KiwiSaver and Mortgages

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Simplicity KiwiSaver can lay claim to be one of the most innovative KiwiSaver providers. They have differentiated themselves by operating as a charitable organisation, a low-cost provider through the use of passive funds and an ethical investment manager through avoiding investments in nasties such as fossil fuels, alcohol, tobacco, gambling and weapons. Now they are set to take on the banks by offering low cost mortgages to members buying their first home.

Banks make a good profit on mortgage lending. They take in deposits from investors and borrow money in wholesale markets. They then add on a margin, lending money at a higher rate than they pay for borrowed funds. Funds like KiwiSaver usually hold part of their investment portfolio in cash investments such as bank deposits. Falling deposit interest rates have an impact on KiwiSaver returns. There is clearly an opportunity to cut out the banks and strike a rate for deposits and lending that gives KiwiSaver members a better return on their invested funds and a reduced cost of borrowing for mortgages.

Simplicity KiwiSaver members should be concerned about two things in particular, which arise from the small scale of the proposed lending. The first is the quality of the lending decisions made. Lending, particularly to first home buyers, is a skill which is acquired over many years. Simplicity has no track record in this area and will presumably need to recruit this expertise. The second concern is the degree of diversification of lending. Small-scale lending implies few borrowers which means that if any one of them defaults there could be a significant financial impact. The advantage of large-scale lending is that the lending is well spread amongst a huge variety of borrowers, thus reducing default risk. Simplicity KiwiSaver members should satisfy themselves that these concerns have been addressed.

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