I am often totally out of my depth -but I am never "bored". Please continue to contribute
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Ok, cutting through the 'accounting speak', if I lent some money out to an old crusty home owner at say 7.4% p.a., for ten years, would I like it better if:
1/ I got that 7.4% in interest paid back to me each year OR
2/ I got that interest paid into a bank account for ten years, then picked up all the interest in one hit at the end.
The preferable scenario is clearly 1/. However, in the case of a Heartland 'reverse mortgage agreement', the interest that you are 'not collecting' each year is itself collecting interest along the way at the same 7.4% rate. So although you are sacrificing the liquidity of your interest income for ten years, you are getting paid well for making that sacrifice. Thus in the case of a reverse mortgage agreement there ends up being no difference in the present value of the return, whether you choose scenario 1/ or 2/. And a reverse mortgage is scenario 2/.
Using a WACC 'hurdle' to evaluate the cashflows from a potential future investment, I would have thought, is fairly orthodox accounting practice. If a potential return is only equal to the WACC then that, to me, is a signal not to proceed with that investment. Or to put it even more bluntly: If Heartland were only charging 7.4% for their reverse mortgage interest cashflow and the weighted cost of capital was 7.4%, you would have to question whether the reverse mortgage interest charges properly reflected the risk from a Heartland shareholder perspective.
I imagine that over the 'long term' houses will trend up in value, living costs will trend up in value, and those who take out reverse mortgages will take out larger loans in dollar terms to fill their larger living requirement bills, All affordable because of the higher value of the houses.Quote:
It seems that HER loans on average have a much longer duration than a lot of their other lending and I was wondering what you thought about the capital implications are when these loans are repaid allowing for inflation.
I can also imagine that there are times when house prices increase a lot faster than the cost of living and there may be times of low to no house price growth even as the cost of living goes higher. In those cases, crusty homeowners may think twice about that reverse mortgage. I think it makes a difference borrowing $50,000 if your house price has just moved up by that amount in a year (psychologically you are borrowing new windfall capital that you didn't have a year previously) , verses borrowing $50,000 in a year that your house value remains the same (in this instance you are mortgaging your past hard earned nest egg.) Looked at objectively there is really no difference between the two transactions. But home owners do not always think objectively.
At least a couple have indicated that they are 'not bored', so I guess you are out voted on that Winner ;-P. If I owned Heartland shares, and reverse mortgages are highlighted as a big part of future growth, I sure as heck would think it worthwhile putting some effort into figuring out how to value them.Quote:
As we seem to ‘bore’ people with these conversations I’m don’t expect you to reply on this thread.
SNOOPY
Snoops
Some reckon ANZ cost of capital is about 8.5%
So one of your sentences above could read ......ANZ charging 4.5% for a residential mortgage and the weighted cost of capital was 8.5% you would have to question whether mortgage lending charges properly reflected the risk from a ANZ shareholder perspective.
As I said above you can’t really compare the two rates ..maybe in the ANZ context above you can see why.
O.K. so maybe I am looking at this the wrong way.
You have a whole office load of guys and gals at Seniors Finance. Someone in the Northern Territory wants a new reverse mortgage. Seniors check with their Ozzie bankers CBA to see if they will pay out the money in cash, while Seniors (Heartland) takes out a first mortgage on the house. "Sure" say CBA "$440m borrowed already, but borrowing headroom doesn't max out until $600m". "Go right ahead"
So Seniors hands over the reverse mortgage loan to our 'Crusty NT Couple'. But no more guys or gals had to be hired to do the deal. No more office space had to be rented out to do the deal. So although the Heartland WACC was 7.4%, the actual cost of writing out that new deal was a phone call and a couple of e-mails - close to zilch. And because the overheads have not increased, the difference between what CBA charge Seniors, say 4.5% and what the end line NT customer ends up paying say 7.8% - (7.8%-4,5%=) 3.3% is all 'profit' for Heartland. 3.3% profit may not sound like much. But 3.3% profit over a zero incremental asset/cost base is one heck of a return. And it doesn't take too many deals like this to really ramp up the return on the original Seniors asset base.
However, if Heartland wanted to sell Seniors to another company that did not have a finance operation, then you would have to look at things differently. In this instance you would have to look at the whole Seniors asset base as a cost centre, to be cost allocated across all the Senior's loans. So in this instance using the WACC of Heartland as an estimate to measure the efficiency of a whole business unit is valid.
Does that make sense?
SNOOPY
NZ REL's are financed by HBL.
Snoops .....third paragraph good ...fourth paragraph says a prospective would look at it as a business and see if returns exceed their hurdle rate (maybe their cost of capital)
Back to Heartland it’s good they make a 11% ROE when WACC is about 7.4% eh .....excessive returns over and above their cost of capital which are rewarded in its share price being significantly above its book value.
I would hazard a guess that the HER business is one of Heartlands better ‘value creating’ bits ...but have no numbers to support that
Five O'Clock and the lawn is still too wet to mow. Don't want to substitute other chores, so time to rip into Winner's exercise.
Seniors interest rate is 7.82%. It is variable but since we don't know how it will vary in the future I will keep it fixed for the purpose of this exercise. To keep the figures easy, Mr & Mrs Crusty will look to take out a $100,000 reverse mortgage loan.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Interest Payable $7,820 $8,432 $9,091 $9,802 $10,568 $11,395 $12,286 $13,247 $14,282 $15,399 $112,332 Time Discount Factor Face Value 7.4% 7.4%^2 7,4%^3 7,4%^4 7.4%^5 7.4%^6 7.4%^7 7.4%^8 7.4%^9 Time Discounted Interest $7,820 $7,851 $7,881 $7,912 $7,935 $7,974 $8,005 $8,037 $8,068 $8,099 $79,582
Here is a graphic demonstration of compound interest. Mr & Mrs Crusty end up paying back $112k interest on top of the $100k that they borrowed! Or put another way each dollar they spend in their ten years of retirement costs them $2.12. Just as well the Crusty kids weren't banking on much of an inheritance then!
Now we look at the adjusted income on a per year basis: $79,582 /10 = $7,958 averaged per year.
And on loan capital of $100,000, that equates to an annual interest rate of 7.95%
And that proves, I am not sure what?
SNOOPY
Payable $212,322 plus exit fees.
The power of compounding interest.
ps.It is not The Crusty kids' money.It is their parents.
pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.
ppps.Better to own a bank than having money in the bank.?...lol.
Well I got that wrong then! I had thought the answer might be "the greed of Heartlanders."
From:
https://www.stuff.co.nz/business/mon...interest-rates
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Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.
Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.
The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.
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Well a $212,000 payment is more that 100% of the loan principal. So could Heartland be looking at a government imposed cap on its lending arrangements?
In this case it is neither the parents nor the kids money. It has become Heartland's money.Quote:
ps.It is not The Crusty kids' money.It is their parents.
Well 7.82 - 4.5 = 3.32 percentage points. That makes a NIM of 3.32 percentage points. But wait, Heartlands overall net interest margin was 4.34 percentage points over FY2017. So doesn't that indicate that Heartland's REL business could actually be lower margin than the other business units?Quote:
pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.
SNOOPY
HBL do a bit of magic...….lol.
ps.TRA's NIM is over twice HBL's.
NB.TRA and HBL are the good guys.!