Giving borrowers confidence in a changing market

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As the market moves into a new and more uncertain phase, non-bank lender Pepper Money recognises that now is the moment for mortgage advisers to showcase their true value

TOUGHER CONDITIONS for borrowers in 2023 will allow mortgage advisers to provide crucial value to their clients. The pace of recent market changes and the Reserve Bank of New Zealand’s efforts to engineer a recession in 2023 to tame high inflation are the source of stress for many. Advisers will need to be on the front foot and talking to customers as soon as the New Year celebrations wind down. “The speed of change may feel confronting, but advisers can reduce customer anxiety by explaining how rate changes will specifically [affect] them and what action they

Since entering the New Zealand market in 2019, Pepper Money has quickly established itself as a lender that truly embodies the spirit of the non-bank sector. Pepper Money provides a variety of flexible home loan solutions designed to meet customer needs, including some that banks won’t offer. Pepper Money proudly offers hard-working Kiwis a real-life and flexible approach to lending. It looks at each Kiwi family or individual’s situation. Helping people succeed is at the heart of what the company does, and that means whether someone is just getting started, recovering, or looking to improve their situation. Now and in the future, Pepper Money is here to help people achieve that goal.

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“Kiwis are resilient, and as a nation we have withstood a multitude of challenges over the years … and we’ll see this through as well”

Campbell Smith, Pepper Money New Zealand

Successive rate hikes, including the largest-ever 75 basis point increase to the OCR late last year to 4.25% and the central bank indicating a new expected peak OCR of 5.5%, are already impacting Kiwi households. But Smith says, “Kiwis are resilient, and as a nation we have withstood a multitude of challenges over the years, including the global financial crisis, the economic impact of the pandemic, the unintended consequences of the changes to the CCCFA [Credit Contracts and Consumer Finance Act], rising inflation and more; and we’ll see this through as well.”

So far, borrowers seem to be toughing it out. Data from credit bureau Centrix shows home loan arrears tracking at just under 1% over the last six months; they are down to some of the lowest levels on record and well below the average 1.4% of home loans with missed payments that was typical of the years before the pandemic. But the proportion of home loans in arrears is slowly starting to rise off this low base. “These rapid-fire rate rises are coming at a time when many households are rolling off fixed rates,” says Smith.

“As an adviser you are in an ideal position to make sure that your customers are best placed to weather the current economic turbulence – and therefore we recommend that you get on the front foot, understand how these market shifts may impact your clients, and proactively discuss how they can best protect themselves.” Providing ongoing guidance to existing clients is great way to not only ensure their best interests are regularly reviewed and met but that the adviser also remains in tune with their customers' needs, Smith says. He suggests that one way to do this effectively is to segment clients into three categories:

“We recommend that [advisers] get on the front foot, understand how these market shifts may impact clients, and proactively discuss how they can best protect themselves”

Campbell Smith, Pepper Money New Zealand

An anchor amid uncertainty Smith explains that while these conversations are sometimes challenging, advisers can try three key techniques to show customers that they are listening and there to help:

“The one thing that hasn’t changed is the importance of understanding your customers, more so than ever, so you can provide the right advice, alleviate their stress, and eliminate any confusion,” Smith says. “Rates come and go, that much we all know, so the only way to operate sustainably is to focus your business beyond the rate or product. “Look at the service you provide. Those interactions are what set you apart from dealing directly with the bank, and from other advisers in the industry.” Getting it right means advisers can be the secret sauce for

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Number of mortgage accounts past due

15,200

Source: Centrix, Oct 2022

can take today to mitigate the associated impact,” says Pepper Money New Zealand head of country Campbell Smith.

“Previously fixed one- and two-year rates, which at the time may have been locked in at between 2% and 3%, are rolling off onto much higher rates of between 6% and 7%. That’s a significant increase and associated burden for any Kiwi household to bear.”

RBNZ's monthly data for total loans shows that 58% of all mortgages as of September 2022 were due for an interest rate change within 12 months. While this is a significant drop from the 72% due for a change within 12 months at the same time in 2021, the data shows that a large group of people missed out on snagging longer-term loans at historically low rates. Know your customer The most important thing, according to Smith, is for advisers to understand their customer base. “For your business to remain sustainable, advisers need to focus beyond the rate or product and look at the service they provide, just as we do. It’s these interactions that will set you apart from dealing directly with the bank, or from other financial advisers,” he says.

Shift clients This group has some leeway but could benefit from professional advice to reduce financial stress. “For clients with some equity but limited cash flow, consider a quick home loan review. Debt consolidation and budgeting guidance could help them feel more in control, and a discussion may unearth other needs or concerns,” Smith says. Strong clients “Stay in touch with clients who have a strong equity position and savings buffer, and help them make sound financial decisions by showing what a 1–3% rate rise could mean for them.”

Acknowledge the situation, but avoid saying “I understand”. Reflect the situation back to them so they know they’ve been heard. Answer their questions clearly.

reducing clients' stress and ensuring they achieve the best financial outcome possible in a challenging period – and this is something customers will remember. “While the economic outlook for New Zealand remains uncertain, advisers remain well placed to ensure that their customers are well informed and making the right decisions for their needs, in the context of the best information available on the day,” Smith says. “By helping customers navigate this complexity, advisers will be in the best position to retain business and enjoy those they help as customers for life.”

It’s only natural that change makes people feel unsettled, but advisers should be the constant that customers can rely on.

Challenged clients Smith defines this group as those who perhaps purchased a property during the market high and were stress tested at lower interest rates. “[These clients] are likely to find the rate rises hardest and could even face a negative-equity situation. Contact these clients first, while they still have options,” he says.

Source: Reserve Bank of New Zealand sector lending (C5) data, Dec 2022

Growth in non-bank lending by sector

Housing

Housing and personal consumer

Business

Personal consumer

$1bn

$2bn

$3bn

$4bn

$5bn

$6bn

$7bn

$8bn

$9bn

$10bn

$11bn

$12bn

Nov 2021

Nov 2022

$4.88bn

$6.06bn

$6.09bn

$6.10bn

$10.97bn

$7.37bn

$8.50bn

$12.16bn

Source: Reserve Bank of New Zealand sector lending (C5) data, Dec 2022

Growth in non-bank lending by sector

Housing

Housing and personal consumer

Business

Personal consumer

$1bn

$2bn

$3bn

$4bn

$5bn

$6bn

$7bn

$8bn

$9bn

$10bn

$11bn

$12bn

Nov 2021

Nov 2022

$4.88bn

$6.06bn

$6.09bn

$6.10bn

$10.97bn

$7.37bn

$8.50bn

$12.16bn