Personal Finance

  • Elizabeth Kerr gets personal with her reasons for building a money machine

    By Elizabeth Kerr

    People decide to build their money machines for all sorts of different reasons.

    There is no right or wrong reason.

    I’ve personally never heard someone say they wanted to build a money machine so that could have a big ole house on the hill and drive around in luxury sports cars whilst blowing their loose change on the good looking and good cooking. Nope, never!

    Typically people share more subtle reasons for wanting the financial independence that a money machine provides. Reasons that are more reflective of their inner values – such as:

    • “I want to be able to take my kids to school each day”
    • “I want to be able to coach my sons cricket team”
    • “I work in an industry where job security is fickle”
    • “I want to provide for my children and the generations that follow”
    • “I don’t want to have to worry about how to afford healthcare costs when I’m older”
    • “I want to go into Ministry for my local church”
    • “I’ve want to travel home every year (and escape the NZ winter)”.
    • “I’d like to do a PhD one day”
    • “If I loose my job I don’t want it to affect my lifestyle”
    • “I want to stay home for the kids”
    • “I’d like to become a yoga instructor”
    • “I’m passionate about giving my kids a private education”
    • “I’m interested in volunteering overseas”

    You get the idea ... There is no single or right reason to decide to build a money machine, but you must have a reason.

    When times get tough and temptation starts nipping at your heels; or Harvey Norman has a half price sale, it’s your reason that will keep you accountable to saving and then investing your hard earned money.

    So why did we start a money machine?   Motherhood made us do it!   Pull up a chair folks I’m about to get personal.

    *cue classical story telling music*

    Once upon a time our accountant sent through an email suggesting we attend a seminar doing the rounds about Property Investing.   (Note: when your accountant emails you suggesting you need property education that’s a pretty strong red flag that you’re not doing it right!).

    And in that seminar we realised we were certainly NOT doing it right.   We had a few properties but two of were leaking like they were made of weetbix, a block of money-sucking land and our PPR.  Not exactly the stuff early retirement dreams are made of.   Oh and we only had one income and some small savings.

    In our personal life at that time we had just been blessed by our first son. And quite honestly I thought it was a shitty time (no puns intended).

    I did not evolve into the earth mother I had envisaged myself to be. Besides the fact I had the cutest child the world had ever seen, he didn’t feed or sleep and I was quite sure I was never going to physically survive the experience. Hubby and I spent a lot of time wondering how people managed to go on to have more than one. I was always generously swinging between pride and elation to boredom and depression.

    But in amongst it all I had this GENIUS idea!!!   With the few brain cells remaining, and the seminar fresh in my mind, I thought –

    “What if we could build a Money Machine that could replace my husbands’ income?”

    Obviously we can live off one income and if he didn’t have to go to work then he could stay home and we could do this parenting thing together.  Genius!!!   In my imagination we would spend the day pushing the most beautiful sleeping baby the worlds ever seen around trendy café’s drinking lattes and reading newspapers every-single-day!   (The only realistic part of that is of course the money machine part).   The baby latte experience wears off as soon as sleep depravation kicks in and you figure out coffee is medicinal and don’t give a flying hoot for trend.

    Anyway, achieving this goal became my entire focus. The idea of having someone to tag-in to parent at any time was a pretty powerful motivator. I dedicated every spare moment to thinking about it, I scoured the internet for blogs from others who had pulled it off and bored the pants off anyone who would listen. Every financial decision we made was in light of this goal.   Every single spend was questioned. Our lifestyle design suddenly became very intentional.

    Bye-bye went the BMW X5 and random block of beautiful but money-sucking land, hello leaky building remediation, excel spreadsheets and saving 30-50% of our take home pay. Added to that was a selection of the smartest property investors I’ve ever met whom had access to up to date market knowledge and ta-da…. one self sustaining property portfolio and the bones of our money machine was born.

    My reason for building a money machine was so powerful for me that I was going to let nothing distract me from achieving it.  Those that succeed with their own money machines have powerful reasons.  

    You need a reason!

    Comment below, find me on facebook or email me at Elizabeth.Kerr@interest.co.nz.

    (I’m very pleased to report that I eventually got the hang of parenting and did go in and do it all over again a few years later. But I cannot stress enough how empowering it is to know that whatever happened we can flick on the machine and I can tag him in at any time).

  • Bernard Hickey suggests removing cash and adopting a blockchain-type system for transactions and savings accounts that is set up and hosted by the central bank to combat deflation, tax evasion and crime

    By Bernard Hickey

    It's easier than it ever has been to imagine a New Zealand without notes and coins, and not just for the convenience factor.

    A cashless society could help us combat crime and tax avoidance by making it much harder to trade illegally and in an untraced way. It would also avoid the problem of cash hoarding if interest rates were ever cut to 0%, or even negative rates. It would make it much easier to have negative interest rates that gave the Reserve Bank the power to stimulate the economy by charging savers to look after their money. A move to a digital currency could also allow us to do without banks for transactions and save an awful lot of money in processing and conversion fees.

    So why don't we do it? Now that most people have smart phones and almost all retailers are connected to a payments network, it would seem a simple step to remove cash from the system. After all, many of us use EFTPOS and contactless Visa and Master cards to pay for things. Why not switch completely and remove all the cost and danger of storing, transporting and handling cash?

    Yet it's proving much harder than many thought, and it's not just a New Zealand problem. Despite all the gadgets and terminals, there is actually much more cash in circulation than there's ever been. The Reserve Bank reports there was NZ$4.96 billion worth of notes ands coin sitting in wallets and vaults and under mattresses as at March of last year. That's up 61.6% from the NZ$3.07 billion in circulation just 10 years earlier.

    A lot of money was withdrawn from ATMs by worried savers during the Global Financial Crisis and has never been re-deposited. Almost NZ$200 million was also distributed in Christchurch in the aftermath of the earthquakes to help Cantabrians get by when their shops couldn't connect or use their regular payment systems. But even with these special events, the amount of cash in the economy has been growing at surprisingly strong rates and faster than the economy as a whole.

    To be fair, New Zealanders hold and use less cash than people in most other countries. The cash we have in circulation is worth just over 2% of GDP and we hold an average of around NZ$1,000 each. Australians hold three times as much as us per person, while Americans hold four times as much and Japan's cash holdings are a startling 18% of GDP.

    A large part of the rise is due to STDs -- sex, tax and drugs. The secret economy loves cash and it's no surprise IRD is having to launch regular crackdowns on cash jobs to ensure everyone is paying their GST, PAYE and company tax.

    But there's something else going on too, and not just here. Extremely low inflation and not so much faith in banks, particularly in the Northern Hemisphere, has encouraged people to hold their savings in cash because the real value of that cash is not being eroded much.

    Only Sweden has managed to avoid this growth of cash under mattresses and in tinny houses. The home of Spotify and Candy Crush is also the home of an app called 'Swish'. It is an app set up by Sweden's banks that allows easy and cheap payments between banks. It avoids the Visa/Mastercard or EFTPOS systems we are used to. ANZ's goMoney does something similar, but New Zealand hasn't yet found an easy smart-phone based system that mimics EFTPOS and can be used by everyone cheaply. Our banks could do it, but seem determined not to invent a more modern version of EFTPOS and allow Visa and Mastercard to take over our payments system by stealth.

