Mortgage Insurance Helps Lenders, Not Borrowers
Sydney Morning Herald
Tuesday June 20, 1989
FOR home buyers, particularly in the current property market, the prospect of defaulting on their mortgage and being forced into a "fire sale" is frightening indeed.
Already, as interest rates remain stuck at historically high levels, the number of home owners seeking urgent Government help because they are unable to meet their mortgage repayments has more than doubled.
According to a recent report, applications under the NSW Mortgage Assistance Scheme, where people unable to meet their mortgage repayments may qualify for an emergency, interest-free loan (subject to a means test and other criteria) are now running at twice last year's rate.
For those contemplating buying a home, the current circumstances suggest that it is worthwhile to consider insuring your mortgage against the inability to repay.
First, you should be aware of the important distinction between the two ways of insuring a mortgage.
The first way, and perhaps the most common, is so-called "mortgage insurance". This is a policy which protects the lender against loss - such as the bank or building society - should you default on your mortgage.
Many banks and building societies make mortgage insurance a condition of the loan where the mortgage represents more than 70 or 75 per cent of the total purchase price. It takes the form of a once-only premium, paid by the borrower to the lender. The lender is usually teamed up with a mortgage insurer, such as the Mortgage Guarantee Insurance Corporation of Australia(MGICA) or the Housing Loans Insurance Corporation (HLIC).
The cost depends primarily on the loan-to-value ratio. Where the mortgage is $85,000 and this represents 75 per cent of the value of the house, the premium is about $340. Where the $85,000 mortgage represents 90 per cent of the value of the house, the cost is much higher - at about $1,000 - because the assessed risk to the lender is higher.
Mortgage insurance comes into play if you are forced into a sale through inability to repay, and, when the house is sold, there remain insufficient funds to pay off the mortgage in full. The mortgage insurer foots the bill to the lender for the shortfall.
Mr Peter Bartlett, chairman of the HLIC, reports no discernible increase in claims against such policies - yet. However, he says there is typically a six-to nine-month lag before borrowers start to default in the face of punishingly high interest rates: "We would expect that arrears and defaults by marginal borrowers will start to happen by September this year."
Even less fortunate than the marginal borrowers who suffer from insufficient means to service their debts, are those whose ability to repay has diminished or disappeared because of some unforeseen circumstance, such as the death of an income earner.
So-called "mortgage protection insurance", or "loan protection insurance", is designed to protect the borrower in such a situation, avoiding a mortgagee sale by effectively picking up repayments where the borrower was forced to leave off.
Such insurance is not compulsory, but is a good way to avoid the trauma of a forced sale. Most lending institutions offer mortgage protection insurance in the form of a level premium, term life insurance policy. This means the annual premiums remain the same throughout the term of the policy, while the cover decreases in line with the reducing balance on the mortgage.
In general, the premiums vary according to the size of the loan, the age of the borrower and whether the borrower is a smoker or non-smoker. The more extensive schemes cover unemployment and sickness as well as death and disability, and you can choose which types of cover you require.
For example, the St George Building Society offers a choice of death and disability cover or just death cover. A 30-year-old with a $85,000 mortgage over 25 years would incur an annual premium (payable monthly) of $510, while a 40-year-old would pay $1,224 for the same cover. Clearly, the younger you are when you take out such a policy, the cheaper it will be.
The annual cost of life and total, permanent disability cover on an $85,000 mortgage for a non-smoker aged 30 from the Commonwealth Bank is $348.50, and for a smoker it is $486.
While the scheme offered by the lender may be the most convenient from an administrative point of view, it may not be the cheapest, and nor may it cover all the eventualities with which you are concerned.
Before committing yourself to a mortgage protection policy with your lender, it is worthwhile checking on the policies offered by independent insurance companies. This is particularly so for non-smokers, since unlike insurance companies, some lending institutions make no distinction between them and smokers when setting premiums.
If you require only cover against death, and your mortgage is your only significant liability, an ordinary life insurance policy may be the best and cheapest option. Similarly, it is worth investigating the standard sickness and disability insurance offered by insurance companies as an alternative to the more specialised mortgage protection insurance policies offered by lenders.
Finally, in their desperation, borrowers having difficulty in meeting their repayments, whether or not they are covered by loan protection insurance, often forget the crucial first step: go and see the bank or building society and explain the problems.
In nearly all cases, the lenders would much rather work out a new scheme of repayments which is within your capacity to repay than force you into a mortgagee sale.
© 1989 Sydney Morning Herald
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