Recently, I had a coffee meeting with my clients, Melanie and Mark. They are young doctors who want to buy a home for their expanding family.
In our discussion, Mark said something that caught my attention.
“My parents have a great relationship with their bank, but should we consider other lenders? Their advisor told us we’d likely be approved, and their all-in mortgage payments were within our budget.” Mark said.
Did you catch what I noticed?
“All-in mortgage payments?” I asked. “What are all-in mortgage payments?”
“He didn’t say.” Melanie replied. “We just thought that included any fees they might have. Here’s the pre-approval they gave us.” She pulled a package out and slid it across the table to me.
My earlier financial career years included being a lending officer at a bank, so I had a sneaking suspicion of what I’d see was an “all-in” payment. It’s common to have property tax included in the mortgage payment, and it’s perfectly fine. There’s no interest and the bank remits it on your behalf.
“All-in mortgage payments?” I asked. “What are all-in mortgage payments?”
But this wasn’t the case.
What isn’t perfectly fine is when I see mortgage protection slipped into the payments, usually without any discussion of what it is (and more importantly, what it isn’t!).
The reason I know this? If it is explained properly, nobody would ever buy it.
And sure enough, there it was:
“Credit Protection – $108.15 / Monthly”
Ouch! This was to protect their $1,000,000 pre-approval with life insurance.
“Would you mind putting on another pot of coffee?” I asked. “There are some things you need to know about creditor protection.”
5 Problems With Creditor Protection
1. Let’s start with the cost.
Mark is thirty-two years old. If he wants to protect his family with $1,000,000 of coverage, he can do so with his own policy for as little as $55 per month. About half the cost.
2. Was Mark actually insurable?
The underwriting for Mark’s personal policy would be approved before they took on a mortgage. With the bank, that’s done afterwards should Mark prematurely pass away. And if it was then found he wouldn’t have been insurable, the premiums are refunded but the mortgage lives on…when it’s too late.
3. It’s your cheapest debt.
Let’s assume it would pay out however. If you’re like most families, your mortgage is your cheapest debt, with an interest rate lower than your student loans, car loans, lines of credit or credit cards. Or maybe you’d prefer to keep some of the insurance to fund your children’s education? Sorry, it’s called creditor protection for a reason…to protect the creditor.
4. Well, at least you’ll get the rest, right?
Nope, the benefit for the survivor is the amount of your mortgage, not the million you started with. In other words, you’re paying a level premium for a decreasing benefit.
5. You can’t take it with you.
Lastly, what if you want to move your mortgage to another lender who has a better interest rate, but your health has changed? You may be stuck with whatever your bank’s rates are, if you no longer can obtain insurance elsewhere.
Mark and Melanie have many long-term goals, but none of them were about HOW they could ensure their bank was protected.
The Good News?
Mark applied and was approved for his own policy, which was almost half the cost of the creditor protection from their bank. Putting the difference toward the RESP for their children and together with government grants, they would have almost $20,000 more toward university funding for their children.
And good-bye unnecessary credit protection!
Now THAT was a win-win!
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