Lenders Mortgage Insurance persisting

[fatboy4]

Hi all,

This might qualify as a rant but I'd genuinely like to understand the Bank's point of view.

Some time ago (about 8 years) we purchased another property and needed Lender's Mortgage Insurance. It was our fifth home and the market was pretty flat- not much equity. (In Bundy at the time it was as cheap to buy as it was to rent. We paid $112,000 for a 5 y.o. 4 bed, ens, SLUG + pool and rental would have been $180 pw.)

Now, have 2 mortgages with Westpac, our LVR on the either or both combined is close to 50% (with the vals the bank has). We prepaid interest last fin year and have been told we can't have interest only again this year because that loan has mortgage insurance. Only way around it is to do a new loan.

My way of thinking is that there was a risk (our previously "high" LVR) which was covered by insurance. Now, that risk is gone (we have a low LVR) yet the insurance must remain tied to the loan.

It is a small loan and the cash flow difference is no biggie but I can't understand the thinking.

I feel much better. Any ideas?

 

[Kristine..]

G'Day

In a nutshell, when a lender (any lender) requires a loan to be insured, the risk is insured for the life of the loan.

This is unlike 'ordinary' insurance, for example, the security property is insured on a periodic basis - annual or even monthly if that is how you pay your Fire & General and Public Liability insurance.

The 'term' of mortgage insurance is, as mentioned, for the life of the loan.

So if you borrowed money over a 30 year term then the insurance underwrites or warrants the loan for the full 30 years. That is why the initial premium is so cheap. The risk is designed to be lessened as inflation and capital growth improve the value of the security property over time.

Each lender has different service contracts with their insurers. To the best of my knowledge Westpac self-insure. You pay the same upfront premium but they underwrite the risk themselves.

If they have effectively advised you to refinance then this may be a great opportunity for you to look at the loan products you currently use and how you have your finance structured. Even after a few years the loan products may now be outdated for your current circumstances.

cheers

Kristine

 

[Spectre]

I agree with Kristine to a large extent. Mortgage insurance only applies (generally) when you dont have 20% equity and it sounds like you do so that part of the contract is moot. However, if the property was bought prior to 1996 then the contract could be legally out of date as the governments changed the legislation after it - i'm thinking consumer credit code here - if you dont know what that is ask the bank they will all tell you as they have to know what it means. It really seems westpac has some weird policy sometimes. There could be behind the scenes reasons like it may help the guy whos doing the loan's sales statistics. I'd look around for a new deal somewhere else as generally a new loan means new fees and for that it is usually cheaper to refinance to a lower rate under some package another bank offers. Banks should be falling all over themselves to do loans not hinder people from doing what they want. But also (i'm on a rant too) if you've prepaid the interest last year for this financial year then you dont have to make payments...

 

[fatboy4]

Lmi

Thanks Lukentel and Kristine,

Nowwww I unustand. Why the Bank's warm and fuzzy types could not articulate it so clearly (as Kristine has) is beyond me. I even spoke to the Insurance guy and he couldn't.

I am looking at my finance- have a good broker in Brissy looking into a refinance of a commercial loan we have on a Boarding House- could save $5k a year in interest. If he can pull it off we'll look at our IP's. Our circumstances have changed- will be looking into more low doc stuff now we are no longer slaves to the wage.

I agree about Banks' falling over themselves. I "topped" up the other Westpac Mortgage we have easy peasy- no financials, minimal cost...

I have emailed the Bank lady (through the Branch Manager's email address) and had a little rant and also let them know that we have a reasonable property portfolio and other loans with other lenders.

Thanks again guys, I appreciate your expertise. This forum and its people are a fantastic resource.