    The holy grail would be a type of bitcoin system that allows people to pay each other without having to use the banking and credit card systems and avoid all the transaction fees and conversion fees that clip the ticket on the (legitimate) economy's every transaction.

    One idea suggested by the Bank of England last year was the creation of a digital currency by the central bank itself. It would use the 'blockchain' technology at the centre of the bitcoin system, but that would be reliable and backed by the state. Everyone would have a central bank account and simply transfer money between each other without having to pay fees.

    Such a system would allow much cheaper transactions and allow the central bank to impose negative interest rates, once it had also gotten rid of cash. It would be much easier to police crime and reduce the ability to avoid tax.

    It all sounds like a radical idea, but it's one that central banks and policy-makers are considering in other countries as they try to encourage spending, investment and efficiency in a world of deflation, crime and tax avoidance.

    New Zealand is some way off the negative interest rates now set by Europe, Sweden, Switzerland and Japan, but it has been a financial policy pioneer in the past and matches Sweden in having a relatively low amount of cash stashed under mattresses.

    It may be time to stash the cash back in the central bank and start using our phones to do all our business.  

    ------

    A version of this article first appeared in the Herald on Sunday. It is here with permission.

  • RBNZ's Toby Fiennes argues deposit insurance would blunt incentives for banks and depositors to monitor and manage risks properly

    By Gareth Vaughan

    Reserve Bank head of prudential supervision Toby Fiennes has reiterated the bank's opposition to deposit insurance, arguing it blunts incentives for banks and depositors to monitor and manage risks properly.

    In a speech to the New Zealand Bankers' Association and BNZ, Fiennes said the importance the Reserve Bank places on market discipline is "strongly reflected" in its prudential regulatory regime. 

    "It's also one of the reasons we don't have, and are not advocating, deposit insurance - a clear difference between New Zealand and most other developed countries. Deposit insurance blunts incentives for banks and depositors to monitor and manage risks properly. Research by the World Bank finds that deposit insurance lowers banks' interest expenses and makes interest payments less sensitive, though not insensitive, to bank risk and liquidity," said Fiennes.

    "While these effects could be ameliorated somewhat by risk-based pricing of deposit insurance, in practice this is extremely difficult to achieve. It also favours some parties relative to others: for example, people with larger deposits and those who manage their affairs to create multiple protected deposits."

    Market participants must have incentives to monitor banks, and some aspects of the regulatory framework such as the Open Bank Resolution (OBR) Policy and no deposit insurance, reinforce these incentives, Fiennes added.

    NZ an outlier

    New Zealand is an outlier among developed countries in not having deposit insurance. The likes of Australia, Canada, Hong Kong, Singapore, the USA, India, Britain, and major other European Union countries all have deposit insurance. Under the Australian scheme, deposits are protected up to a limit of A$250,000 for each account-holder at any bank, building society or credit union that's authorised by the Australian Prudential Regulation Authority. In New Zealand all of the Labour Party, the Greens and NZ First have advocated for deposit insurance. 

    (You can see my recent opinion article on deposit insurance here, and also George Friedman on the lurking crisis of bank deposits here).

    Fiennes, meanwhile, went on to say a financial system in which depositors can afford to be indifferent to the risk of the bank they invest in will be a weaker financial system with people chasing return with no regard for risk.

    "It is of course true that many people expect governments to stand behind their deposits. That expectation was reinforced by the widespread government guarantees, including in New Zealand, during the Global Financial Crisis. The existence of an expectation, though, is not a sound reason to adopt deposit insurance. A key virtue of our OBR tool is that it provides authorities with the ability to impose losses on creditors without closing the bank. This supports market discipline and improves incentives on investors and larger depositors to monitor banks," said Fiennes.

    (Here's our story on how the OBR might work, if implemented after a bank failure).

    'Deposit insurance could reduce market monitoring incentives'

    Fiennes also noted this year's IMF Financial Sector Assessment Programme (FSAP) review of New Zealand will be a major focus for the Reserve Bank this year. This will involve the IMF assessing the regulatory frameworks overseeing the banking, insurance and non-bank deposit taker sectors, financial market infrastructures, and the Reserve Bank's macro-prudential policy framework. The last IMF FSAP of New Zealand was in 2004.

    "We recognise the benefits of regulatory discipline in many areas, while wishing to retain and indeed strengthen the market discipline pillar. As a result, we are not advocating for measures such as deposit insurance that could reduce market monitoring incentives, or watering down disclosure obligations," Fiennes said.

    The Reserve Bank will shortly be consulting on its "dashboard" concept, which it's proposing to introduce in place of banks' off-quarter disclosure statements. The dashboard is touted as an electronic form of bank reporting that's more accessible, comparable and timely, and that should reduce costs for banks.

    "Our current focus is on a quarterly rather than a monthly dashboard, covering a sub-set of the information we receive through private reporting," Fiennes said.

    (Here's Fiennes' full speech, and a Bulletin article on market discipline the Reserve Bank has released). 

  • We've looked at the P2P lenders from the perspective of borrowing - but how about if you want to invest?

    By David Hargreaves

    Less than two years ago there were none. Now there are four.

    Yes, as we've seen, that’s how many licensed peer-to-peer (P2P) lending businesses are now up and running.

    While new ways of borrowing money are always welcome (and you can read our article on P2P from the borrowers' perspective here) you can argue that the more vital contribution P2P is making to the financial scenery at the moment is in its adding to investment options. With interest rates continually, it seems, heading toward the floor, the options are many for the borrower.

    But what if you've got a bit of cash you would like a decent return on?

    Jaded would-be investors, cowed by viewing a constant diet of sub-4% term deposit rates can give their sore eyes a rest by casting them on to double digit rates of return potentially being offered by some of the P2P operators.

    The risk is, of course, that there is a risk. You are lending your hard earned directly to someone else. And they might not pay it back. However, unappetising rates of return might look with the banks, you do know with absolute certainty that you would get your principal back.

    Ah, but what is life without risk. The other point about P2P investing is that, potentially, it’s actually a bit of fun. I hasten to add that nothing in this article should be taken as investment advice - I'm not an adviser and I'm as new to this P2P stuff as the next person.

    I will disclose an interest early here and say that – as a bit of the aforementioned fun – I early last year invested a four-figure sum with the first P2P cab off the rack Harmoney.

    I don’t wear my heart on my sleeve, so won’t be disclosing hard dollars and cents, but for the record, I will say that so far my borrowers have been keeping up to date with their repayments (though hold the phone, I see just at the moment two are in arrears) and since last March I’m showing an annualised rate of return somewhat higher than Harmony’s platform average, currently, of 12.66%.  What that tells me is that I’ve (inadvertently) taken on rather more risk than I really intended to. And to that extent I would caution new players (do as I say, not as I did!) not to go at investing your money like a bull at a gate and if the right kind of credit worthy investment is not available at the time you look then be prepared to wait. (I wasn’t!)

