated by a single broker: YQ: What successes have you seen over the past year?A: We have had a significant year-on-year increase in lending volume, and with the exemption of lending for new residential construction from the LVR restrictions combining with the release of affordable sections in the new Shotover Country development, we have seen a significant lift in the number of first and second home buyers being able to build their own home, which is great for the local economy.

Company: Kris Pedersen MortgagesLocation: AucklandSettled: $95mNumber of loans: 301All loans originated by a single broker: YQ: What do you expect from the market in the year ahead?A: The year ahead is likely to be more challenging with the interest rates rising more people are not passing the banks servicing criteria, and with the RBNZ looking to continue to try to put a brake on the property market with the LVR rule introduction, as well as discussion regarding new rules around property investors with five-plus properties and the potential introduction of a DSR type rule. On the positive side, we are definitely seeing an increase in construction related inquiries and more business is being written outside Auckland, a trend I believe will continue.

Company: Professional Financial Services LimitedLocation: AucklandSettled: $112mNumber of loans: 276All loans originated by a single broker: YQ: How has this year compared with previous years, and what is your main source of business?A: This year has seen a 25% increase in volume. About 70% of business is from word-of-mouth referrals from customers, followed by estate agent referrals at 15%.

Ravi Mehta

Company: Loan MarketLocation: AucklandSettled: $109.7mNumber of loans: 286All loans originated by a single broker: YQ: What, if anything, have you done differently this year?A: Taken on a new assistant to provide more back office support. This is for quality of life purposes rather than business growth and the only reason I have taken people on in the past.

Bruce Patten

Mark Pullar

Kris Pendersen

Company: Global Financial Services LimitedLocation: AucklandSettled: $290mNumber of loans: 702All loans originated by a single broker: YQ: What qualities, in your opinion, make for a successful mortgage broker?A: Do whatever is best for the customer, not for you (the broker). Try to go outside the square to add extra value or savings if you can but within rules. Never give any assurance that is not possible to fulfil. Always take less time to say No (if something is not possible) than, Yes (if you are able to fulfil needs of the customer). Use your documentation absolutely perfectly, and as per the rules of the professional organisation with which you are associated. Update and upgrade your industry knowledge regularly.

Company: SquirrelRegion: AucklandSettled: $300mNumber of deals: 700All loans originated by a single broker: NQ: What is your top tip for other brokers?A: For most, brokering is not a business it is a job. Would someone pay you something up front to buy your business or are you the business? Its important to build up assets so you become less reliant on brokering 24/7. Everyone knows this and all the best brokers do it.

Some of the top brokers on TMMs Top Broker list share their advice on how to succeed in this competitive industry. Work in the best interest of industry as a whole. Look after your clients, but at the same time look after banks and lenders as well. Do not churn just for sake of your commission. Do not over promise to clients, exceed their expectations by promising less and delivering more. Ravi Mehta, Professional Financial Solutions Limited. Remember that your customer comes first. Listen to their needs and fill them. Embrace regulation and get qualified now before it becomes mandatory. Jeff Royle, iLender. Do everything a little better than your clients expectations. Bruce Patten, Loan Market. Set your own standards and be true to your clients and your relationships with lenders and peers. This will put you in good stead in the future and help grow a good reputation and a sound referral business. Jason Hurdle, Beyond Mortgage Limited. I believe it is important to ascertain what part of the market you want to target and become an expert, rather than trying to cater for all parts. We have traditionally targeted the property investment market and, while I have recently bought in a new broker to target the first home buyer side of things, part of the reason we have managed to get a good number of referrals is that people have known where our expertise lies which has also meant people have known why they should use us rather than dealing with the banks direct. Kris Pendersen, Kris Pendersen Mortgages. Do whatever is best for the customer not for you [the broker]. Try to go outside the square to add extra value or savings if you can, but within the rules. Always take less time to say No (if something is not possible) than Yes (if you are able to fulfil needs of the customer). Ajay Kumar, Global Financial Services Limited. Focus on the whole package you offer the customer not just negotiating the best rate (particularly if that is the clients initial primary focus). Mark Pullar, Roost Mortgage Brokers. It probably sounds a bit clichd, but hard work goes a long way. It all comes down to how hard you are prepared to work. David Windler, The Mortgage Supply Company. Look after your existing customer base like gold. They are the absolute best source of new business. Glen Mcleod, Edge Mortgages. Listen carefully to your clients, make notes and step your clients through the process professionally and with confidence. Robyn Ashkettle, Ashkettle Financial Services Limited. Be on your toes. Opportunity never strikes twice. Gopal Sreenivasan, Creative Mortgages Limited. Treat all leads as gold and treat your existing clients as the way you would want to be treated, always. Stuart Matheson, Mortgage Excellence Limited. Always work in the best interests of your client. Rob Parsons, Mortgage First NZ Limited.

