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Despite being hit by interest rate hikes and inflation, brighter times for the mortgage industry are predicted to be just around the corner, says CFML Loans. It’s already seeing positive signs and encourages advisers to prepare for an upswing in applications

LENDING TO first home buyers and property investors is down compared to lending at the height of COVID, but Patrick Middleton and Johny Kale from CFML Loans have a spring in their step as they look to the future. Middleton, CEO at the non-bank lender, and Kale, its COO, spoke to NZ Adviser about market trends and how mortgage advisers should prepare themselves for an increase in business post the general election and heading into Christmas. CFML Loans has been operating in New Zealand since October 2019 and offers loans only through mortgage advisers, working with them through the company’s distribution partner, Funding Partners Limited.

CFML Loans is the lending arm of Conrad Funds Management’s business. CFML Loans (which includes CFML Lending Limited and Conrad Funds Management Limited) is a non-bank lender that specialises in residential first mortgage lending. CFML Loans works with mortgage advisers throughout New Zealand to ensure customers get a quick response from our highly experienced lending team with over 30 years’ experience. Our strong focus is on delivering a solution to customers’ lending needs, while also delivering a positive customer experience.

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“If there’s a change in government and the tax non-deductibility rules are repealed, we expect investors will come back into the market quickly, because, in our opinion, property prices are close to the bottom”

Patrick Middleton, CFML Loans

Reserve Bank of New Zealand figures for new residential mortgage lending show total lending for all borrower types was down from $8.8 billion in July 2021 to just under $5 billion in July 2023. For first home buyers, this figure fell from $1.6 billion in 2021 to $1.2 billion in 2023, and for investors it was down from $1.46 billion to just $854 million. Middleton says the mortgage market has definitely cooled off this year, which reflects interest rates rising and housing transactions slowing down across the board. “We continue to grow our business relationships with advisers, but I think across the non-bank lending sector it’s been a slower period, particularly because it’s a tighter market,” Middleton says. “The banks have been more aggressive, both on retaining customers and obtaining new ones.”

Middleton says the broader economy is starting to “feel the bite” from interest rates, with unemployment rising. “We’re starting to see signs of inflation coming down a little bit more. It’s a bit of wait and see, but my view is that it feels like we’re around the top of the interest rate cycle.”

In a predominantly fixed rate market, Middleton says only 50–60% of mortgage holders have rolled off their low fixed rates on to much higher rates, so there’s still more pain to come for borrowers as those maturity dates come up. Kale says home loan borrowers will be coming off interest rates of around 2% on to rates as high as 7% and more.

CFML Loans has seen loan applications where advisers “are now really needing to assist clients with cash flow management”, Middleton says. This may involve looking at rising mortgage payments, cars on hire purchase and payday loans, and helping them consolidate their debts. “Advisers are definitely very important in that process.” CFML Loans’ customers on floating rates have had to “ride out” cash rate hikes, Middleton says. Some self-employed customers have encountered cash flow difficulties because they have had to wait for clients to pay them. He says it’s great when clients are proactive in dealing with changing circumstances and the non-bank lender looks to assist them by offering interest-only loans or other options. There’s been very little visible mortgage stress among customers, Middleton says. Where advisers can really step in and assist with solutions is with those clients who “bury their heads in the sand and deny they’ve got an issue”. This issue dovetails into discharges as well. Kale says, “The discharges we’re seeing now is probably a 50/50 split going to the bank or actually selling their properties. Some investor clients have got to a stage where they have gone, ‘OK, I’ve looked across my portfolio and I’m looking to sell’.” Middleton says changes to interest deductibility rules mean some property investors are facing tax bills, which is forcing them to make decisions about whether or not to sell. Some of these investors have held property for long periods, Kale says, and while values have come back a bit recently, overall they have done well and could be in the right position to sell.

“Advisers are starting to see some green shoots and a little more enquiries coming through, not necessarily purchasing and settling but definitely a lot more enquiries”