    Still, at the moment all is well and as I long as I don’t dwell on the fact when I’m trying to sleep at night that there are some people out there paying nearly 40%!!! for the pleasure of accessing some of my money, it is, as they say, all good.

    But the P2P scene is now much more than just about Harmoney. Already there’s an encouraging diversity of options available. I've pulled together some of the key differentials between the operators in the table below. Also note that the Financial Markets Authority, which approves P2P operators, has this brochure available.

      Harmoney LendMe Squirrel Money Lending Crowd
    Minimum investment $500 $1000 $500 $500
    Fractionalisation? Money broken into $25 lots Money broken into $1000 lots No Money broken into $50 lots
    Secured or unsecured loans Unsecured Secured Secured or unsecured Secured
    Fees Service fee of 1.25% of principal and interest payments collected on each note 0.9% to 1.95% per annum depending on risk of loan Service fee of 2% of outstanding loan balance per annum 10% of the interest collected
    Terms 36 months, 60 months Up to 60 months 24, 36 and 60 months 36 months, 60 months
    Information available to investor about borrowers? No personal details Detailed information after loan agreed. Lenders can ask borrowers questions about the loans No personal details No personal details
    Interest rate range 9.99 - 39.99% 6.64 - 15.04% 9 - 14% Personal: 7.90 - 19.10% Business: 8.95 - 19.75%
    Returns? Current average after fees of 12.66% 5.74% to 13.09% after fees depending on risk You choose between 7% and 9% 7.9% to 19.75% minus the 10% interest fee
    Open to personal and institutional investment? Both Both Only personal Both
    Can borrowers repay early? Yes Yes

     

    Yes Yes

    From my experience so far - and bearing in mind it has been limited to just the one operator, there are a few issues that come to mind. I personally find it a bit frustrating when borrowers repay early (and it tends, from my experience so far, to be the higher-rated borrowers). There's no penalty to the borrower, while you as the lender then have to go back and reinvest that money. Frustrating if you are an essentially impatient type like me. Then there's the whole question of what you should know, if anything about the people you are lending to. And there's some marked differences in approach emerging here between some of the operators.

    So, with some of these thoughts as a cue, I put the same set of questions to each of the four operators and below are the responses I got. Thanks very much to all four for taking part. I've listed the responses in alphabetical order.

    First up, here's what Harmoney said:

    There are now four P2P operators offering a variety of different investment options. What particular advantages/services/investment options do you think your company has over the others and why should investors choose you over the others?

    Harmoney pioneered p2p lending in New Zealand and remains the only platform of scale. Most importantly that scale has been planned and we delivered to that plan.   For example, openly stated that our first year target was $100m in lending and we achieved that in 50 weeks and we are on track to lend another $100m just 4 months later. Investors are currently getting 12% “RAR” Realised Actual Returns on the Harmoney platform on average, results vary of course check out our marketplace statistics page at https://www.harmoney.co.nz/investors/marketplace-statistics

    Firstly, Harmoney has always seen the competition as more traditional places for fixed interest such as Bank Term Deposits (low risk to investors) that attract the lions share of dollars invested offering low risk but also low returns. Harmoney's 3,500 + active retail lenders take the risk of loans not paying back but enjoy gross returns from 9.99% to 39.99%, Harmoney's actual realised returns is currently 12% on average at 22nd January 2015 after all of Harmoney's fees and all actual written off loans have been deducted - after just over a year in business! Harmoney offers a range of marketplace statistics here market stats.   See our marketplace statistics page at:  https://www.harmoney.co.nz/investors/marketplace-statistics

    Scale is critical for any marketplace, choice of loans to invest in, brand, investment in the platform, engineering investment, attracting a great team, borrowers and investors to our marketplace and wider community. 

    Secondly, the marketplace itself for the experience of borrowing or lending. Most importantly the empowerment to understand, choose and manage the risk you want to take as a lender for the return that you want. 

    Thirdly, Harmoney offers 30 Credit Risk grades to choose from, each individually priced and every loan fractionalised down to $25 so that you can invest in many loans, choose your risk and finally manage to the return that you want. Challenging to build and operate, marketplace lending platforms offer transparency, risk rating and fractionalisation. 

    Whereas banks stand behind their lending to the extent of their balance sheet, peer to peer lenders do not, the investors on the platform take the risk of the loan not being paid back. There are different ways of managing or packaging that risk but it is still borne by lenders. Banks manage their products by having large and diverse borrowers, fractionalisation brings that ability to be able to diversify widely which enables a more stable return. 

    Lastly, look for a team with specific knowledge for example the Harmoney team started a Personal Loan business in NZ in 2002, created credit models from scratch and lent $1.6b to Kiwis over the following 5 years. Lending is easy, it is getting the money back that is hard!  Our team has a credit in its DNA and this is critical.

    What is your attitude to institutional investors versus personal investors? 

    Personal Investors or our Lenders are the soul of our business - that's why Harmoney was vision was to offer a marketplace where the risk and pricing is open, transparent and therefore manageable.  

    Grading loans through 30 grades and fractionalising them down to $25 is challenging to say the least so we have picked probably the hardest business model for Harmoney in terms of the number of transactions we manage but we firmly believe the most rewarding for our Lenders as you have choice and if you want to you can see almost as much data the bank sees in making a loan decision before you invest. We will be constantly investing and building out functionality in our marketplace c. $35m in capital invested by our personal investors to date. 

    The alternative is some sort of fund structure, this would be cheap, quick and easy in comparison but Harmoney has and continues to build out the complexity so there is a global benchmark of transparency within our marketplace whilst also working on providing tools to simplify and automate the experience over time so our Lenders and Borrowers get to choose. 

    Do you believe that having a mix of both gives personal investors the chance to get the best investments?

    Absolutely, institutional investors offer a number of key benefits for Retail  (personal) Lenders. All the major platforms globally have institutional investors on their platforms - generally it takes 3 to 5 years to achieve this, Harmoney was able to prove up our credit models to such a degree that we achieved $100m lending capital before we launched the platform, a world first!

    The very first advantage is their understanding of Credit, Risk, Fraud, Compliance and Funding. All institutional investors are pro-active in completing detailed Due Diligence before deploying lending capital - how would retail lenders be able to achieve this level of peace of mind otherwise? 

    Retail Investors shouldn't take for granted a platform's ability to approve the right loans and collect on the money - refer to earlier point, institutions who understand the business of lending intimately generally wait 5 years, demanding 5 years of history before providing funding to platforms.   We had $100m before even launching - thus the quality of our credit model.

    Very important point is that institutions provide standby Lending Capital that means investors don't get "Cash Drag" waiting for loans to fill up and for borrowers get their money in a reasonable time also. 

    The second advantage is in Harmoney’s marketplace Retail Lenders pick and choose their investments whereas all our institutional funders take the index ie they can't pick and choose.  Institutional lenders follow retail lenders investing in the same loans for the same interest rate and risk.

    For example, two Kiwi “Challenger Banks” provide wholesale facilities - Heartland Bank for example provided a $50m lending facility pre-launch. Harmoney deploys the facility under a mandate for institutions so an individual lender providing $25 for a Personal Loan would be followed by our two funding banks - on the same gross interest rate and in the same risk.  

