As a wholesale investor it was only able to get around 1 per cent to 1.5 per cent return on bank term deposits but lending some of the money to home buyers would allow it to pass through most of the 2.95 per cent to its KiwiSaver members, he said.
"We will get enhanced returns for our KiwiSaver members."
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Stubbs said it looked at the building society model to set up the mortgage lending which will see all applicants go into a monthly draw to get the loans from November with the first borrowers drawn out in December.
Home buyers will then have six months to purchase a house.
Borrowers must have a deposit of at least 20 per cent and the loans will only be available to those will have been a Simplicity KiwiSaver member for at least a year.
Stubbs said because the lending and the funding would be handled in house it didn't need to apply to the Reserve Bank for a banking license.
Instead it will set up a separate first home buyers fund where some of its KiwiSaver money will be channelled into to lend from.
Simplicity currently has 31,000 KiwiSaver members with $1.2 billion in funds under management out of the total $57 billion KiwiSaver market.
Stubbs said it would also use the lending as a stepping stone to becoming a non-bank deposit taker which would require it to get a license from the Reserve Bank.
Most mortgage borrowers are on fixed term rates but Stubbs said it wanted to offer a floating rate to encourage borrowers to pay off the loans sooner so it could recycle the money into more loans.
The interest rate can be changed with three months notice.
Stubbs said the set-up would be a win-win for both borrowers and KiwiSaver members but admitted mortgage lending would be riskier for investors than term deposits.
However that was why it was only lending to first home buyers with a minimum deposit of 20 per cent and repayments which did not exceed 30 per cent of combined after tax income.
"They are the highest quality lending a bank does. They have incredibly low default rates."
"We are only lending to the most conservative part of the market."
Stubbs said the mortgage lending should boost returns in its KiwiSaver funds although only 3 per cent of its growth fund will go on the lending and 10 per cent of its conservative fund.
The loans will be allocated in a monthly draw and Stubbs said it was also working on trying to standardise legal fees and its documentation to keep a lid on costs for borrowers.
He expected demand to be strong and said Simplicity was getting around one application a day for first home withdrawals from KiwiSaver at the moment.
"We expect demand will be well in excess of supply."
Asked how he could offer an interest rate so low Stubbs said banks were getting an average margin of 2.21 per cent on fixed rates and as a non-profit it was able to lend at a much lower rate.
"New Zealand's rates are still high internationally. We think this is what should be charged."
First home buyers typically want their hands held when it comes to borrowing such a large amount of money but Stubbs said its contact centre would be able to handle queries over the phone and lawyers would be able to deal with the provider directly but those who wanted to deal with someone in person would have to look elsewhere.
"We certainly won't be for everybody."