TOP TIPS

Ajay Kumar

John Bolton

022

The top brokers share their views on the issues facing the industry Only three of mainstream banks are in mortgage broking channel. It would be good if industry bodies could prevail on the others Ravi Mehta, Professional Financial Solutions Limited. The banks themselves. Its too easy for a broker to spend a lot of time and then have another bank change their 'rule' even if they have declined before. Jeff Royle, iLender. Market share growth. In order for the industry to grow, we need to recruit new people to the industry. Bruce Patten, Loan Market. I still think we need more lenders. While having had a lender like Resimac come into the country I compare it with the last cycle where we had a much larger range of options in the tier just beneath the banks which I believe resulted in more people using brokers and which I think is reflected in why, in Australia, a much larger proportion of the business is written by brokers. Kris Pedersen, Kris Pedersen Mortgages. Ever since I began, in 2007, theres been a challenge on the horizon whether it be trail commissions ending, soaring interest rates, a financial crisis, plummeting house values, LVR restrictions But despite these constant challenges, I have found that I have still grown lending volume year on year, so success is all about growing your market share through offering a great service that your customers love to tell people about. Mark Pullar, Roost Mortgage Brokers. The growing conflict between the advice process and the transactional process. Brokers need to add enough value so that clients go through the advice process rather the choosing a readily available mortgage products online or direct from their bank. David Windler, The Mortgage Supply Co. Rising interest rates and lack of housing on the [Auckland] market at present. Trail commission provided to advisers is an issue that I would like to see addressed by the lenders. Glen Mcleod, Edge Mortgages. Current issues relate mainly to the Reserve Bank restrictions around LVR's and the pressure placed on brokers with two monthly pre-approvals. Robyn Ashkettle, Ashkettle Financial Services Limited. The market will stay more or less the same for the rest of the year due to elections, tweaking of interest rates, etc. It will rebound in 2015. Gopal Sreenivasan, Creative Mortgages Limited. I wonder about the sustainability of lenders paying cash contributions to clients (up to $3,000) in addition to the upfront commissions paid to the broker channel. James Health, Mike Pero Mortgages. The rising interest rates and escalating prices in Auckland makes it challenging to provide accurate advise for clients. Krish Krishna, Mortgage Suite Limited. I dont see anything major. Maybe Im just too old and wise and have seen all this before. But the reluctance of two major players, BNZ and KiwiBank, to deal with brokers is an issue. Rob Parsons, Mortgage First NZ Limited. A volatile economic environment with huge amounts of uncertainty that can cause volumes to increase and decrease quickly and unexpectedly. It makes planning really hard. John Bolton, Squirrel.

TOP CHALLENGES

OVERVIEWTotal funded $2 101 637 507

Total number of deals: 6632*

Average number of deals: 229

Total number of years in business: 339

Average number of years in business: 11

Women: 17%. Men: 83%

* Excludes deals from one broker

Auckland

Canterbury

Southland

Manawatu-Whanganui

Wellington

70%

10%

3%

3%

7%

Waikato7%

INSURANCE

By Steve Wright

Steve Wright is general manager products at Partners Life.

Total and Permanent Disability (TPD) insurance and trauma insurance can often be provided either as accelerated or stand-alone. Accelerated generally means the payment of a claim represents an acceleration or early payment of life cover or a portion thereof.

An amount of life cover, at least as large as the TPD or trauma cover claim potential, must accordingly be held on the same policy.

By contrast, stand-alone TPD and trauma cover claim benefits are not an acceleration of life cover, benefits are paid irrespective of any life cover they stand-alone. Accordingly, corresponding life cover is not necessarily required. Where clients do have life cover, this is not affected by any stand-alone TPD or trauma cover claim paid.

While accelerated TPD and trauma covers are usually less expensive than their stand-alone counterparts, the downside of accelerated cover is that a claim reduces the clients life cover, meaning less [or nothing] may be payable in the event of subsequent death.

Some accelerated TPD and trauma policies include a life cover buy-back option which must be selected at the time of application for cover.

UnderwritingThis typically allows a client, who survives 12 months following a TPD or trauma claim and who has had life cover reduced as a result of the claim, to buy-back the life cover reduced, without further medical underwriting. This can be useful halfway-house between accelerated and stand-alone covers, with usually a price to pay for this option.

Whether accelerated or stand-alone covers should be recommended depends on each

clients needs and how the adviser structures the clients risk protection package. Properly used, both options have merit. If the client has a need for significant life cover following a claim on their TPD or trauma cover then stand-alone cover may be more appropriate.

