Mortgage diversion regulations - questions we've been asked

Questions and answers about the mortgage diversion regulations applying to KiwiSaver.

This section of the TIB sets out answers to some questions we've received on the mortgage diversion regulations applying to KiwiSaver which may be of general interest to readers.

All references are to the KiwiSaver Regulations 2006 unless otherwise stated.

Q: In relation to regulation 23(1)(b) "secures obligations in respect of the mortgagor's principal residence", it is not clear what the intention of this regulation is. It is not clear whether this regulation covers mortgages that secure obligations in respect of the mortgagor's principal residence, or whether these words extend to mortgages that secure obligations in respect of the mortgagor's principal residence and other obligations. As an example, would a mortgage that secures obligations in respect of the mortgagor's principal residence and a car fall within the regulation? Also, it is not clear from the wording of Regulations 23(1)(c) and 23(2) if revolving credit facilities and contracts payable in instalments are both excluded from participation in the facility.
A: Regulation 23(1)(b) "secures obligations in respect of the mortgagor's principal residence" includes mortgages that secure obligations in respect of the mortgagor's principal residence and other obligations.

"All obligations" mortgages to secure residential lending are almost universal across the banking sector. These types of mortgages allow banks to allocate consumer debts to increase home loan debt in times of default. Due to the prevalence of these security instruments, it was not considered possible to exclude these mortgages while at the same time maintaining a widely accessible KiwiSaver mortgage diversion scheme.

It was recognised that it is difficult for banks to determine with any precision whether a loan given by a bank is being used principally to fund the purchase of a home. While the regulations could impose such a requirement, it is unlikely that banks could police such a provision without incurring substantial costs.

Regulation 23 provides the types of mortgages that qualify for participation in the facility. A mortgage qualifies if it is a mortgage over the mortgagor's principal residence, secures obligations in respect of the mortgagor's principal residence, and is not a mortgage that secures obligations under a revolving credit contract. This means that where a mortgage secures both a revolving credit facility, a home loan, and other obligations, the entire mortgage is excluded from mortgage diversion by virtue of the revolving credit contract. A revolving credit contract is defined under Regulation 23(2).

Fixed-rate loan contracts are not excluded from mortgage diversion, by virtue of the wording in Regulation 23(2)(b) "does not include a contract that provides for a known or determinable amount of credit by instalments if known or determinable amounts".

Q: It is not clear who mortgage diversion applies to or who the mortgagor and borrower must be.
A: For the purposes of understanding mortgage diversion, the principles of mortgage diversion in section 229 of the KiwiSaver Act 2006 and the regulations need to be read together. The principles in the KiwiSaver Act provide that the facility is available to a person at any time after 12 months have expired since the earlier of: the date the Commissioner received the first contribution for that member, or the date that a provider received the first contribution for that person's membership of a KiwiSaver scheme. Mortgage diversion can only apply to mortgagors who are KiwiSaver members.
Q: What is the meaning of "principal residence" and how does mortgage diversion work when the mortgagor consists of two people and only one of them lives in the relevant residence?
A: Mortgage diversion is available in relation to a mortgage over the person's (the KiwiSaver member's) principal residence. Therefore, a member of a scheme can only divert money to pay the mortgage on a property if the member is the mortgagor and the mortgage is over the member's principal residence. Therefore, mortgage diversion will not be available to a person who has a mortgage over a residence, but who does not live in that residence. If there is a mortgage in joint names and only one of the mortgagors lives in the residence, the person living in the residence can participate (provided they are a KiwiSaver member and meet the other requirements of mortgage diversion - for example, 12 months have expired since the first contribution was received in respect of their membership (by either the Commissioner or their scheme)). In other words, not all parties to the mortgage must have that property as their principal residence (or participate in mortgage diversion) - only the KiwiSaver member applying for mortgage diversion.
Q: The regulations should be clarified regarding the part of the mortgage that the diverted payments must be applied to. Can the facility be used to make up the minimum mortgage payment? Can diverted funds be credited into the loan funding account?
A: The regulations are silent on this matter, to allow industry the flexibility to develop new products that allow for the amount diverted in the minimum payment. Industry feedback during consultation was that it would not be feasible for amounts diverted under a mortgage diversion facility to form part of the minimum mortgage repayment amount. Doing so would introduce risks, due to the involvement of a third party (Inland Revenue) in terms of timing issues, the potential for amounts to vary, and monitoring and enforcing mortgage payments. It is therefore recognised that it is likely that any payment received by banks will be additional amounts over and above existing repayment obligations. Banks should ensure that any money diverted under mortgage diversion facility cannot be redrawn by the mortgagor before being applied to the loan.
Q: Can a KiwiSaver member avail themselves of the mortgage diversion facility when a family trust or other party is the only mortgagor of the relevant mortgage?
A: Because the KiwiSaver Regulations require a member participating in mortgage diversion to be a mortgagor (although not necessarily the only one), the answer is no. Read cumulatively, Regulations 24 to 27 show this requirement exists. The terms of Regulations 24, 26 and 27 show that the mortgagee involved in the facility must be the member's mortgagee. Regulation 25 meanwhile requires certain actions from mortgagees who have agreed to participate in the facility in respect of a mortgagor.