Johny Kale, CFML Loans

Middleton says there are a couple of positive trends in the market that will soon come to fruition for advisers. The first, which is also backed up by direct feedback from advisers, is that first home buyers may be considering the views of recent economic commentators who have pointed out that property prices are probably at their lowest level, there is plenty of assistance in terms of grants, and FHBs can access their KiwiSaver account balances to help fund first home purchases. Middleton says CFML Loans believes that first home buyers are not necessarily buying, but “we think they might be deciding at what point, with my salary and my outgoings, can I afford to take on a mortgage”. The second factor is that CFML Loans believes investors may be reaching the same conclusion about property prices bottoming out and may be asking themselves, “Can I afford to repay a mortgage at the current interest rates, knowing that they’re probably going to come down?” Middleton says many investors are in a holding pattern, waiting to see who will form a government following the election and for clarity on interest deductibility rules. “National has indicated that it would withdraw the prohibition on deducting interest and take the law in this area back to what it was previously,” he says. “The first home buyers are probably waiting to see if the Reserve Bank of New Zealand is done [with interest rate rises] so that they’re not stung with further increases.” While the market is currently quiet, Middleton says that for advisers it’s all about their pipelines. “It’s future business for them; they have to continue to communicate with and cultivate their clients. Things will change – it’s not if, it’s when.” Kale agrees. “I think it’ll change quite quickly as well,” he says. “If there is a change of government, I believe it is likely there will be more property transactions before Christmas than if we continued with the current government.” Middleton says advisers can also add value when it comes to assisting clients who, in the last few years, have put deposits down on new builds that are now coming up for settlement. He says some of those valuations varied a lot from the purchase price, and advisers can assist clients who need additional capital in existing property to allow those settlements to occur.

Some advisers are completing loan applications subject to finding the most suitable property. “It doesn’t matter whether it’s a first home buyer, a second home buyer or an investor, they know that – subject to enquiries into the consumer’s circumstances and responsible lending checks – they should be able to get finance from someone like CFML Loans today,” Middleton says. “They just want to find the suitable property to transact on, and the timing to do it, so this gives them comfort.”

Interest rate rises

How advisers are assisting customers

Published 25 Sep 2023

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CFML Loans at a glance*

First mortgage security only

Loans to eligible individuals, companies or trusts

Loan purposes: Purchase of residential property in NZ; refinance; debt consolidation

Loan amounts: $50,000 to $2.2 million

Loan term: From 5 to 30 years

Interest-only period: Up to 5 years

Loan type: Floating rate only

LVR: Up to 80%

Repayments: Monthly

Loans to CCCFA customers and non-CCCFA customers

Apartment lending specialist

Loans to overseas borrowers

*Subject to lending criteria and approval

Opportunities for advisers

120

100

-40

-20

-60

-80

-100

How do you feel prices are generally changing at the moment?

More real estate agents say property prices are rising than falling in their locations

Jan-21

Source: REINZ and Tony Alexander Real Estate Agents Survey – July 2023

Jan-22

Jan-23

Net 9% of real estate agents surveyed feel property prices are rising in their locations

This is a turnaround from the trend since January 2022 when more agents surveyed were seeing prices falling than rising

The new-build market has been a growth area in the last few years, and Middleton says relationships with developers and real estate agents have proved fruitful. “That sector has definitely slowed down, so advisers have to pivot their thinking.” Accountants are key referral partners, given their work with small businesses and investors. Advisers can add value to these partnerships by helping clients with debt consolidation solutions. Middleton says that when advisers are proactive with their referral networks, even if the clients are not transacting today, those advisers may be on the front foot to pick up that business in three to six months’ time, or whenever those types of transactions start increasing in frequency again.

Referral partners

First home buyers, subject to a number of criteria, can access almost their entire KiwiSaver account balances (except for $1,000 and any money transferred from certain overseas schemes) to use towards purchasing their first owner-occupier properties. Middleton says more people are using some of their KiwiSaver account balance to get on the property ladder. “KiwiSaver is now over 16 years old, so some people have saved up reasonable balances, and it can become a good contribution towards their overall deposit or purchase price. Advisers are very aware of what’s available to first home buyers, and they can assist their clients with the process of accessing their KiwiSaver account balance to purchase a first home.”

Accessing KiwiSaver

If there’s a change in government and the tax non-deductibility rules are repealed, Middleton predicts investors will come back into the market quickly. Advisers need to stay in touch with their investor clients and understand their intentions. “What are their hot buttons? Is it tax deductibility, or is it asset prices being at their lowest? Getting the answers to these questions should put the advisers in a good position to be ready to assist their investor clients.” Kale says that ahead of the election, advisers need to focus on first home buyers and then, depending on the result of the election, “flip back to the investor side”. “The general feedback from the advisers is that they are starting to see some green shoots and a little bit more volume coming through, not necessarily purchasing and settling but definitely a lot more enquiries. “If you get more enquiries, you eventually should get more loan applications and loans coming through.”

Spring to bring growth

The article above is intended to be general information only and does not constitute financial advice. The information does not take into account your individual circumstances, and CFML Loans recommends you seek financial advice from a financial advice provider before making any financial decisions.

Net % rising