If by contrast clients are paid significant amounts on suffering a TPD or trauma cover claim, the additional financial consequences on death may not be very large, meaning little if any additional cover on death will be needed and accelerated covers may be appropriate. Some providers allow a combination of accelerated and stand-alone covers to be included on the same policy, which can be useful in designing an insurance plan.

AdditionalIn certain cases the premium saved by using accelerated covers instead of stand-alone covers can be usefully applied to buying additional life cover, thereby providing more cover on death and leaving additional life cover intact following an accelerated claim. The amount of extra life cover that can be bought as a result generally differs, depending on age, gender and sums insured involved but it can be significant in some cases.

Finally, one matter to pay careful attention to though is to ensure sufficient life cover is in place if accelerated covers are recommended. For example, a client with $500,000 accelerated TPD and $500,000 accelerated trauma cover, who wants both products to pay full benefits should they qualify for claims under both, needs at least $1 million life cover; anything less will limit claim benefits to the amount of available life cover.

While it is feasible to structure TPD of $500,000 and trauma cover of $500,000 and only have life cover of $500,000 (for

instance where the client only requires cover of $500,000 at claim time and is taking TPD and trauma cover simply to ensure all contingencies are covered), it is important to remember that payment of either the TPD or trauma cover will extinguish all the life cover in a case like this, leaving no further accelerated benefits payable. This means a premium is paid for each type of accelerated benefit even though only one can ever be paid.

AcceleratedAn alternative option may be to choose a trauma policy that includes a suitably comprehensive TPD benefit as one of the covered conditions: this achieves the same objective, namely payment of the $500,000 trauma cover sum insured either on suffering a trauma condition or on becoming totally and permanently disabled, while only requiring a premium for the accelerated trauma benefit.

A suitable TPD benefit is one that will pay the trauma cover benefit regardless of the condition suffered if this leaves the client permanently unable to perform their own occupation, not merely the very much harsher Loss-of-Independent-Existence condition common to many trauma policies.

TPD and trauma cover accelerated or stand-alone?TPD and trauma cover have benefits but it pays to exercise all insurance options

023

LEGALSALES & MARKETING

Do you believe a doctor if you are diagnosed with a specific disease? Do you seek a second opinion? If its serious enough, you may do. But in most cases you wont. Why not? Is it because you believe, Shes a doctor, She must be right! We all know there are good and bad doctors, so what makes yours so special that you probably wont seek a second opinion?

Most expert service providers think that their clients are buying their expertise. That makes sense, as if they could do it themselves, they wouldnt need professional help. But how do the clients know that this is the right expertise? They have no basis of evaluation. They cant say if you got them the best deal, they just have to take your word for it.

In most professional services, expertise is assumed. If you say you are a mortgage broker, then the assumption is that you must have access to key lenders and know the best deals. Otherwise how can you call yourself a mortgage broker?

The reason why people rarely get a second opinion, is because of the relationship they have with their professional services provider. That doctor might have been your doctor for 10 years and in that time you have no reason to doubt their integrity and expertise. You have a good relationship with him or her. But how does this work for a mortgage broker? Your clients dont know you. They have never met

you and, more importantly, they have never used your services. So they know nothing about your expertise, other than what you have told them yourself on your web site or in your advertising.

This is why referrals are so powerful. Someone other than you told them you were good. But how do you build a relationship before it even starts? And then how do you maintain it during the process so you dont lose the prospect directly to a lender? Then how do you maintain the relationship afterwards to generate referrals?

RelationshipThe answer to these questions separates the good from the great mortgage brokers. The great ones do not sell their expertise, they sell a relationship. Here are a few ways for you to raise your game and focus on the relationship, rather than the expertise you offer.

First, put clarity in everything you do. This means de-jargonising all your communications, including clichd nonsense. Avoid, Your loan is under the lenders microscope and, Your application has been escalated up to... and, Your LVR is good and the LOC is being arranged. Clients hate this! It is just noise that clouds the real message. Talk and write to them as if you were telling your wife or husband. Just plain and simple chat.

What do you know about them as people? In the course of a conversation you will learn

By Paul Watkins

a lot about their lives without them realising that they have told you so much. A little while ago I ran into someone who I hadnt seen for over five years. I started of asking how his wifes 40th surprise birthday party had gone (which was held over five years before). He looked at me in disbelief and then complimented me on my memory. The conversation went amazingly well considering the time gap and I know it was because I remembered the birthday.

You should keep note of such things following client meetings for future reference. Its such small things as this that impress clients. On this point, never say that you have done something more impressive than the client, viz-a-viz, Client: We went to Fiji for our holidays You: Yes, Ive been there about six times now, we did Vietnam this time, as you will come across as a plonker!

