In an eye-catching move, KiwiSaver provider Simplicity has announced it is to offer home loans.
The offer will be limited to Simplicity members only, and only a small, limited allocation is planned.
And they will only be offering mortgages to members who are first home buyers.
The offer is for a floating rate mortgage at 2.95% pa where they will give three months notice "if interest rates rise". It is not clear what notice will be given if interest rates fall however, although Simplicity says it hopes to pass reductions on immediately even if their formal documentation doesn't provide for it.
Another unique feature is that these loans will have "no break or penalty fees", allowing partial or full repayment at any time without cost.
To be eligible for a Simplicity first home loan, applicants will need to have been a Simplicity KiwiSaver member for at least one year and meet the criteria of a first-time homebuyer. First home loans will be offered via a ballot system run monthly. Simplicity members can register for the first ballot on November 1st, which will be drawn in early December. Successful members will then have six months to find their first home.
Simplicity says $50 million of loans are expected to be made in the first six months of the program. The company uses an example of a $600,000 home loan in their promotional material, and on that basis, they have a target of well less than 100 loans in those six months, or about three a week.
A core limitation in this offer is that borrowers' mortgage "repayments do not exceed 30% of combined after-tax income". This is a very tough standard for first home buyers and will ensure that only the wealthiest fraction of them will qualify. For the Company, this ensures minimal exposure to defaults and distress costs on loans.
Simplicity also says it "expects to achieve higher investment returns for its KiwiSaver and Investment fund members". They will not be borrowing to support the mortgage product nor using any external funding.
But funding it out of their KiwiSaver and Investment funds may seem unlikely to help members' returns if the gross mortgage interest rate is 2.95%.
According to the latest FMA monitoring, Simplicity's return to members in their KiwiSaver funds are:
| Simplicity ... | Conservative Fund |
Balanced Fund |
Growth Fund |
Guaranteed Income Fund |
| Number of members | 1,233 | 3,897 | 16,983 | 21 |
| Value of fund ($ mln) | $46.1 | $131.8 | $509.8 | $2.0 |
| average member's balance $ | $37,421 | $33,819 | $30,019 | $96,834 |
| Market index, past year return | 8.37% | 9.15% | 9.69% | 8.31% |
| Past year return (%) net charges and tax | 6.06% | 6.96% | 7.68% | 6.03% |
| Past year return (%) net of charges gross of tax | 8.03% | 8.63% | 9.21% | 7.63% |
| Market index return since fund started (%) | 5.42% | 8.64% | 11.33% | 7.30% |
| Return since fund started (%) net | 4.59% | 6.70% | 9.21% | 5.44% |
| SOURCE: FMA |
Exactly how charging 2.95% for their new mortgage program can improve these investor returns will be unclear to many readers and Simplicity members. But there is a way, and it depends on the fund asset allocations.
In any fund portfolio, there is an allocation to fixed interest investments and Simplicity has these. The yield of these has now fallen to very low levels and well below the 2.95% gross interest these mortgages will earn. A substitution away from that low fixed interest yield will be positive for Simplicity's earnings, provided that is how these mortgages are funded.
However, at the same time, falling bond yields bring rising bond prices and they will then be giving up those gains. That will be important to the members invested in the Conservative and Guaranteed Income Funds, and not unimportant for Balanced fund members too. Net, there could be little earnings advantage for these members, and in the end all there is is a substitution from investment grade low risk bonds to first home buyer mortgages. Simplicity members will want to be sure that is risk-positive.
Simplicity says it is absorbing the costs of back-office support for its mortgage portfolio internally. Mortgage administration is being handled inhouse.
But the point may be more marketing exposure than profitable business. This announcement will garner wide exposure for the company, its chief executive Sam Stubbs and his predictable bank-bashing campaign. Potentially that's effective marketing to get more members to sign up. On that basis, a 2.95% mortgage rate may be an effective marketing exercise. Whether that results in a rush of new members and then disappointed new members expecting to get loans as super-cheap rates remains to be seen.
61 Comments
For about 1/3 of the population its the reality if you want an actual house (instead of an apartment or unit) without 2 hours of commuting each day. But the 20% deposit and FHB restrictions are probably more of a factor really.
As someone with their kiwisaver with Simplicity, its great that they are being super risk adverse with who they are lending to, keeping my money safe..
As a potential buyer in Auckland, the 20% deposit limit makes it pretty irrelevant to us unless we decide to shoehorn ourselves into a small unit for a few years before buying a real home.
Yes agreed, being risk adverse is vitally important. So having a 20% deposit limit is good. Though I would check with them on this small but possibly risky detail: " Simplicity says it is absorbing the costs of back-office support for its mortgage portfolio internally. Mortgage administration will be outsourced". My question is; Outsourcing to who and where?
Wow you guys are behind the times, even the Bank of China is offering a 2 year fixed rate of 3.15 % in NZ at the moment. Go look at the mortgage rate table: https://www.interest.co.nz/borrowing/mortgages
CJ, please refrain from commenting on Interest rates, it's clearly not your field of expertise. Of course we know some Chinese banks offer lower rates but again you cannot compare the services these banks offer to the 4 OZ banks + Kiwibank. I doubt you have any mortgages, probably you never had one, this lack of experience really shows in your comments, stick with commenting on issues you know.
What an innovative idea from this not for profit business! Can only see win win for young FHB Kiwisaver investors with lots of marketing noise and new member attraction for Simplicity. Possible downside for their bond heavy schemes but a feel good factor for any savers cheesed off with cartel like falling TD rates and pleased to see a bit of disruption and innovation in the house loan/Kiwisaver market.
Although a step in the right direction, Simplicity's investment portfolio could contribute at best $100m in mortgages. It's a drop in the massive ocean that is NZ's housing loan market, currently estimated at $268b, hardly forcing banks to follow suit and drop rates.