    Having a mix also enables us the opportunity to deliver and fund loans for our borrowers with speed i.e. 95% of our loans are funded within 24 hours.

    What is your attitude to investors having detailed information about the borrowers and do you think investors being able to contact and ask questions of the borrowers is a good idea?

    Harmoney runs a p2p online marketplace and there should be as much information as possible accessible on demand that would reasonably help retail investors choose whether or not to invest in a loan. Now that doesn't mean that Lenders need to look at every loan they invest in but they should know if they wanted to the information is there. 

    Peer to Peer Lenders should be using their platforms to deliver rich data and insights wherever possible, putting Lenders in control. Again, the bar and challenge to get this done is high and tough - the Harmoney team is working tirelessly on constant improvements to improve in this regard and always will be! 

    Direct contact between Lenders and Borrowers needs to be managed carefully. Identities must remain confidential, otherwise we could see some Lenders being pro-active in collecting their money in their neighbourhood!

    Is allowing borrowers to pay back their loans early without any penalties in the best interest of investors? 

    Yes, being repaid is always a good thing! Better to worry about late and no payers than early payers! Loan Terms are the maximum number of months the borrower will repay rather than the term of the investment. Borrower fees are highly regulated and the opportunity for fees would be unlikely to be of sufficient quantum to put those that want to pay off early off doing so. Keep in mind Harmoney and our retail lenders provide a benchmark Personal Loan product to borrowers where rates and fees are fair, honestly represented, fully disclosed without any sneaky business. 

    What course of action do you recommend to investors faced with fairly high numbers of early repayments?

    Welcome early repayments as a crucial and fairly standard way of doing business when building a loan book, keep in mind that you are building a portfolio and your early repayments mean the borrower has paid back or they have taken another loan, paying out the original loan for a higher amount and these offer an investment opportunity in the marketplace. Yes, early repayments dampen returns a little but overall lenders need to ensure that the rate you are getting back compensates for the risk. 

    Lenders should not lend unless they are thinking of building a portfolio across many loans. Some investments in some loans may not get the return hoped for. There could be many reasons for this but perhaps the most common are early payment or no payment by the borrower. Some platforms might hide these facts in someway but they remain intrinsic to building a loan portfolio. 

    Anything else you want to add?

    Four different platforms with different offers in the Peer to Peer lending vertical is very encouraging. The peer to peer value proposition is extremely strong if offered in the right way. 

    Harmoney is building the complex and hard first, we haven't always got it 100% right, but the passion of our team will enable us to reach the high bar set for us by our community. Harmoney's goal is to be the best at getting better with our counterparts such as Lending Club, Prosper, Funding Circle or Zopa. 

    Harmoney hopes to positively and meaningfully increase the wealth and prosperity of our entire community in a meaningful way and are feverishly working very hard toward that goal. 

    $200,000,000 of lending to Kiwis in just 15 months is amazing, our lenders have adopted early, embraced the Harmoney platform and given us the privilege of a start! The Harmoney team is determined to deliver a benchmark platform and experience in return - it is a long and hard journey, to hit the standard we all aspire to with a fraction of the investment our European and USA counterparts get, but hopefully a worthwhile and rewarding journey. 

    So, thanks for the help, support and passionate feedback from all our borrowers and lenders. 

    Next up is Lending Crowd:

    There are now four P2P operators offering a variety of different investment options. What particular advantages/services/investment options do you think your company has over the others and why should investors choose you over the others?

    Lending Crowd - advantages for investors

    -         The only peer to peer company in NZ whereby the Directors have successfully navigated the Global Financial Crisis and have a long and “proven history” of dealing with both borrowers and investors. I.e. The LCL Directors are the same as existing Non Bank Deposit Taker 16 years established- Finance Direct Limited

    -         100% of Lending Crowd loans have security of either a car, caveat or mortgage or combination of all. I.e. Therefore investors have the comfort of knowing that asides from robust risk mitigation systems that all borrowers have skin in the game.

    -          Lending Crowd does not charge its investors fees on principal and interest payments. Lending Crowd aligns its interests with the investors and only earns its money as a percentage of the “interest” earned by the investor. Therefore if no earnings for an investor then there is no earnings for Lending Crowd.

    -         Very simple investor registration system than allows both individual AND institutional investors to bid on borrower loans on-  EQUAL TERMS.

    -         Lending Crowd is the only P2P Lender in NZ to target Small to Medium sized business loans and this offers the investors a quality asset class to invest in as these loans are normally reserved only for the big trading banks to invest in.

    What is your attitude to institutional investors versus personal investors? Do you believe that having a mix of both gives personal investors the chance to get the best investments?

    We believe that as long as private investors and institutional investors invest on exactly the same terms then this is a positive outcome for personal or smaller investors. Firstly the personal investors have the comfort of knowing that institutional investors would not commit large sums without a very high level of due diligence. Secondly institutional investors allow borrower loans to be originated or fully funded quickly and this is essential for the credibility of the system and means personal investors can be assured the loan will proceed.

    What is your attitude to investors having detailed information about the borrowers and do you think investors being able to contact and ask questions of the borrowers is a good idea?

    Our view is that ALL investors should have a comprehensive view on the risk of the actual loan they are investing in the form of a “loan listing”. We are not a fan of unaudited Provision funds that socialise losses or hide the risk profile of an individual borrower from the investor who put their money into a particular loan. We believe a loan listing should clearly cover off the security offered, capacity to repay, stability and risk grading of the applicant. We are not in favour of investors contacting borrowers directly as it creates unnecessary noise in a 100% online system and furthermore in our view it would only cater for a very small number of curious investors who would be interested anyway.

    Is allowing borrowers to pay back their loans early without any penalties in the best interest of investors? What course of action do you recommend to investors faced with fairly high numbers of early repayments?

    Firstly Lending Crowd investors are not penalised AT ALL for early repayments or top up of existing loans. Lending Crowd we will NOT take a clip of investors “principal” and only earn its money from the investors earnings  Our recommendation to investors is to always keep their funds invested and earning interest. Don’t worry about loans being settled early or refinanced with Lending Crowd as this is a natural feature of consumer and SME loans and considered healthy and investors should make sure that like Lending Crowd that other P2P lenders also have systems to ensure overdue or defaulting loans are not being topped up or refinanced back to new or existing investors. Compensating investors by penalising the borrowers for early repayments is not the answer and goes against the ethos of Peer to Peer lending. Furthermore investors should be mindful that at some point in the future with the exceptional rates on offer through P2P that they may want or need to be a borrower.  

    Anything else you want to add?

    We know from experience that retail investors have a low appetite for risk and as P2P loan books mature i.e. in 2 to 3 years OR maybe another global or local financial shock occurs then we believe it will become apparent what P2P model is the most robust for investors. After all its not until the tide goes out that you find out who’s swimming naked.  

    Lending Crowd has created a very easy 100% online service for “secured loans” all designed to offer fair above market returns to investors and at the same time significantly drive down the cost of people borrowing money. Developing an unsecured platform like Harmoney and Squirrel for consumer loans and SME loans would have been a lot easier for us however we inherently understand that NZ retail investors have an exceptionally low appetite for risk and the loss of their capital. The objective of Lending Crowd is to over time build the trust of all investors but in particular retail investors. This will be achieved by offering fair returns but with bank grade risk mitigation.

