Factor In Insurance

The Age

Wednesday May 8, 2002

Bridie Smith

Insurance costs in the medical and building sectors have been a hot topic of late. But what many borrows may not realise is that there are insurance costs to be taken into account with home loans as well.

Lender's mortgage insurance is a fact of life for clients who borrow more than 80 per cent of the purchase price. It is a cost calculated by the loan to valuation ratio (LVR) by the mortgage insurer.

In some cases, lender's mortgage insurance may also be required when the LVR is below 80 per cent.

The solution is to save a deposit of at least 20 per cent of the purchase price. A $295,000 property purchase will mean a $36,000 deposit to avoid the lender's mortgage insurance.

If this is out of the question, factor in the added expense of the insurance on your home loan costs.

If a client borrows $280,000, for example, this will incur a lender's mortgage insurance bill of $4835.

A financial planner at the ANZ bank Jason Back advises borrowers to "understand what your borrowing powers are, including all fees".

It should also be understood that it is the bank's potential loss that is insured, not the borrower's.

"There is zero benefit from the borrower's point of view," Mr Back says.

"Most people don't understand why they pay it. But it is not a perfect world. Banks are businesses that have to answer to clients and shareholders, and it would be unwise to take on an uninsured loan."

While borrowing more than 80 per cent of the purchase price is neither tax-effective or tax-deductable, Mr Back says it should be considered an opportunity cost.

"I wouldn't deter people from borrowing more than 80 per cent," he says, "as borrowers shouldn't sacrifice other assets to meet their deposit.

"Property is a long-term investment and quality assets will get quality returns."

Top 10 standard variable home loans**
Banks
Lender                  Product                 True rate       Lender rate
        Total                   Ongoing         Exit fee
                        name            AAPR*                           upfront
fees    fees
National Australia              Choice Package  5.70%   5.56%           Nil
        $375    No
Bank                    Tailored HL                             annually
AXA Home Loans          Rate Saver Loan         5.74%   5.74%           Nil
        Nil     $200
Macquarie Bank          First Choice    5.94%   5.90%           $650
Nil     $350
                        Variable
ING Bank        Standard                Variable                5.95%   5.95%
        Nil             Nil     $100
AMP Banking             AMP Advantage   5.99%   5.95%           $600
Nil     $150
                        Home Loan
Non-banks
Lender                  Product                 True rate       Lender rate
Total                   Ongoing         Exit fee
                        name            AAPR*                   upfront fees
        fees
Melbourne Credit Union  Freedom HL      5.34%   5.35%           Nil
Nil     $430
LoanNET                         Standard Variable       5.40%   5.40%
Nil             Nil     No
Wizard Mortgage Corp    Essentials Loan         5.50%   5.45%           $760
        Nil     $285
AIMS Home Loans                 Aims Variable   5.54%   5.50%           $668
        Nil     $150
La Trobe Country Credit         Sec. Var.       5.59%   5.55%           $614.50
                Nil     N/A
                        Home Loan
* AAPR is the annualised percentage rate - the rate after extra fees and charges
 are taken into account.
** Rates are for loans of $176 000 to $275 000 in Victoria for owner-occupied
homes.
Compiled by www.interestrate.com.au using Cannex data (May 1).

© 2002 The Age

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