Simplicity first home borrowers will pay $6k less a year on a $600k mortgage

Wednesday, 2 October 2019

Simplicity KiwiSaver chief executive Sam Stubbs says the not-for-profit will lend money to its own member to buy their first home.

Simplicity KiwiSaver is offering mortgages for first home buyers, and it's charging far less than the banks.

Aspiring homebuyers often use KiwiSaver to save house deposits, but Simplicity is the first KiwiSaver scheme to offer savers the home loans they need to get onto the property ladder.

It will charge 2.95 per cent for its floating rate loans, which will require borrowers to have at least a 20 per cent deposit. The large Australian-owned banks charge 5 per cent or more for their floating mortgage rates, and their one-year fixed rates start from 3.35 per cent.

'Our borrowers will be paying significantly less than they would to the banks,' said Simplicity founder Sam Stubbs.

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On a $600,000 loan, Simplicity borrowers would pay around $6000 less in interest a year, compared to people borrowing the same amount from a big bank, Stubbs said.

'That's the equivalent of getting an $8000 to $9000 pay rise,' he said.

As the loans were floating, there would be no penalties for paying them off faster than the minimum required repayments.

Demand would be managed by allocating loans by ballot, and he hoped the first home loan would be made before Christmas.

Only people who had been a member of Simplicity KiwiSaver for at least a year would be eligible to enter the ballot for loans.

Currently around 30 people a month were withdrawing KiwiSaver money for first home purchases each month from Simplicity.

On a $600,000 loan Simplicity borrowers would pay around $6000 less in interest a year, compared to people borrowing the same amount from a big ban, Simplicity founder Sam Stubbs says.

Bank KiwiSaver schemes do not lend money direct to first home buyers as Simplicity KiwiSaver now does, Stubbs said.

Instead they lend KiwiSaver money to banks, including the banks which control them, and they in turn lend it out as home loans after adding a margin to earn a return for their shareholders.

'Banks provide most home loans in New Zealand and are driven to make profits by charging a margin. They pay less than 2 per cent for most deposits and then on-lend it to home buyers at interest rates closer to 4 per cent,' Stubbs said.

But as Simplicity was a not-for-profit scheme, no margin needed to be added to satisfy shareholders, Stubbs said.

The loans would earn interest for Simplicity KiwiSaver, which would be higher than the return KiwiSaver schemes typically earned from lending money to banks.

'Instead of getting 1 per cent from the banks, with the remainder of the cost of a home loan going to fuel bank shareholder returns, Simplicity KiwiSaver will be getting 2.7 to 2.8 per cent. They will be winning, and the borrowers will be winning.'

He likened the move to the old building society model of saving and lending.

'Not-for-profit building and friendly societies have been lending to their members for centuries', Stubbs said.

'We're calling this back to the future.'

The major banks could start making similar home loans direct from their KiwiSaver schemes, but Stubbs believed they would not.

'They would cannibalise their own businesses,' he said.

While Simplicity, which has $1.2 billion of KiwiSaver funds under management, would be starting small, in time Stubbs expected it to become a competitive force driving home loan rates down.

The ballots for loans will begin in early November. People whose names were drawn had six months to buy a house and draw down on their loans, Stubbs said.

'We may have our first person in their house by Christmas,' he said.