Keep them informed this is a big one. Buying a house is a really big deal to your clients. Every day is an anxious wait to see if they will get their dream. So keep them informed. Every day could be a good frequency in the form of a quick email or call. And if you think it will take three days, tell them five!

TransparencyCopy them into emails where appropriate. If you received an email from the lender asking for more info or confirming something, then forward it to the client if appropriate. It shows transparency in your dealings and they are kept informed.

bigpicturebigDEAL

When your doctor tells you that you have a disease, do you get a second opinion?

024

I have mentioned newsletters in these articles frequently. This is because they work! Not having one sent regularly after the deal has been done says, Hey Im a hit and run guy, now I got your money, I dont care about you anymore. Enough said.

Give yourself and staff a few little telephone protocols. For example, all telephone messages will be returned the same day! Email will be answered the same day, even if that means evenings. If you are not available, then the person taking the call should know how long you will be.

Diary anniversaries such as the day they moved into their new house. Then you can have a bring-up file that alerts you to this and you can call or send a card of congratulations.

Dont friend them on Facebook. This is a bit creepy and a blatant invasion of privacy. If one or both of the partners of the clients is on LinkedIn, however, it is acceptable to ask to link. Your relationship is professional and LinkedIn is a professional relationship site.

TrustedThis is a never-ending list, of course, but you will get the idea that building a trusted relationship takes a series of well planned activities like the ones listed above. The great brokers focus on the client relationship and not the product or service. This is assumed by the client. Your role is to manage the relationship and stop them going directly to lenders.

And if you do a great job of this, referrals naturally follow. Everyone is proud of finding that special provider. When friends say that they need a new doctor as theirs has moved, nearly everyone will instantly recommend theirs. Is he or she a better doctor? You have no

The great ones do not sell their

expertise, they sell a relationship

bigpicturebigDEAL

way of judging that. But you can recommend them based on the way they treat you and your relationship with them.

And to end this article, I will recount an unfortunate incident which shows how easy it is to destroy as relationship in an instant! This is a true story. A mortgage broker was dealing

with a friend of mine. At the end of one of a series of calls, this one on a cell phone, the broker forgot to end the call quickly enough. She was heard to say, What a b****. Needless to say, the relationship ended at that point and the brokers name has been mentioned in somewhat negative terms to the clients friends ever since.

INTEREST RATES

RBNZ hikes 0.25% again in JuneAs widely expected, the RBNZ lifted the Official Cash Rate (OCR) from 3.00% to 3.25% at its June review. The interest rates on floating rate mortgages are lifting by a similar amount, to around 6.50%. Shorter-term fixed rates may also be in line for some upward adjustment. The RBNZ has now lifted the OCR at three consecutive meetings, and further increases are expected, including when the Bank meets again in July. Accordingly, floating mortgage rates and short-term fixed rates are likely to lift again soon.

RBNZ June meeting summary and outlookAlthough the RBNZs decision to lift the OCR was expected, the accompanying Monetary Policy Statement (MPS) was more hawkish than we expected, with little signal of an imminent pause in the tightening cycle. A key feature of the RBNZs forecast within the MPS was the much stronger net migration outlook in the wake of recent stronger than expected inflows. Although the RBNZ acknowledged this net migration inflow would increase the supply capacity of the

" Global interest rates have started

to rebound to some extent, which is eroding banks

ability to lock in low funding costs"

Its in your interests to assess

the likely path of interest rates

NZ economy, the RBNZ was very much focused on the boost this net inflow would have on housing and household demand.

We are now expecting the RBNZ to lift the OCR in July. The RBNZ is showing very little sign it is about to deviate from the path it laid out in March, which showed around 125bp of OCR hikes over 2014. We do see a move in July as more event dependent than any of the OCR increases to date. It essentially requires the RBNZs view on inflation and growth to be in line with its outlook, for net migration to be at least as strong as what the RBNZ has factored in, and for commodity prices to not weaken by any more than factored in. On the financial market front, chances of a July hike will be influenced by the strength in the NZ dollar, and whether fixed-term mortgage rates remain soft enough that they continue to undermine the effectiveness of the 75bp worth of OCR increases made to date. We see the track of fixed rate mortgages as one influence on how prepared the RBNZ will be to lift the OCR again in July. The less transmission of the higher OCR, the more prepared the RBNZ is likely to be to push a bit harder.

Our full OCR view is two more 25bp increases this year, in July and December, followed by three more 25bp increases in 2015 at the March, June and September MPS releases. We still expect the RBNZ will get to the same OCR endpoint of 4.5%.

What does it mean for future mortgage rates? Mortgage rates will lift over time. Following the RBNZs June MPS, we expect the RBNZ will

Chris Tennent-Brown

lift the OCR to 4.5% around September, 2015, another 125bp from the current level. Our peak OCR forecast of 4.5% implies the variable mortgage rate will reach around 7.75%, with short-term fixed rates settling near 7% and the 5-year rate nearing 8%. The increases will be greatest for rates of up to two years maturity: these terms will steadily reflect the effect of the rising OCR over their time horizons. 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.

