Why you should never rely on Mortgage Protection Insurance and Lenders Mortgage Insurance provided by your bank lender!
Many of us in New Zealand dream of owning our own home. We struggle, we save, and then we go to the bank asking for money to buy our home.
But with the new Loan To Value rules set by the Reserve Bank it has never been harder for people to afford property. You now need a 20% deposit to buy your home, and a 35% deposit to buy an investment property!
Making matters worse, house prices in relation to incomes have blown out to significant proportions, to the point where the New Zealand House Price to Income Ratio (which is the ratio of median house prices to median familial disposable incomes) is 6.2 – which means you need 6.2 years of median disposable income to afford a home in New Zealand! But if you’re in Auckland, then you need 9.6 years of median disposable income to afford a home!
You’re probably wondering how this relates to the bank’s Mortgage Protection Insurance that they’ll try to sell you when they give you a mortgage, or the Lenders Mortgage Insurance that you’re forced to pay for when you get a mortgage with less than a 20% deposit.
To help you understand, let me ask you a question – what business are the banks in?
When I ask some of my clients this question they’ll say “banks are in the property investment business, because they lend most of their money for people to invest in property”. Or they’ll say “banks are in the building businesses business, because they lend money to help businesses grow”.
What do you think?
Well, if you looked at the financial statement of any bank, there is one thing you WON’T see in their asset column – property!
That's because banks are NOT in the property investment business, and don’t own any property themselves!
You know what else you WON’T see in their asset column – businesses! Banks don’t want to own any of the businesses they lend money to!
If it’s still not clear what business the banks are in, then I’ll tell you – Banks are in the LENDING business. They lend people money, and charge interest on the money they lend. All the risk is on the borrower (YOU) to make sure the debt is repaid. All the bank cares about is getting their initial loan back from you PLUS the interest.
So why does this matter?
If things go wrong, and you’re struggling to repay the debt, or you default on the loan, then the bank will come in, take over your mortgage, and SELL YOUR PROPERTY. They don’t care if it’s a good time or a bad time to sell the property. They don’t even care if the price they sell the property for is enough to repay the debt!
And you know why?
Because YOU are still liable for any debt that is left unpaid! That’s right, you’ll have to find the extra money to make sure the bank receives the full debt back.
Now you’re probably thinking “But Brian, my bank’s Mortgage Protection Insurance will kick in if I’m unable to work and pay the mortgage”. Will it? Have you ever compared bank insurance products (which are notoriously poor quality, provide very narrow coverage, and are very hard to claim on) to specialist insurance provider products? If you haven’t, then you’re sitting on a ticking time bomb.
Now some of you who have your bank’s Mortgage Protection Insurance and have also been forced to purchase Lenders Mortgage Insurance because you had less than a 20% deposit are probably thinking, “Well Brian, we’re definitely protected. If we default on the loan and the bank sells the property but the selling price is less than the debt, the insurer will pay the bank the difference!”
That’s true – but you’re still liable for the difference! That’s because Lenders Mortgage Insurance protects the lender (the bank), not the borrower (you)! The insurer will now relentlessly come after YOU for the difference that they had to pay the bank to repay the full debt.
Now this all sounds very unfair. But it is much worse for people who have purchased their Mortgage Protection Insurance and Lenders Mortgage Insurance with their bank lender.
Why is it worse?
Because your bank is both the lender and the provider of your Mortgage Protection Insurance, there is a massive conflict of interest. In fact, in some cases it may be much easier and financially better for the bank to force a mortgagee sale and rely on their Lenders Mortgage Insurance (that protects them) to recover any difference than to approve your Mortgage Protection Insurance claim (that should protect you) that would ensure you could keep your home!
So what should you do now?
If you think you might be at risk, then call me to arrange your review. It’s free, simple and we’ll make sure your home is protected!