    Now LendMe:

    There are now four P2P operators offering a variety of different investment options. What particular advantages/services/investment options do you think your company has over the others and why should investors choose you over the others?

    First and foremost, our main point of difference is our focus on secured lending. Although others may state that they will do some secured lending, we don’t believe they are ensuring that the security will adequately cover the risk associated with a loan in the way that we are. All of the loans facilitated to date (approximately $1m of lending) have been backed by 1st mortgage transferred into a bare trust for the lender. Additionally, we have ensured appropriate general security agreements and adequate insurance cover over all security are taken. This, we believe, is what enables lenders to have a far greater degree of confidence to lend larger amounts and for us to offer a higher lending ceiling to borrowers (up to $2m). By way of example of the care we take to protect our lenders, in a recent loan we facilitated, we had to ensure that the property used as security had adequate water rights (which were initially missing) so as to enable appropriate insurance cover over the property. This was an oversight by the property developer, and through our attention to detail we were able to have this issue resolved in advance of drawdown so that we could be 100% certain the investor had adequate and complete security backing their investment.

    As highlighted by the above example, a key differentiator for us is the experience of our team. We have credit managers who have approximately 40 years of banking experience each. This is invaluable when it comes to analysing any loan application, and the relationship between the loan to value ratio of the security and a borrower’s willingness and ability to repay their debt. All of this experience is brought to bear on every loan application, as we don’t feel it is appropriate to rely on an algorithm-based approach only. Particularly as one of our credit managers works with every loan applicant to structure the loan to minimise lenders’ risk while ensuring the best possible deal for the borrower.

    What is your attitude to institutional investors versus personal investors? Do you believe that having a mix of both gives personal investors the chance to get the best investments?

    To date, we have focused solely on personal investors. We want to make sure we are providing a genuine opportunity for peer to peer lending to succeed in the first instance. Our tag line is ‘kiwis funding kiwis’ and we have been true to this so far. Moving forward, we want to continue to provide a significant amount of opportunity to personal investors. With uncertainty in global stock markets, including our own, and continuing poor returns from bank deposits, we want to provide a genuinely safe opportunity for kiwi investors to be able to take advantage of LendMe loans. Given the great returns investors will receive, backed by security, we would love to see kiwis prosper by making funds available to other kiwis at fair rates of return given the risk of each loan. We will however be open to some institutional investors in the future, as we would not want borrowers to miss the opportunity to obtain funds for the things they want and need. At this stage however we are still strictly peer to peer.

    What is your attitude to investors having detailed information about the borrowers and do you think investors being able to contact and ask questions of the borrowers is a good idea?

    When borrowing through LendMe, borrowers will have the option to disclosure varying amounts of information about themselves. The first level is full disclosure where everything is shared with potential lenders except for addresses and contact details. We believe that this level of disclosure will provide lenders with a greater degree of confidence about investing in a loan. Partial disclosure will mean that borrowers’ names, addresses and contact details are removed. Because we believe that this will increase lenders’ reticence to invest somewhat the borrower will incur an additional 0.5% loading on the interest rate. And finally, borrowers can opt to be anonymous. This will mean that only high level loan application details are released to potential lenders – such as loan type, amount, LVR, interest rate, reason for borrowing, etc. In this final example no supporting documentation will be released to lenders. We believe however that this will increase potential lenders’ reticence (potentially significantly) to invest in a particular loan and so this incurs an additional 1.0% loading on the borrower’s interest rate.

    To date, we have found that lenders seem more confident to lend to people in situations that they understand. So, it seems that farmers may be more willing to lend to other farmers, and even people from a particular region seem more comfortable to lend to people in their own region (or a region they know well). With this in mind, we believe that lenders being able to ask borrowers questions will help bridge the divide in some instances. Not everyone will necessarily want to do this, because the information about the loan will stand up on its own. We believe however that there will be questions that lenders may want to ask regarding a borrower’s situation that could be the difference between deciding to lend or not. Additionally, experience from others abroad has suggested that borrowers who have been directly engaged by the lender are less likely to default. Given our short trading history, we are yet to put this to the test in NZ however.

    Is allowing borrowers to pay back their loans early without any penalties in the best interest of investors? What course of action do you recommend to investors faced with fairly high numbers of early repayments?

    Allowing borrowers to pay back their loans early without penalty provides a significant differentiator with the banks. Of course if a well performing loan is repaid early then this will mean that the investor doesn’t have the opportunity to take advantage of that loan for its full term. However, I would consider this a significantly better outcome than default. Should a loan be repaid early we would be recommending lenders to identify a new loan to invest in. At this stage, we don’t anticipate high numbers of early repayments as we work with borrowers when they apply to set the ideal loan term given their financial situation.

    And, finally Squirrel Money:

    There are now four P2P operators offering a variety of different investment options. What particular advantages/services/investment options do you think your company has over the others and why should investors choose you over the others?

    We are the only P2P Lender with a Reserve Fund that protects investors from credit losses.  We are the only P2P lender with market-based interest rates that change depending on supply and demand.  For borrowers we have the lowest fees and overall the lowest interest rates and we generate a healthy return for investors of around 9.00% with a reserve fund to protect against expected defaults.

    What is your attitude to institutional investors versus personal investors? Do you believe that having a mix of both gives personal investors the chance to get the best investments?

    We don’t use Institutional Investors.  Peer-to-peer is supposed to be disrupting the market (or dis-intermediating) for the better of borrowers and retail investors.  Offering them something they otherwise can’t get.  The types of early institutional investors are credit fund managers who are looking for abnormally high returns.

    What is your attitude to investors having detailed information about the borrowers and do you think investors being able to contact and ask questions of the borrowers is a good idea?

    It’s not practical.  And if you’re trying to invest say $100,000 into fractions you simply don’t have time to drill into too much detail.  Some investors will do due diligence and analysis and be well informed in their decisions, but many won’t really know what they are doing.  To suggest that all retail investors are astute credit managers or portfolio managers is a big stretch.

    With our platform we take responsibility for credit decisions and the platform’s performance rides on those credit decisions.  We put our money where our mouth is and underwrite the platform at 4.00% for the first 12 months.  We are the only P2P Lender with a Reserve Fund that protects investors from credit losses.  If a borrower misses a payment then the payment is covered by the Reserve Fund and the investor is still paid.  This gives investors certainty of return and the simplicity of not having to do hundreds of loan fraction to diversify.  The Reserve Fund is continually topped up by part of the borrower interest payment.  We are current reserving at 2.50% against expected credit losses of 1.50%, so the Reserve Fund will increase in size over time.  

    Is allowing borrowers to pay back their loans early without any penalties in the best interest of investors? What course of action do you recommend to investors faced with fairly high numbers of early repayments?

    Repayments are inevitable with lending and with personal loans in particular.  We don’t charge the investor a fee based on the amount repaid, so there is no cost to them when a borrower repays.  This is different to Harmoney which charges its fee on the amount repaid.

    Anything else you want to add?

    The obvious thing is what happens when we have a market correction.  

