Alarm bells ringing - mortgage broker

[Micholas]

Hi PTalkers,

Going through a mortgage broker for the next project, they have come back to us with a Letter of Offer from Sovereign. I am curious as to why the mortgage broker has presented us with this offer and not one from one of the major banks. I suspect it has something to do with one of the conditions on the offer:

You acknowledge our recommendation that the appropriate insurances are organised to adequately protect your needs. These should include life insurance for at least the amount of the loan, income protection in the event of incapacity and medical cover in the event of illness. The policy documents are to be held by you.

Our mortgage broker clips the ticket on health/life insurance etc and has tried to push these services on us in the past. Their reasoning was that we shouldn't have the mortgage for this project at the same bank as our last rental property (ASB).

We do not want to take out any insurance and I would much rather go with one of the major banks, do you guys think my mortgage brokers have just gone straight to Sovereign because they get to clip the ticket on all of the insurances also?

Thanks for any input, much appreciated!

-Micholas

[NovInvestor]

Hi Micholas

If you didn't specify to your broker which bank you would like to go with, then of course your broker is then free to choose the bank that offer them the best commission!

As an investor, I always tell my broker exactly what my terms are, for example:
1) which bank I want to go with
2) what amount of maximum loan I require
3) what LVR% I will borrow at
4) maximum purchase price to link with 2)
5) likely rental income per week at 4)

Plus I email all my financial info, ie bank statements, pay slips, and most importantly, a property schedule detailing my portfolio to my broker.

Basically my broker doesn't need to offer advise, they just do what I tell them to do.

As for insurance, I buy my own over the phone, usually with Tower...

NI

[drelly]

I've said it before and I'll say it again... there is no such thing as an entirely independent/unbiased broker. They all get incentives or bonuses. The more you put with one company, the better they are. Also in some cases, the more they put with one company, the better terms they can offer for that company.

[kapitibeanman]

Well if you don't have some sort of plan to cover contingencies
such as extended sickness or death, can't blame them for
feeling nervous about your capacity to repay. If you already
have sufficient cover in place and your broker knows you have, then
yes, I agree, it would be a bit off to require you to take out more
cover with them. However, they are just drawing your attention
to the risks, not making it a condition of the loan. That will make
them feel better if they have to throw you or your family out on
the street to get their money back because you had no cover.
It's still your choice I presume.
Who lends you the money has no bearing.
And yes, of course your broker sells the cover.
If you do decide you need cover, tell your broker how much you
are prepared to spend & see what he comes up with. Or get quotes
somewhere else if he wheels up Rolls Royce options only.

[essence]

Sovereign is owned by ASB, so you're basically just dealing with the same company.

[Gladdynook]

Hi PTalkers,



You acknowledge our recommendation that the appropriate insurances are organised to adequately protect your needs. These should include life insurance for at least the amount of the loan, income protection in the event of incapacity and medical cover in the event of illness. The policy documents are to be held by you.

I'm not sure they are in fact forcing you to take out life/income protection insurance. Rather they are stating that they have made a recommendation to you for the above and it is up to you as to whether you take them out. Just dont come back to them later and say "why didnt you tell us to take out insurance... now we're destitute as a result of our loss"..

So purely to protect them in the future. Westpac offered us life insurance the other day, and they then required a signed document to say we had declined the offer. (we have our insurance through another company)

Check with your lawyers before signing up any documents from your broker.

[epsomtax]

Some good comments from the posters. OP, just remember that your mortgage broker has probably got kids to feed, and that's how he/she makes his living, i.e. by clipping the ticket. (I am not a mortgage broker by the way!!)

:-)

[speights boy]

OP, just remember that your mortgage broker has probably got kids to feed, and that's how he/she makes his living, i.e. by clipping the ticket.

Brokers should get your business because they add value, not simply be there to clip the ticket.

[epsomtax]

Yes true, but let's not forget that we all have families to feed and just because someone is clipping the ticket doesn't make it bad advice. If they don't declare exactly what their interests are upfront, then steer well clear, of course!

[Eugene]

If you are aged over 24, you should be considering level life cover, where the premiums remain the same throughout the duration of the contract, instead of the more commonly sold stepped cover.
With stepped cover, premium increases are very minor up to the mid 30’s. However after the 40’s these annual increases go up at an alarming rate.

See:

http://www.compasslife.co.nz/index_files/WhyPremiumsIncrease.htm

-I totally absolutely recommend Marlon.

See also for a description of the two types of policies:

http://www.lifeinsurancefinder.com.au/post/life-insurance-premiums/life-insurance-stepped-premiums-vs-level-premiums/

You pay a little more for level cover at the start, but the break even happens quickly.

[kapitibeanman]

Some good advice there Eugene. I'm of the opinion that a stonking great
level term life policy at a young age when premiums are cheap and health more robust
can be an excellent purchase. No need to wait until you know who your dependants are.
With the hindsight of a few too many decades, I would look for level premiums
that stop at age 80 or 85, cover to continue until death or non payment of premiums.
I don't know whether you can get all those features in one policy these days.
It's like creating a substantial instant estate for outgoings of x$ per month or year,
and the sooner you start, the less x$ is.

[Eugene]

You can get to age 65 or age 80; to age 80 is more expensive of course, since you are more likely to die while still holding the policy.

The level policy seemed like white magic at first, too good (inexpensive) to be true, until I realised you are not certain to die while holding the policy and there is thus a good chance the company won't ever have to pay.

With stepped policies, the insurance company raises the premiums to force you off the policy before you die.

Another reason level policies are less expensive is that there is less churning - people pay slightly more at the start and a whole lot less starting from about one to three years after taking the policy out, so they hang on to the policy. Insurance companies pay a commission every time a new policy is written, and if people hang on to their policy only one commission is paid.

Income protection policies can also be level, here premiums for level policies can even reduce slightly as you get closer to age 65, since the payments if the policy is called on end at age 65. Thus the risk to the insurance company is lessened as age 65 approaches (fewer years to make payments).

[kapitibeanman]

Eugene, I wouldn't be keen to buy a policy that conks out
when I need it most. I would look for these benefits:

1. Level (i.e. not decreasing) life cover until the day I die.

2. Unchanging premiums that preferably stop at a given age.

I have seen these policy conditions at various times, and also own
a policy that won't charge any more premium past 85 (I think) but
keeps the cover going until I'm dead.

[DazRaz]

The problem with level premuim policies from a young age is that inflation eats away at it. When I was 18, I took out a policy insuring me for 100K. This was a very large amount back then but now is hardly worth the bother.

The other thing is your need for cover changes. As your investments build up, the need for life insurance changes. Of more importance though are family changes. Need for life insurance is high while children are home but as they become independant, the need to protect income providers reduces. It may work out better to use some cheap term cover while the family is dependant. The cover be reduced down as the family leaves home and the costs start to escalate.

[Eugene]

Eugene, I wouldn't be keen to buy a policy that conks out
when I need it most. I would look for these benefits:

1. Level (i.e. not decreasing) life cover until the day I die.

2. Unchanging premiums that preferably stop at a given age.

I have seen these policy conditions at various times, and also own
a policy that won't charge any more premium past 85 (I think) but
keeps the cover going until I'm dead.

Does your policy meet conditions 1 and 2 as well? If so it is a great policy, if the premiums are reasonable. I would love to know whose it is.

Are policies called 'level' because the cover stays the same or because the premiums stay the same? I always thought it was the latter.