Who’s protecting your loan or mortgage?

Q & A with Ray Hair, ALI Group CEO about the importance of having insurance and the different types of insurance available.

Ray Hair’s Profile

• Chief Executive Officer of ALI Group
• A specialist in loan and mortgage protection insurance
• Member of the Institute of Chartered Accountants of Australia (ICAA)
• Member of the Mortgage & Finance Association of Australia (MFAA)
• Graduated from La Trobe University with a Bachelor of Economics/Commerce

Q: How and why did you get into the mortgage broker business?

A: I was fortunate to be involved in the launch of the Royal Automobile Club Victoria’s (RACV) life insurance, funds management and mortgage management initiatives during 1994-98. It was a fabulous learning ground and gave me a taste for financial services distribution, having previously been a tax consultant! I have never looked back; working with Fortis Insurance, PLAN Australia and ALI Group in insurance and mortgage broking since 1999. I particularly enjoy working with self employed mortgage brokers; they are passionate people, building great businesses whilst assisting Australians to purchase their dream house and protect their loved ones.

Q: One of your specialities is mortgage and loan insurance, what's the most interesting piece of advice you can give investors in this area of expertise?

A: Investment strategies seek to increase the wealth of the investor. Often such strategies require debt to finance investments or leverage returns. Debt increases risk and good investment strategies should seek to mitigate risk. Insurance is an essential part of every investment strategy.

Q: Why is it important for someone to have mortgage protection?

A: For most of us, a home loan is all about putting a roof over the heads of the family or building wealth through an investment property. How can we work so hard to make this happen, but leave our family exposed to significant financial hardship if we were to die, suffer a critical illness or trauma? Having achieved that initial dream, it is essential people understand that unforeseen events can destroy that dream.

Most people insure their cars, their house and its contents but very few have sufficient life insurance, trauma cover and/or income protection. Death or trauma can result in a borrower defaulting on loan repayments and ultimately the repossession of the financed property.

Further, a person’s income is their most important asset when it comes to meeting home loan repayments. Illness or an accident can interrupt someone’s ability to meet repayments and, if interrupted long enough, can result in the lender repossessing the house.

Many people consider life insurance to be expensive. Mortgage protection insurance is a bundled solution for the budget conscious and/or those unwilling to seek personal advice from a financial planner and undertake any required medicals and blood tests.

For convenient, affordable protection in relation to a home or investment loan, it is worthy of consideration.

Q: What's the difference between mortgage protection and mortgage insurance?

A: Lenders’ Mortgage Insurance (LMI) protects the lender not the borrower, should the borrower be unable to fulfill their obligations. The borrower is still liable for any default or loss, however the liability or debt is effectively passed from the lender to the insurer.

Lenders generally require LMI (at the borrower’s cost) on loans where the borrower’s equity in the financed property is less than 20%. These loans are regarded as being higher risk because the borrower has greater exposure and less equity.

Mortgage protection insurance protects the borrower in the event of death, terminal illness and, in some instances, involuntary unemployment. It is designed to reduce the financial hardship and emotional stress that arises when a borrower suffers an unforeseen health crisis or, in the worse case, death.

Q: What are the best types of mortgage protection nowadays?

A: Mortgage protection insurance generally comes in one of two forms; consumer credit insurance (CCI) that is specifically linked to the loan amount and/or loan repayment amounts, or life insurance that is independent of the loan contract but the sum insured is determined by reference to the amount borrowed and/or loan repayments.

CCI is often a bundled protection package (death, terminal illness, specified trauma and involuntary unemployment) with a fixed three or five year term. The premium (for the full 3 or 5 years) is usually financed in the loan and benefits are paid directly to the lender on behalf of the borrower. The advantage of CCI is that the cost is spread across loan repayments and therefore only adds a small amount to each monthly repayment; the disadvantage is that the borrower is paying interest on the premiums for the life of the loan, possibly 25 years or more.

The alternative to CCI is an annual renewal life policy with a similar bundle of benefits (death, terminal illness, trauma and involuntary unemployment) that the borrower can pay for monthly or annually, for as long as the cover is desired or considered necessary. The benefits are payable to the insured (borrower) or their estate and can therefore be applied to loan obligations, medical costs and/or other needs.

Q: What are the benefits of mortgage protection?

A: The primary benefit of mortgage insurance is peace of mind. No one wants to claim on a life or trauma insurance policy; however, knowing that you and your dependants won’t suffer financial hardship should unforeseen health issues disrupt your plans to own the family home is priceless.