    What if losses go to 10% or 20%?  

    Depends on who you lend to and how big any market correction is.  Throw away numbers like this lack any analytical rigour.  Why not 50% or 70%?  That’s essentially what risk is all about – understanding the probability of different outcomes.

    The biggest correction in modern history in NZ was post 1987 (which got to its worst around 1992) and we briefly had an unemployment rate of 10.7%. Off the back of the Asian crisis in 1997 we briefly hit 7.70% unemployment and then 2012 at 6.90% post GFC.>

    The unemployment rate tends to hit lower skill occupations more and one industry towns. During the GFC companies were reluctant to retrench higher skilled roles as they knew they'd be hard to replace after the correction.  So ... if we (Squirrel Money) are predominantly lending to B-grade borrowers (who have a statistical probability of default of around 1.50%), live in metro areas, have an average income of $87,000 (mostly PAYE), clean credit records and 46% own their own house - how would we get defaults of 20% even in a market correction scenario?

    We are happy to grow slowly and methodically, and are firmly playing in the bank space, not the traditional finance company space. We have no desire to chase high risk loans.

    A “B" grade client (majority of our clients) would have a clean credit history and good account conduct and on average an income of around $80,000.  The borrowing rate would be circa 12%-13% unsecured which is about 2.00% lower than banks for a similar loan.  There are plenty of low risk clients out there.  Across the whole population the default rate is less than 2.00%.  People understand the value of having a good credit record.

    So if credit losses trended to say 5.00% what would happen?

    First as the Reserve Fund began to reduce we’d increase the reserving rate (which would slow down the rate of depletion.)  

    As the market got risker the borrowers would pay more.  As personal loans are relatively short term with more than 32% of principal repaid inside 2 years it does’t take too long for price movement to start to impact on the portfolio.  If the Reserve Fund went below 1.00% the trustee could elect to divert more of investor interest to the Reserve Fund (and in essence socialise the loss across all investors.)  If we have 4.00% reserves, maybe higher it would only take 3 months interest to cover the shortfall and investor principal would be protected.

    Under our model it is very difficult to lose capital.

    Some additional points worth noting.  P2P is not like a finance company in that the money is held in trust for investors.  Finance companies suffer from liquidity mismatch with long assets and short deposits.  P2P is perfectly matched.

    *This article was first published in our email for paying subscribers. See here for more detail and to learn how to subscribe.

  • The ins and outs of Harmoney, LendMe, Squirrel Money and Lending Crowd compared from a borrower's perspective

    By Jenée Tibshraeny

    Peer-to-peer (P2P) lending is gathering steam in New Zealand with four licensed platforms entering the market over the past 18 months.

    The idea is, those who need cash can get it directly from those who are willing to lend it at a price, through an online platform licensed by the Financial Markets Authority.

    While the P2P lenders in New Zealand share the same over-arching concept, there are a number of differences in the way they operate and position themselves in the market.

    Harmoney and Squirrel Money are targeting consumer borrowers – facilitating unsecured loans in Harmoney's case, and unsecured and secured in Squirrel's – while LendMe and Lending Crowd are tapping into the business market as well – facilitating larger secured loans.

    The P2P lenders also take different approaches to how borrowers’ interest rates are determined, with Squirrel letting its marketplace dictate rates to some extent, while the other P2P lenders set rates themselves.

    Yet the fact all lenders take borrowers’ credit histories and financial situations into account, suggests highly indebted borrowers, who are perhaps unable to borrow from a bank, may not be in the running for a good deal, if any deal, through a P2P lender.

    While the average interest rates P2P lenders are charging are below banks and personal finance companies – for example ANZ charges interest of 17.95 - 18.95% on personal loans and Instant Finance, 19.95 - 29.95% – they are turning down a large number of would-be borrowers.

    Squirrel Money managing director, John Bolton, in December told interest.co.nz he wanted the platform to stay in the bank quality end of the market.

    In fact, so far Squirrel’s lending has only been to borrowers deemed A and B risk grade, and it's only approving around 21% of the loan applications it receives.

    Harmoney, LendMe and Lending Crowd are also taking cautious approaches.

    Lending Crowd managing director Wayne Croad says the platform’s objective is not to enter into “that second tier end of the market”.

    He points out Lending Crowd lets borrowers know whether they make the cut after they answer a few simple questions through the online quoting process. Croad is also managing director and majority owner of finance company Finance Direct.

    Here’s a table that compares and contrasts the P2P lenders from a borrower’s perspective.

    It's still early days for these platforms, so their average interest and approval rates are likely to change over time.

    Also of interest are Harmoney's detailed statistics page here and the FMA's tips on P2P lending brochure here

     

    Harmoney

    LendMe

    Squirrel Money

    Lending Crowd

    Who

    Part owned by founder and CEO, Neil Roberts (48%), Trade Me, Heartland Bank, P2P Global Investments and others. Began trading in NZ in Sep 2014.

    Plans to launch in Australia.

    Founded by Mark Kirkland and Edwin Morrison, of Auckland-based law firm Kirkland Morrison O’Callahan and Ho. Began trading in Dec 2015.

    Part of the Squirrel brand that provides mortgage broking services. Headed by John Bolton. Began trading in Nov 2015.

    Founded by Finance Direct's managing director, Wayne Croad, and technology specialist, Bob Durrant. Began trading in Dec 2015.

    Wants to launch in Australia.

    Borrowers targeted

    Consumers

    Consumers, business, rural - trusts, companies, other organisations

    Consumers

    Consumers and small to medium-sized businesses.

    Secured or unsecured loans

    Unsecured

    Secured

    Secured or unsecured

    Secured

    How much you can borrow

    $1,000 - $35,000

    $25,000 - $2 million

    Secured: $3,000 - $70,000

    Unsecured: $3,000 - $30,000

    $2,000 - $200,000

    Repayment period

    3 or 5-year

    Variable – different repayment options for different types of loans. Most loans are offered for 1 - 5-year terms.

    2, 3, 5-year

    3 or 5-year

    How interest rates are calculated

    The risk grade Harmoney assigns you based on your income, assets/liabilities, credit and third party checks, and repayment history.

    The credit score LendMe assigns you based on your ability to service the loan, your credit history and the loan to value ratio – the amount of the loan compared with the value of security.

    The Squirrel marketplace. Investors bid an interest rate between +/- 0.50% of the market rate. The market rate gradually goes up or down depending on supply and demand. Squirrel adds a levy to the borrower interest rate based on your individual risk profile.

    The risk grade Lending Crowd assigns you based on your credit profile and security offered.

    Interest rate range

    9.99 - 39.99%

    6.64 - 15.04%

    9 - 14%

    Personal: 7.90 - 19.10%

    Business: 8.95 - 19.75%

    Average interest rate charged

    17.73%

    8.74%

    12.41%

    14%

    How far through the process you find out your interest rate

    Once you’ve provided Harmoney with your personal financial information needed for it to calculate a rate.

    You can get an estimate quote online straight away.

    Once you’ve provided LendMe with your personal financial and security information needed for it to calculate a rate.

    Immediately. Squirrel publishes live data on its web site so borrowers can get indicative rates immediately.

