KiwiSaver provider Simplicity announces a mortgage offer for first home buyer members that features a startlingly low floating interest rate well below current fund returns, solely funded by member contributions

KiwiSaver provider Simplicity announces a mortgage offer for first home buyer members that features a startlingly low floating interest rate well below current fund returns, solely funded by member contributions

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

61 Comments

Comment Filter

Highlight new comments in the last hr(s).

"a small, limited allocation"
Is it a quick fling or the start of something more meaningful..I wonder

30% of after tax pay is going to limit eligibility quite a bit. A couple on 2 x $75k salary will only be able to borrow about $700k
Min 20% deposit required. Very limited eligibility indeed.

Borrowing $700k for your first home is quite a bit though, is it not....??

No,no....Only $700k!

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?

We have been advised that we misunderstood these arrangements and mortgage admin is actually being handled inhouse. They have hired additional staff to do this. I have corrected the article above. Sorry for confustion.

Ok thanks David that's good to know that they're keeping things all inhouse. Typically services can go a bit downhill if left to being outsourced to a third party.

got a credit union feel about it but full marks for trying.if it helps even a handful to get into their first homes.

FHB with such a good credit profile (20% dep, repayments not greater than 30% etc etc) likely can get 2.8% from a bank.

Really? Where? Or is that just a random guess?

I cannot see any bank offering more then 0.2% of their carded rate.

I got 0.75 off floating.

Getting much of fixed rate specials is a bit more difficult. 3.29 for 2 years is the offer for me at the moment

3.29 for 2 years is extremely good, which bank please?

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

BOC even pickier with borrowers... very much doubt they would touch an 80% loan

Moving banks would require breaking the other half of the mortgage. Not entirely sure I want to move to the BOC given the switching costs.

So which bank did you get 3.29% with DaveB1978 ?

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.

Rates are rates Yavil or do you just not like the Chinese for some reason, seem that your just racist. And yes I do have a mortgage.

ASB

Yes please share the love

I have seen as much as 1% off floating rates. Best I have seen off fixed was 0.2%. I can imagine with a larger mortgage some people may be able to negotiate 0.3% off fixed. Perhaps it would require less cash back though.

I know a friend with 20% deposit got 3.2 from BNZ and cashback around 5K. Another one got 0.4 % off carded rate.

No they can't NIMBY

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.

See I told you so that we would be see mortgage rates drop to 2.99% before the end of the year. The good news for NZ home owners with mortgages is that the rate are continuing to drop. So you'll see this type of very low rate offer with other banks fairly soon.

I don't think you understand Simplicity's product, nor do you understand how banks get their funding. The above does not mean that standard banks will follow suit.

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.

Yvil; With added competition from Chinese Banks and the very recent Australian Reserve Bank rate cut, we're likely to see continued competition with the mortgage rates here.

Hmmm, certainly a head turning offer, even if limited to only a very few… Despite DC's explanation above, I struggle to see how this will financially stack up, interesting concept though

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.

Surely there needs to be space for a risk premium, even on extremely conservative lending criteria.

There is.. 2.95% is 2.1% above the T-bill rate at the last issue

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.

Overheads, loss provisioning etc would all need to be factored in. Not sure I would be happier with the riskier profile of the fund if I were a Simplicity KS

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?

Very different.... you may have missed the debate but banks hold capital to protect bond investors from losses on mortgage portfolios.... nothing sheltering Simplicity investors from defaulting mortgages and falling house prices.

Fantastic move by Simplicity, as a KS member and potential borrower if they extend beyond FHBs this is great :)

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.

I would think this could only ever be extended to the very safest of safe bets, with very conservative lending criteria. That said, there are some such out there, and they might be tempted.

30% aftertax DTI (on repayments) and <80% LVR is not too bad, many two income households will likely be eligible for their current lending

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.

Sounds like a genuinely interesting and compelling product. There has been little innovation in financial products so I really wish Simplicity all the best.

Excellent news. Disruption at its best. Remember when Uber came on the scene? The only people who didn't like it were the taxi companies. Why? Because they didn't think of it. Good on you Simplicity.

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.

So no requirement on type of property eg apartments 35sqm all covered?

I'd imagine thats unlikely based on the other conserative lending criteria.

400k city apartments could be snapped up the tenants (couples) and at that interest rate they'd more than halve their living costs as well as get a foot on the property ladder

@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

Inner city apartments.. a foot on the ladder.. but that particular market is more snakes and ladders. Between the leakers, body corps, and the glut of building its a risky move.

Looking to offload a couple are you?

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.

Simplicity announces a new form of mortgage that is anything but simple. LOL

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.

Yes the FHB aspect seems designed to make a splash, at the cost of making the pool riskier. Given the small numbers, surely they could tempt members with established mortgages and even safer profiles, if they really are offering that low interest rate.