NZ Herald 12 December 2015

AThe main issue here, it seems to me, is that every borrower has their eyes wide open.

For the benefit of others, peer-to-peer lenders operate through websites, bringing together people who want to borrow money with people who want to lend, and charging each side a fee. The Commerce Commission confirmed recently that it is looking into peer-to-peer lenders’ fees and expects to report on them early next year — but that’s another topic.

Through Harmoney, lenders typically spread their money over several borrowers.

Neil Roberts, CEO of Harmoney, says the examples you’ve given are at the risky end of their borrowers. Each borrower is assigned one of 30 risk grades. Interest rates range from 9.99 per cent on A1 loans to 39.95 per cent on F5.

I agree with you that close to 40 per cent is a horribly high rate, although Roberts says F5 loans make up less than 0.5 per cent of Harmoney’s total loan portfolio.

Asked about your concern that borrowers won’t realise how much a loan will really cost them, Roberts says, “Put simply the process starts with a calculator that requests the amount and provides repayment information, and ends with a breakdown of the loan amount, repayments, interest charges, interest rate and fees, delivered on screen and by email.

“So this concern would be better pointed toward those that operate in the offline space, where it may be possible to get through a process without knowing this information. “

When the Responsible Lending Code was introduced in June, “Harmoney already met or surpassed the standard in all material respects,” he says. “Harmoney also complies with 11 different sets of legislation, and in addition Harmoney operates under a Peer to Peer Lending License issued and regulated by the Financial Markets Authority.”

Harmoney was the first peer-to-peer lender to be licensed by the FMA. It has since been joined by Lendme, Squirrel Money and Lending Crowd.

Roberts says Harmoney satisfies itself that a borrower will be able to repay the loan. In the process, it turns down the majority of applications. “In the first year of business, Harmoney has received $1 billion of applications and written $100 million of loans.

“Our average borrower is 45, married or de facto, owns their own home paying off a mortgage, earns considerably more than the national average and works in the trades, junior management or emergency services.”

He adds, “With respect, we would strongly suggest your writer not invest, and we will consider the market as having operated the way it should i.e. provided the depth of information for an informed decision.

My opinion: Your list does make rather alarming reading. I would have hoped that the holidaymaker, in particular, would have looked at the numbers and realised that if he or she postponed the holiday and saved up for it, the money would go a lot further.

But according to Roberts, borrowers know what they’re getting into. And nobody’s forcing them.

The people on your list who could instead have added to their mortgages or taken out bank loans were free to try that. We can only assume they chose not to or were turned down and then moved on to Harmoney, and that they felt they needed — I hope it wasn’t merely wanted — the money, even though they’re paying a pretty high price for it. Their choice.

Before peer-to-peer lending, some desperate borrowers — hopefully not holidaymakers — had nowhere to go but payday lenders. And interest rates there can be way above 40 per cent. I prefer having regulated peer-to-peer lenders filling the gap between banks and — let’s face it — loan sharks.

However, there may be more reason to worry about lenders to Harmoney. See Diana Clements’ article on the next page.

AIndeed.

AYour two options are a long way apart on the risk scale.

While buying a rental property somewhere like Rotorua is a lot safer than buying in the overheated Auckland market, there are still risks and hassles with any rental.

They’ve been listed here before: tenants who don’t pay or wreck the place, a lack of tenants, unexpected high maintenance costs, and so on. And it’s always possible to lose money — or make less than in a bank term deposit — because the neighbourhood deteriorates, the home turns out to be leaky, or the place is contaminated with P.

Ask yourselves: If the rent doesn’t cover mortgage payments, can you easily make up the difference — even if your income plummets?

And are you prepared to travel to Rotorua quite often, or pay for property management, which will eat into your profit?

Meanwhile, your other option, paying down the home mortgage, is risk-free. And it’s the equivalent of an investment that earns a return, after fees and taxes, equal to your mortgage interest rate.

Sure, a rental property might return more than that, but only “might”. I say get rid of your mortgage first. Then you’re in a strong position to take on a fairly risky investment like rental property.

By the way, I can’t resist suggesting you get into KiwiSaver, and each contribute $1043 a year — perhaps by transferring $87 a month from a bank account.

At that contribution level, the government will contribute $521 a year — multiplying your savings by 1.5 each year. That means your retirement funds will be 1.5 times as big — for example, $150,000 instead of $100,000 if you had saved the annual $1043 elsewhere.

AThanks for your perspective. You’re not the only one writing along these lines. Some points made in letters from insurance advisers:

• “What people are missing in the MJW report is the massive disservice it does to the public. If we abolished independent advisers, and the suggested actions would potentially cause this, we’d end up with poor quality bank peddled products that are sold en masse and not advised on.

  “This would ensure financial support at critical times in people’s lives is less than it needs to be. Access to medical treatment and supporting incomes in disability are the key issues for people today, with 75–80 per cent of people currently exposed in this area. Life insurance in the form of life cover is a long way down the list.”

• “I’m fiercely independent, yes even though I get paid on commission, about being able to provide the right solutions to my clients. To this effect I hold agency agreements and can access all providers in the industry, excepting for the tied ones like Westpac and BNZ etc.

  “I’m paid pretty much the same by all of them, the commission bias perceived isn’t actually there. In most cases the products I recommend usually come at a lower commission rate than others I do have access to.”

• “As for bank insurance having less churn, well they can’t offer a better or alternative product as they only have one to sell. Most bank life products other than straight life cover are very poorly rated and don’t come close to what is offered in adviserland.

  “It is common to have only nine conditions covered as part of a bank trauma policy when, for the same money, an independent adviser can recommend a product that covers in excess of 40. Which one would you prefer?”

Okay, both sides have had their say now. Let’s hope we can come up with a system that works for both advisers and consumers.