But, recently, fixed-term mortgage rates have been held down by a decline in global interest rates. Bank competition has also been fierce. Both of these influences contributed to relatively low 1- to 3-year fixed rate specials being on offer in recent months, and provided a window of opportunity. While this window remains open, it is actually allowing borrowers to access rates that are unexpectedly lower than when the RBNZ began raising rates back in March.

This window wont, however, last forever.

INCREASES NOT OVER YET

OCR

026

Global interest rates have started to rebound to some extent, which is eroding banks ability to lock in low funding costs. Even then, the market is still pricing in fewer interest rate increases than we and the RBNZ expect. That leaves open the risk that at some point wholesale interest rates move up closer in line with the RBNZs and our forecasts. Such a lift in wholesale interest rates would in turn put upward pressure on fixed-term mortgage rates. Identifying the best strategyThe future is uncertain it is always easier to guess the All Blacks winning score after the match than before. But 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 your personal preferences over factors such as preferences for certainty and flexibility.

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

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 24 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.

AvailableWe can also use our forecasts to calculate the expected cost of other strategies such as rolling six-month or 1-year terms for the next five years, and compare the interest rate expense with 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 4-year to 5-year rates. But this really hinges on our view that the RBNZ will have several pauses in its OCR increases over the coming years, and the OCR will peak at 4.5%. The recent lowering of mortgage rates in the 1- to 2-year terms is another factor making the longer terms a little less appealing.

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 7-7.8% 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 5.99% - 6.50% at the main banks at the time of writing. If the RBNZ lifts the OCR again in July (as we are forecasting), the floating rate will most likely lift to around 6.75% soon afterwards. A follow up hike in December would likely see the floating rate end the year around 7.00%

A borrower can fix a two-year mortgage for under 6.5% at the time of writing, and even below 6% in some circumstances. In other words, a borrower can lock in a fixed-term rate that is in line with, or even 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 RBNZs tightening cycle underway, we think it is safe to assume the RBNZ will keep lifting the OCR, and it is prudent to plan for more mortgage rate increases from todays level over the coming months and years.

Final thoughtsMore interest rate increases should be expected over the next two years. Borrowers can at present lock in some certainty without paying too much more than the current floating rates (which look set to rise the most out of all the mortgage rates). 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 borrowers 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.

Home Loan Rates% %

Two year ahead

10 -year average

One year ahead Current

June 2013

8 8

7 7

6 6

Source: ASB5 5

1-year RateVariable Rate 3-year Rate 5-year Rate

Home Loan Rates %%

Source: ASB

VARIABLE RATE

1 year rate

2 year rate

5 year rate

1111

1010

99

88

77

66

55Jan 07 Jul 08 Jul 11Jan 10 Jan 13

027

PROFILE

Severn keeps on rolling...

Rod Severn wants a bolder approach from his members as he tries to increase financial literacy.

New Professional Advisers Association chief executive Rod Severn admits he approached his new job with a bit of anxiety and trepidation. He was new to the industry, relatively new to the country and wasnt sure how hed be welcomed by the 1200-strong membership of the association.

But he says he neednt have worried. Being an outsider coming in has been seen as a benefit rather than a hurdle and hes been warmly welcomed by advisers around the country. Many pointed out that it was good to have someone with a fresh perspective in a key role.

Severn came to the PAA top job from Smartpay, where he was chief operating officer. Before that, his career was in Australia, in senior management in organisations mainly operating in the IT arena.

The largest had $150m turnover and 135 staff members and I was responsible for all of that, it kept me busy. I have been a sales director and chief operating officer here, Severn said.

He was approached about the PAA job by a board member and decided to put his hand up. It stacked up and I got the role. Its been terrific, Ive been warmly welcomed to not only the PAA but the industry as a whole.

Severn has been travelling the country,

talking to advisers at a series of meetings and roadshows. He says hes been impressed by the passion he has seen so far from the industry.

A key focus for the PAA at the moment is its learning and development offering. Theres huge scope for myself and the PAA to get involved with a range of opportunities and platforms we want to take forward to members. Were broadening the content and accessibility of our learning and development offerings.

He says the PAA will offer 35 to 40 structured credits over the next two years so members can pick and choose what works for their businesses. Under the new code of professional conduct for authorised financial advisers, they have to complete 30 hours over two years. Were increasing our business value-add for members, Severn says. Advisers can choose what they do for their 30 but it will all be from the one place.

