Simplicity has fired a shot across traditional mortgage providers’ bows – and says if you think home loan rates are as low as they can go, you ain’t seen nothing yet. 

Mortgage rates could be a whole lot lower, argues KiwiSaver provider Simplicity which has launched the cheapest home loan in the market. From November 1 Simplicity members buying their first homes can go into a ballot for a floating mortgage at 2.95% interest, over 1% lower than the variable rates offered by the major banks.

Simplicity, a non-profit, is the first KiwiSaver provider to start doing mortgages, and managing director Sam Stubbs says there’s no reason other providers can’t get into the market as well.

Stubbs says Simplicity’s primary motivation is to offer better returns to its KiwiSaver members. Banks make money by taking deposits and on-lending them for a profit, and at the moment wholesale deposit rates are very low, he says. “So why don’t we just lend to our members directly and give the benefits of that back to them?

“It’s a model that will apply no matter where interest rates are but it just so happens that right now there’s a little more motivation than normal. But we’re in this for the long term,” Stubbs says.

“Quite frankly, it’s something we think every KiwiSaver manager should do, because your investors win, the borrowers win, the banks lose.”

It also highlights that mortgage rates could be cheaper, Stubbs says.

Lenders do have some good deals at the moment – Kiwibank is offering a one-year fixed mortgage at 3.55% while Bank of China has 3.15% for the same term, for example. But mortgages are still way more expensive than they should be, Stubbs argues. “Mortgage rates are extremely high relative to the cost of funds. You can see it in the bank profit numbers.”

As a result of Simplicity’s move “people will always now see what it actually costs to profitably lend money” he says.

Simplicity will lend $50m in the first six months (around 100-150 mortgages) so will be a small player in the first home buyer market to begin with, he concedes. First home-buying members wanting to take advantage of the low rate will need to go into a monthly ballot, and if they don’t succeed they can reapply the next month.

Karen Tatterson, a mortgage broker with Loan Market, agrees that the mainstream banks are still making a healthy profit from home loans, and New Zealand hasn’t seen much competition in non-bank mortgage lending unlike in Australia.

However she is sceptical that Simplicity’s offer will make much difference to the market since its only for a narrow band of people: Simplicity members who’ve managed to put together a 20% deposit for their first homes.

“All it’s going to do is generate a lot of interest around rates as opposed to interest around being able to provide lending for people who currently can’t get lending.”

Home loans are also not just about rates, Tatterson says. “It’s about making sure we get the right loan structure for the client. We need to make sure people are getting good advice.”

Ian Burns, CEO of KiwiSaver provider Kiwi Wealth, says Simplicity’s move poses a number of questions for the scheme’s members. “For example, how the inherent conflict of interest is handled, as at a rate of 2.95% it seems to benefit the borrowers rather than KiwiSaver members, particularly when service costs are included.

“Also based on (Kiwi Wealth parent company) Kiwibank’s experience, the qualification criteria for first home buyers suggests the majority will end up funding mortgages for an elite few.”

However Rupert Carlyon, founder of new KiwiSaver provider Kōura, applauds Simplicity’s move. “It makes a lot of sense as long as they manage the risk appropriately,” he says. “I think Simplicity are extremely good for our industry because if I look at before them, I don’t see any other innovation.”

Simplicity has been a trailblazer in the KiwiSaver industry. As well as being at the forefront of ethical investing, it was the first scheme to begin investing in startup companies through its stake in venture capital provider Icehouse Ventures. It has also put in place consumer-friendly policies such not charging fees on children’s accounts.