    Once you’ve provided Lending Crowd with your personal financial information needed for it to calculate a rate.

    You can get an estimate quote online straight away. You will be notified at this time if you qualify for a loan.

    Investors

    Multiple – investors lend money in $25 chunks.

    Banks & institutional investors provide about 75% of funding, retail investors the balance.

    Multiple – investors lend money in $1,000 chunks. Can fund entire loan.

    Launched with just retail investor funding but aims to bring a bank and institutional funders on board.

    Single investor.

    Is, and plans to remain, 100% retail investor funded.

    Multiple – investors lend money in $50 chunks. Can fund entire loan.

    Aside from retail investor funding will also receive some funding via Finance Direct. May take funding from institutional investors and banks in time.

    How you’re matched with an investor

    Investors choose whether they want to invest in your loan based on the level of risk and return.

    Investors choose whether they want to invest in your loan based on the level of risk and return.

    The platform automatically matches investors with borrowers based on interest rate and term.

    Investors choose whether they want to invest in your loan based on the level of risk and return.

    Portion of loan requests that get approved

    30%

    7%

    21%

    70%

    Portion of approved loans on market that get funded

    100%

    70%

    100%

    100%

    How quickly you get the money

    Once your loan is approved and fully funded through investors. 95% of loans fully funded within 24 hours.

    Once your loan is approved and fully funded through investors.

    Once your loan is approved and matched with investor. In most cases you can draw your loan down in 24 hours.

    Once your loan is approved and fully funded through investors. You can choose a window of three working days to disperse the loan.

    Establishment / platform fee

    $375

    2 - 7% of the loan amount, depending on your credit score.

    $250 for unsecured loan.

    $500 for secured loan.

    $250 - $1,450 depending on loan size.

    Early repayment fee

    None

    None

    None

    None

    Other fees

    Overdue repayment fee: $30 - $75. Borrowers have 5-day grace period before charges kick in.

    Dishonour fee: $15

    Legal fees: If enforcement action is required against you.

    Legal fees for security establishment. This is to undertake the legal process of placing the security in an independent bare trust with the lender or lenders assigned beneficial interest in the security.

    Missing a payment: $25 a month until loan is up to date. Penalty of 5% interest per year over normal rate. Borrowers have 5-day grace period before charges kick in.

    Overdue fee: interest of 20% on the amount in arrears.

    If loan reaches 91 days in arrears, the full amount of the loan will become due and a number of fees will apply.

    Payment protection cover available as an optional add-on

    Yes – two levels of cover available.

    Partial: death, terminal illness.

    Complete: death, terminal illness, disability, involuntary redundancy, and bankruptcy.

    The fee is calculated as a percentage of your loan.

    None

    None

    Yes – cover applies for death and terminal illness. Lending Crowd is planning to expand cover to sickness, redundancy and bankruptcy this year.

    The fee equals 2.25% of the amount being financed for individual loans or 3.65% of the amount for two person loan.

    *This article was first published in our email for paying subscribers. See here for more detail and to learn how to subscribe.

  • We look at today's 'best term deposit rates' in the face of falling wholesale rates and benchmark bond yields

    2016 has started out with international bond yields under pressure and falling.

    Locally, wholesale swap rates are also falling.

    That has resulted in low term deposit offers.

    But in the past few days, both the international situation and the local wholesale markets have been under added pressure.

    It is not hard to suspect that term deposit offers may be about to fall again from current levels.

    If that is the case and you have funds rolling over or new money you wish to park, locking it in now at current rates could help you avoid additional disappointment.

    Of course, no one knows what the future will bring, me included, so it comes down to your own individual assessment of the market pressures.

    If you think local term deposit offer rates will go lower, the following chart sets out who among New Zealand's retail banks is offering the highest face rates for the various terms, right now:

    Of course, there is more to an investment decision than simple offer rates. You may well be interested in how interest is paid or compounded. The more often it is, the lower the rate offer.

    In addition, you should know that some other specialist banks also offer term deposits, some with rates higher than set out in the above graphic.

    For example, the Bank of India (in NZ) offers 3.70% for six months, 3.80% for 12 months, and 4.00% for three years. ICBC, Kookmin Bank and the Bank of Baroda are also banks that have local offers that may seem attractive compared with our main retail banks.

    Of course there are many non-bank institutions - some with investment grade credit ratings (UDC, Liberty Financial and Medical Assurance Society) - that also should be assessed. Use our term deposit pages to start that review.

    Falling interest rates are especially tough on savers. In a falling market, the balance of earnings availability and the term of the rate offered can involve stressful choices. Using term PIEs can also give a small extra after-tax effect.

  • Uber ups competition with taxi industry through promo with ASB that sees it offer fares up to 50% cheaper than those offered by traditional taxis

    Uber is continuing to ruffle taxi drivers' feathers, launching a new deal that'll see personal ASB Visa credit card holders get a 15% discount off every Uber ride they take from February 1 until July 31.

    It's also giving personal ASB Visa credit card holders who sign up to Uber, a discount of $15 off their first three rides. 

    Having launched in New Zealand in May 2014, Uber has been touted as an industry 'disrupter', using technology to change the way people use personal transport services.

    While it already claims to charge up to 40% less than regular taxis, its partnership with ASB could see its fares cost around half of that of a regular taxi. This is of course only if demand for Uber isn't high, during which time Uber inflates its rates. 

    ASB head of cards Glen Martin says, “The Uber brand is about making life easier for customers, and we see a synergy with ASB through our similar approaches to technology and innovation, and seamless payment services.

    "Uber has revolutionised the way we use personal drivers through its tap-to-ride booking system, and ASB is pleased to offer a financial benefit to our Uber-riding customers for the next six months."

    Yet the regulatory freedom Uber has been enjoying as its operated in Auckland and Wellington could come to an end soon. 

    As discussed in this story, the Ministry of Transport's proposing to create a single class of small passenger services, under which all operators have to abide to the same rules. 

    The public have until February 12 to make submissions on its consultation paper, ‘Future of small passenger services’, which says a single-class of services would, “promote competition between service providers because rules (and associated costs to comply with them) would apply consistently across all passenger services. This would provide strong incentives for improving customer services, compared to the status quo.”

    The New Zealand Taxi Federation welcomes the Government's move to level the playing field in the industry. 

    Its chief executive Roger Heale, says, “Clearly, based on our record passenger numbers this year, our value-added proposition is being widely embraced by consumers and we’ll continue to evolve our business model to meet the adapting needs of all New Zealanders.” 

  • Our monitoring of bonus saver interest rates shows that banks have dropped their offers faster than the underlying benchmarks

    If you use a bonus saver account you will have noted relentless reductions in the interest rates offered.

    This is no different to the rate direction for home loans and term deposits.

    But with any savings account, the bank has the option to reduce what you receive with only minimal notice. With term deposits (and home loans) you can fix the term and avoid instant reductions (or rises).

    But bonus savings accounts have some nice features, especially the ready access to funds without incurring an interest penalty (although you may not qualify for much interest in the month you draw the account down).

    So a key consideration is how the institution maintains its rate attractiveness over time.