Severn said the PAA would also offer training that would not count as structured hours but would help advisers improve the performance of their businesses, such as IT courses and sales tips. Members may struggle to get that elsewhere. There is a growing role for financial advice in New Zealand, Severn says, as KiwiSaver balances grow and people take more interest in their investments.

NOT AWAREYou can get [products] online but its not going to give that knowledge you need. The younger generation join organisations and get KiwiSaver but theyre not aware of where

I use a quote from our chairman if you

think a professional is expensive, wait until you try an amateur.

I think thats a great tagline.

By Susan Edmunds

028

their money is going to go or how its invested. They need a trusted adviser to tell them they have options. A lot of funds are costing people to have money in them. The reason to have advisers is to impart that knowledge.

A lack of financial literacy is a big problem that the PAA is keen to work on, Severn says.

Kids leave school and go to university and theyre lumbered with a massive debt and they have no idea what to do with it. They carry it for years not understanding the damage its doing to them. Theres a place for the industry to create financial literacy at school level. Thats something well be looking at over time.

Advisers should also see a pick-up in their businesses on the back of a more buoyant economy. From an economic point of view, the New Zealand economy is going quite well and theres an opportunity for advisers to prosper and thats going to get stronger as the economy is going well. The future is quite bright.

But theres still a lack of knowledge about advisers and what they offer, he says. There can be a lot of work done around getting information about that to consumers.

The PAA would need to lead that effort, he said. I use a quote from our chairman if you think a professional is expensive, wait until you try an amateur. I think thats a great tagline. If ever there was a message to get out to consumers, its that.

TOUGH PERIODAsked what challenges individual advisers have identified in their early conversations with him, Severn says hes quickly come to realise that authorised financial advisers in particular have been through a tough period of transition with regulation and there is more to come. RFAs are not quite in the same situation, and theyre hoping they wont get into it but I suspect they might.

PAA staff try to stay ahead of the game by working work closely with the Financial Markets Authority on regulation, Severn says.

Board member Angus Dale-Jones undertakes a lot of background work talking to authorities about legislation and required regulation, Severn says. Hes made it plain to them that advisers need to run their businesses, not get bogged down.

The chief executives role is about getting out to the adviser force around the country. Ive got a lot to learn and advisers will be teaching me. Ill be learning from them, talking to them and understanding the issues, telling them the PAA is here.

He says its an exciting time for the organisation and the industry. Its all about the 1200 members and their wider community, their families and communities.

He wants a bolder approach for members and has identified projects that will be launched over the year. Were ramping up the

regional operation to get better representation out to the regions. Its one thing to send out an email saying what we want to say, its another to turn up. Im going to organise a trip to Invercargill and let advisers know that from 9 til 3 Im going to be at this caf, come and talk to me and let me know what you want from us. Thats the biggest value I and the PAA can offer, to be there. To listen and be accountable.

A lot of time has been spent on the road so far, Severn says, but he doesnt mind. They didnt tell me when I started that travel would be involved but Im okay with that. Im not going to sit on my chair in my office in Queen St all the time. It adds no value to advisers in Mt Maunganui or Dunedin South. Im also meeting product suppliers and heads of groups and its vitally important to develop those relationships.

Severn said he was handed a clean slate when he came into the job, and didnt have any preconceptions of what it might entail. So far, he hasnt had one negative comment about the fact he is new to the industry. Most can see thats something good, that Im bringing new ideas and willing to ask questions that a veteran adviser might not.

Things are looking bright for the PAA, Severn says, and hes relishing his new role now that the initial worry about entering a new industry has gone. Im yet to wake up in the morning and think I dont want to go to work. I bound of out bed and Im in to work early.

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By Susan Edmunds

PERSONAL LENDING

Peer-to-peer lenders will start to open their doors to the public over coming months, and one is already considering ways to involve mortgage brokers.Under the Financial Markets Conduct Act,

peer-to-peer lending services, described as a kind of dating agency matching up people with money to lend and those who need to borrow, and crowdfunding services have been made possible for the first time.

Peer-to-peer lending services are popular overseas, such as the LendingClub in United States and RateSetter in Britain, which has its eye on international expansion. In Australia,

Peerless

Westpac recently invested A$5 million in SocietyOne, a peer-to-peer lender.

Previously, they were only possible in New Zealand when they worked on a charitable basis, and those lending money expected nothing in return, or where a new prospectus was issued for every individual borrower, making the process unworkable.

Since April 1, services hoping to act as peer-to-peer lending and crowdfunding intermediaries have been able to apply for a licence from the Financial Markets Authority. The FMA says that so far 12 expressions of interest have come from companies wanting to offer crowdfunding, and four for peer-to-

peer lending.The FMA said it has received one

application for a purely peer-to-peer lending service, three from crowdfunding services and one application from a provider wanting to offer both crowdfunding and peer-to-peer lending.

