I RECKON the biggest rip-off in Australia is mortgage insurance. It's even bigger than the 30% air I get in my cereal packet.
This week I consulted Google after comments I made in a recent article about the property value meltdown happening in Gladstone caused a flutter here and there.
Estimates are that if you were to borrow 90% of a purchase price of $500,000 on your dream home, then the mortgage insurance you'd have to add to your commitment would be an estimated $8820.
If you fell into the trap of borrowing 95%, you'd pay an estimated $15,723.
Why is it a rip-off? There are two reasons:
(1) It is seldom explained to borrowers in the heat of their excitement in having an offer accepted by the vendor that they are paying to insure the lender should they be forced by circumstances to default, not insuring themselves; and
(2) the premium is not transferable, meaning statistically the cover you've forked out for will last just seven years or so.
Just what exactly is the borrower getting for their money? The answer is sweet Fanny Adams!
If the mortgagee forecloses on your loan, then the mortgage insurer forks over the difference between what it got at auction (usually much less than you'd expect because the thing is advertised as a "mortgagee in possession" sale), and what the website blithely says is "the outstanding loan balance and other costs incurred by your lender in relation to enforcing the mortgage" (read exorbitant legal and recovery agent fees).
So life's taken a turn for the worse for you and you've decided to walk away from your home.
At least the insurance you paid through the nose for will satisfy the lender and you'll be able to get on with life and start again. No!
Now you'll hear from the mortgage insurer and they'll want you to cover them for their costs in satisfying the lender's claim. Feel violated?
You will because you'll wear that debt for as long as it takes to repay it and clean up your credit rating.
Forget that new start, past troubles are still biting you on the bum. Your premium covered the lender, not you.
My story is a warning not to simply walk - something far too many do because they think they're covered by mortgage insurance.
Use everything at your disposal to try to stick it out including contacting the Financial Ombudsman Service.
According to the Australian Prudential Regulation Authority in boom state Queensland, insurers had by far the largest loss ratio in fiscal 2013 - 93%, more than twice that of the next worst, Tassie.
The loss ratio is a measure of payouts verses premiums collected. Here borrowers are walking in droves, obviously not knowing the longer term consequences.