    We have previously reported that RaboDirect has scored best on that basis, and that is still true.

    But this time, we want to point out that these rates are falling faster than the underlying benchmark rates.

    Back in April 2014 the average bonus saver rate offered was 4.00% and the best offered was 4.25% when the OCR was 3.00%. That is a +1.00% to +1.25% of a 'premium'.

    In August 2015 that had steadily diminished to +0.60% and +0.90%.

    Today that 'premium' is down to +0.50% and +0.75%, levels that are just half what they were 18 months ago.

    Banks are not competing as hard for bonus saver money, probably relying on the embedded balances hanging around, and that allows them to extract extra profit from them.

    It is a hard thing for savers to notice.

    When assessing the most advantageous bonus saver for you, the track record of the rate is what you should assess, rather than just today's rate. When banks put on the squeeze, you are the one paying for it.

    And we recommend you always look at term deposit, PIE or savings account returns on an after-tax basis and the best way to do that is to use our deposit calculator. This won't change the relative comparisons, but it will get you to focus realistically on what net earnings you will receive. When rates sink, 'surprises' hurt more than usual.

    Here are the current bonus saver rates on offer by banks today:

    (These rates are taken from our comparison page here.)

    Bonus savers compared Minimum
    Balance
    Apr-14 Dec-14 Aug-15 Sep-15 Jan-16
    January 26, 2016
        req'd % % % % %
                   
    ANZ Serious Saver $1 4.00 4.25 3.75 3.75 3.20
    ASB Savings Plus $1 4.25 4.25 3.65 3.40 3.15
    BNZ Rapid Save $1 4.00 4.10 3.65 3.40 3.00
    Kiwibank On-line Call* $2,000 3.00 3.15 2.75 2.50 2.25
    Westpac Online bonus $1 4.00 4.30 3.60 3.35 3.05
                   
    Co-operative Bank Step Saver $1 4.25 4.40 3.70 3.45 3.10
    RaboDirect Premium Saver $1 4.20 4.55 3.90 3.50 3.25
    SBS Bank Incentive Saver $1 4.20 4.25 3.75 3.75 3.25
                   
    RBNZ OCR   3.00 3.50 3.00 2.75 2.50

    * Kiwibank also offers a Notice Saver account where you can earn 2.75% if you give them at least 32 days notice to withdraw and 3.20% if you give them 90 days notice to withdraw. Kiwibank Notice Saver accounts require a minimum balance of $2,000 for these rates to become effective.

    [This story is an update of an earlier one published on September 27, 2015.

  • First home buyers have been getting squeezed out of the Auckland market for more than two years

    By Greg Ninness

    Auckland housing has not been affordable for typical first home buyers since July 2013, according to Interest.co.nz's latest Home Loan Affordability Report.

    The report also shows that low wage growth and the difficulty of saving a deposit are also making it increasingly difficult for first home buyers to get into their own home in Auckland

    The report tracks the Real Estate Institute of New Zealand's lower quartile selling price in each region of the country and compares that with the median after-tax pay of couples aged 25-29 and in full time employment, based on Statistics NZ's Linked Employer-Employee Data Survey (LEEDS).

    In July 2013 the REINZ's lower quartile selling price in Auckland was $444,000, but by December 2015 that figure had increased to $624,000, up by $180,000 (40.6%) in two and half years.

    Over the same period, the LEEDS data suggests the combined take home pay of a typical first home buying couple would have increased from $1488.92 to $1551,32 a week, up just $62.40 (4.2%).

    The report also calculates how much of their weekly income the typical first home buyers would have to put towards their mortgage payments.and shows that the increase in their incomes between July 2013 and December 2015 would have been nowhere near enough to cover the increase in mortgage payments that the huge rise in prices would have caused, pushing the goal of home ownership further from their reach.

    Traditionally, mortgage payments of up to 40% of take home pay have been considered affordable, while those over 40% of take home pay are considered unaffordable.

    The Home Loan Affordability Report estimates that the mortgage payments on a home at July 2013's lower quartile price of $444,000 would have required the typical first home buyers to set aside $576.62 a week, or 38.7% of their take home pay.

    That was the last time the mortgage payments would have been considered affordable at less than 40% of take home pay.

    Squarely in unaffordable territory

    The report estimates that by December 2015 the mortgage payments for a home purchased at Auckland's lower quartile price of $624,000 would be $767.29 a week which would be 49.5% of their take home pay and $190.67 a week more than in July 2013.

    That puts the mortgage payments squarely into unaffordable territory and could leave the first home buyers struggling financially, because on top of their mortgage payments they would have other significant property-related expenses such as rates, insurance and maintenance.

    It could also leave them exposed to more severe financial difficulties if interest rates increased, or if they were to suffer a loss of income for any reason.

    The rising cost of buying a first home in Auckland would have been even greater if interest rates had not been declining.

    In July 2013, the average of the major banks' floating mortgage rates was 5.76% and the average of their two year fixed rates was 5.64%.

    By December 2015 the average 2 year fixed rate used in the report's calculations had dropped to 4.78%.

    However it is clear that the rapid rise in lower quartile house prices over the last two and half years has more than wiped out the benefits of falling interest rates and the rise in income for a typical first home buying couple over the same period, making home ownership increasingly less achievable.

    Unfortunately the problems faced by first home buyers in Auckland extend beyond their ability to make their mortgage payments.

    They will also need a deposit and with Auckland house prices rising more quickly than incomes, that is also becoming more difficult.

    Squeezed from all sides

    The Home Loan Affordability Report calculates how much the typical first home buying couple would have for a deposit if they saved 20% of their take home pay for four years and earned interest on their savings at the average 90 day bank deposit rate.

    In July 2013 that would have been $65,148 or 14.7% of the cost of a lower quartile-priced home at the time.

    In December 2015, low wage growth and falling interest rates meant that figure would only have increased to $68,414 which would be just 11% of the price of a lower quartile-priced home, which could make it more difficult for them to get mortgage funding to buy a home.

    So first home buyers in Auckland are getting squeezed from all sides.

    Better away from Auckland

    However it is entirely an Auckland problem.

    The report shows that lower quartile-priced homes remain affordable for typical first home buyers in all regions except Auckland.

    After Auckland, the next most expensive region is Central Otago Lakes, where the mortgage payments on a lower quartile-priced home would eat up just 34% of a typical first home buying couple's take home pay, still well within affordable limits.

    Typical first home buyers in Wellington would need to set aside just 24% of their take home pay to buy a lower quartile-priced home and in Canterbury the payments would be just 25.1% of take home pay.

    In the Waikato/Bay of Plenty mortgage payments would take up 23.3% of a typical first home buying couple's take home pay.

    And those first home buyers lucky enough to live in Southland would need to set aside just 10.1% of their pay each week to pay the mortgage on a lower quartile-priced home.

    Auckland CentralAuckland North ShoreAuckland SouthAuckland WestWellington CityHutt ValleyPoriruaKapiti CoastWhangareiNew ZealandHamiltonTaurangaRotoruaNapierHastingsGisborneNew PlymouthPalmerston NorthWanganuiNelsonChristchurchTimaruWairarapaQueenstownDunedinInvercargill

     

     

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