ApplicationsThe FMA has said it expected a decision on whether to grant licenses to be made in weeks rather than months after the applications were received. But some would-be providers are finding the process of getting their applications across the line onerous.

lending

Personal lending has taken an innovative turn in NZ following overseas leads, writes Susan Edmunds.

030030

Wayne Croad

Its one of those you cant stop progress

moments.

The FMAs rules allow each borrower to raise up to $2 million a year through peer-to-peer lending. But a spokeswoman said individual providers could set lower limits.

Roger Wallis, of Chapman Tripp, said peer-to-peer lending and crowdfunding were generating interest because technology had progressed to the point where it was much easier to run. Youre not going to be able to use peer-to-peer funding to buy a mansion in Takapuna but you might to kickstart funding for a small business, which is the lifeblood of our economy, Wallis said.

Wayne Croad, majority owner of Finance Direct, said he hoped to have his peer-to-peer service, Lending Crowd, operating this year.

He said peer-to-peer lending was an inevitable next step in the evolution of the finance industry. He said the internet was disrupting a number of industries, and it was just the next in line.

Its one of those you cant stop progress moments, Croad said.

Croad said his company was well positioned to take advantage of the opportunity, as Finance Direct already had a good understanding of lending and risk. Its an area where we want to participate.

Peer-to-peer services would target business that was currently the domain of the big banks, he said. Its a direct play against bank customers. The rates will be more competitive that what banks are offering for debt consolidation, credit cards, and car and boat loans. Thats the space well be looking at.

He expected to offer loans up to $50,000 and said the market would decide the interest rate.

CommissionCroad said he expected to see opportunities in peer-to-peer lending for mortgage brokers. We deal with a number of mortgage brokers now. I think the right thing to do would be for mortgage brokers to refer customers to the site. If they cant use their property as security for a loan, I hope [brokers] would refer them through and put together a different type of arrangement, with commission paid for the referral to the site.

Mortgage brokers were a valuable source of business, Croad said, and eventually peer-to-peer lending could even be expanded to be used when people were looking for home loans. Mortgage business does lend itself to peer-to-peer as well. But theres no model to follow overseas, no one is doing peer-to-peer mortgage products.

Credit cards and personal loans tended to be higher-margin offerings for the banks, he said, which was why they were the usual peer-to-peer targets.

Theyre not targeting lower yield mortgage business but they may do in future, Croad said. Wed want to see a successful model operating before launching it ourselves.

Croad said peer-to-peer lending seemed a good fit for him because Finance Direct was already operating as a non-bank lender. He said the barrier for entry to the market was slightly higher than for crowdfunding providers. We tick the regulatory boxes anyway. We understand the market. Crowdfunding is for venture capital, the entrepreneurial market. Thats not what we have experience in.

Massey University banking expert Claire Matthews said peer-to-peer lending was very popular overseas. Some lenders could offer better interest rates because the company running the platform did not have banks big operational costs. In Britain, a survey found 9% of respondents to a consumer association survey had invested via peer-to-peer lending.

Traditional loanPeer-to-peer platforms did not tend to do as much analysis of the borrower, she said, so the risk to those investing their money could be higher. Some borrowers were those who could not get a traditional loan while others were people who did not want to participate in the standard banking system.

But John Walley, who is working through the process of applying for a licence for Lendit.co.nz, said the risks were being overstated.

He said the key for the peer-to-peer market was the difference between what banks pay on deposits currently about 3.5% - and what they charge for unsecured lending, upwards of 15%. Between those two numbers is our space to play, Walley said.

He said good, quality borrowers would be able to approach Lendit.co.nz for a cheaper loan than they would get from the bank and

people with money to deposit would be able to earn more on their cash. The person borrowing it wins a bit and the person lending it wins a bit.

Walley said he would not consider borrowers without a good credit rating. Because the loans were unsecured, borrowers had to have some skin in the game, he said. If they already had a bad credit rating, they had nothing to lose.

But the process of obtaining a licence is not straightforward. He said the system seemed to be geared towards big organisations and existing non-bank lenders, not small start-ups. The FMA is using a sledgehammer to crack a nut and dont seem to appreciate some risks and fails to grasp other risks.

AdditionalHe had been told that his application would take more than the 40 hours allocated in the $6238.75 peer-to-peer application fee, and each additional hour would be charged at $230 for board members time and $178.25 per hour for staff. Lendit is also seeking to offer crowdfunding.

Walley said that as a start-up, it was important for Lendit to manage its resources, and the FMA process seemed onerous for the amount of risk that would be taken. Im not sure what risk theyre trying to avoid or prevent. Were working through the licensing process and opening more and more esoteric conversations. We could go live tomorrow if we were licensed.