Could Simplicity's innovative idea disrupt the traditional model by bringing in more "crowd-funded" lenders into the housing market? In the current state, partially at best.
Why would it not stack up?
Simplicity is just diverting some of the funds they would invest in Treasury Bills (and similar) at ~1% yeild into a small pool of mortgages at 2.95%. Unless the overheads of issuing mortgage and tracking payments cost them over 1% they will at least double their returns on those funds with not much increase in risk given their very conservative lending criteria.
This will create a huge liquidity issue though. Investments in treasury bills are almost on demand. Mortgages? not so much so. Banks have immediate access to international funds to manage their liquidity. What simplicity is going to do? I guess they are betting on no withdrawals from their members. But that is very risky too. What if members want to move to another provider? For this scheme to work, they will need to have additional terms with their members, e.g. to withdrawal or transfer for a certain period of time to manage their liquidity risks.
I think you are making a mountain out of a molehill. Inflows are going to hugely out strip withdrawals, they get 3% of their members pay packet every paycycle( + employer contribution), and the mortgage payments coming in too. If they pre-allocate funds to the mortgage ballot which then don't get accessed for up to 6 months after the ballot.. lots of time to manage liquidity.
It is an assumption. What if for a period of time, there are more people leaving Simplicity to join other providers than there are people joining? Also, some will withdraw their deposits to buy a house, some may withdraw to leave the country etc. If the mortgage is going to be a serious size, Simplicity will have a big liquidity issue. If it is only a token size, then sure, no problem really. The same with credit risk and all. If the whole portfolio is 1% of their asset, who really cares. But if it amounts to something significant, then they will have liquidity issues like any other financial institution with mismatch assets and liabilities.
Another point (in addition to liquidity risk) is that operating a mortgage portfolio is much more expensive than operating a portfolio of bonds. One simple difference is the administration of collateral for mortgages. This would surely wipe off some of the returns.
Vote with your feet then. Though i doubt most kiwisavers really know what their money is invested in. You think 100 mortgages from Simplicity is risky, how much of your kiwisaver via another provider is invested in bonds and shares in the big four banks with even riskier lending profiles?
They might eventually extend it to other Owner Occupiers I guess, but according to their website they have ruled out interest only, use of guarantors, 2nd mortgages and have said they aren't keen to lend over a million dollars, so extremely unlikely they will go anywhere near investors.
Interesting product and I can see the logic of it - bonds are falling to almost zero if not negative. So lending for home loans on a very strict criteria could in effect replace bonds and other fixed interest products.
Given the size of KS now it will be interesting to see if the other non-bank providers do the same. However, another factor to consider is what is the return on Simplicity KS compared to another provider - is the reduction in the home loan rate worth switching? Some interesting calculations indeed.
Exisiting Simplicity members that meet the criteria would be foolish not to apply. If you win the ballot you won't be forced to buy a house. But you will get a great deal if you do. The new members who switch to Simplicity on the basis of this deal will be the ones funding the loans. But they won't have a chance to enter the ballot until next November. And where will bank interest rates be by then?
Pretty true. Although, they haven't been clear yet with all the details. The speak of an establishment fee that also includes a registered valuation (they dont accept any other type of valuation).. so that might run $1500+. Also, not clear if you'd get a cash contribution like with major banks. When the savings is just 0.51% v 2 year fixed rates, is it that much of a great deal? Also, while it is great that being variable means you can pay lump sum, there is an inherent risk in that for the borrower if rates bounce up.. all well and good when they are low like now.
@400k, 20% dep , just 40k each mostly in kiwisaver, 320k @2.95% is just $181 a week in interest, say 240 a week repayments (term dependent), so long at they earn a combined net $800 a week they'll meet the 30% or less net income test.
Too easy a discussion for FHBs currently paying 550-600 a week rent for a 400k 2 bed apartment in either auck or central welly
Not entirely sure I would be comfortable in having my Kiwisaver money invested in a handful of mortgages.
I cant see how its a permitted investment in the SIPO unless the Trustee has approved it... and I would like to see how the Trustee has satisfied themselves that the pool of mortgages that is being funded is suitably diverse and appropriately managed.
One of key requirements should be that the pool of mortgages is well-seasoned... this surely fails as the investments would seemingly be into brand new mortgages which are more susceptible to default than seasoned mortgages.
I'd be very concerned if I was in a Simplicity Kiwisaver fund.
At <80% LVR and <30% DTI it would take a disaster for significant losses. Would suspect other asset classes that every KS provider holds under such a scenario would be severely under pressure too, so not unique to this asset class.
From the faq:
Q How much KiwiSaver and Investment Fund money will be invested in mortgages?
We are finalising these numbers. They will be conservative, reflecting the fact that this is a different asset class and the underlying mortgages are less liquid than bank deposits
Understand.. but its not a strategy I think a trustee could approve and certainly one I wouldn't be comfortable investing in.
I understand Simplicity's desire to disrupt the mortgage market however Sam Stubbs has to remember he has to invest in the interests of the kiwisaver investors... not in the interests of Simplicity.
With no track record of originating and servicing mortgages and no seasonality in the book, the trustee should surely conclude that $1 in this strategy is too much.
Anyone awake at the FMA?
They came down hard on banks offering discounts on mortgages if people brought their kiwisaver over.... and Sam Stubbs seems to be doing exactly the same by saying his low mortgage rate offer is only open to kiwisaver members.
In terms of its merits.... $50m of the current Funds under Management (FUM) is over 7%. Hardly a conservative allocation to an unproven, unseasoned mortgage pool and with only 100 mortgages doesnt make it particularly diverse. Would seem like an aggressive allocation and given most of their FUM is in the growth fund it is hard to reconcile.
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