The size of lending would be small enough to keep the risks down, he said. He expected that the type of lending by his site would be similar to overseas examples, where a typical loan was $4000, supplied by a group of lenders each lending $100. All borrowers and lenders are choosing to use the platform, borrowers information is entirely available to lenders and investment information is entirely transparent to investors and all risks are clear. The quantum of loans is relatively small.

BorrowingWalley said he did not expect anyone providing peer-to-peer or crowdfunding platforms to make a lot of money. Im much more interested in getting this end of the market working beyond borrowing from friends and family.

He said peer-to-peer lending appealed to him because it would bring people into the idea of using their money in a more creative way than just leaving it on deposit with the bank. I hope it will lead people into crowdfunding. Thats where I see the benefit.

Another group eyeing a peer-to-peer license is Harmoney, fronted by Rob Campbell and Neil Roberts. Snowball Effect is operating crowdfunding for small businesses and money matchmaking service Nexx is believed to have been working on its launch for some years.

031031

By Jonathan Flaws

LEGAL

HEARING CAN DECEIVE, SEEING IS BELIEVINGCommunication and informing the borrower salient details can be lost in translation, or merely lost in the retelling. Here are some useful tips to help make those informed decisions.

An informed decision is made

based on decision steps; it is not one made by the roll

of a dice

An article in Good Returns on Friday June 13 emphasised the difference between what is said and what is heard.A professional Adviser makes his or her living out of communicating information to a client, helping that client analyse the information and apply that to their needs and objectives. By this transfer and analysis of information, clients are assisted by the Adviser to make an informed decision about the product or service that is best suited for them.

The vast majority of the communication is the spoken word. But as the Good Returns article explains, people remember most what reinforces beliefs that they already hold. Put another way, what you say and what your client hears and retains are often quite different.

This is the the lost in translation effect. Its not translation from one language to another but translation from one persons thoughts and experience to those of another. Professionals are the not good translators. We deal in words and concepts and ideas that are specific to our business or profession on a daily basis. As a result, what to lay people is quite foreign is to us basic and fundamental. And its easy to forget to take the time to translate these concepts and ideas to our clients.

It gets worse when what is explained is explained down a chain. Theres the old WWI joke about the front line requesting by word of mouth down a chain of people, send reinforcements were going to advance which becomes send three and four pence,

were going to a dance when it reaches the commanders behind the lines. What you are told by the lender may be repeated to your client by you with a different slant. What your client hears, retains and passes on to others who are not present may not be slanted but be heading off in a completely different direction.

What do people really know about mortgages?In 2011, Kym Dalton at CreditEd in Australia held a focus group at a manage your money course attended by 200 whose ages ranged from 22 63. Of the attendees, about 80% already had mortgages. They were asked to complete a mini quiz of 33 questions. Only 2% of participants scored 100%. The full findings are set out at the end of this article.

We all know the difference between a mortgage and a loan contract, but 74% of the

participants didnt. I suspect that with the recent media focus on LVR restrictions and the impact on housing, the number of people in New Zealand who could not calculate an LVR would be less than the 68% but maybe not by much.

The fact that 27% assumed that any loss on a sale was absorbed by the lender and that loans were non-recourse is interesting but the fact that roughly half couldnt explain the obligations of a guarantor and half thought only one person in the couple had responsibility for repayment is a bit of a worry.

The focus group questions related to generic financial concepts. If there is this level of uncertainty with basic concepts, how much more do you think there might be when it comes to product specific matters? Have you ever tried to explain to client in the past how to apply the safe harbour formula for calculating break costs? Have you in fact seen these in the regulations and understood them or better still, used them to make a calculation? Well done you, if you have, for I certainly find them confusing.

But when a lender took its own approach to calculating a reasonable estimate of its loss on an early repayment, in words that were easy to understand, the lender was taken to Court. The Judge found that the plain and simple language of the lender fitted within the purpose of the legislation and found in favour of the lender. Amendments to the Act may make it easier to explain that break costs only relate to fixed interest rate, but the formula remains and most lenders have their own version of calculating break costs.

032

Communication and the informed Borrower.The issue of ensuring that your communication is as good as it gets has been raised to a new level by the introduction of the lender responsibility principles in the recently passed Credit Contracts and Consumer Finance Amendment Act 2014. Section 9B(3)(b) requires the lender to assist the borrower to reach and informed decision: as to whether or not to enter into the agreement; and be reasonably aware of the full implications of entering into the agreement.

The highlighted text is significant. The word assist means that you can no

longer just sit back and hope that what you

have said sinks in. The fact that you have disclosed information is no longer good enough. You have to jump to the other side of the desk and guide the borrower through the information.

The words informed decision and whether or not mean that once on the other side of