In an attempt to remain competitive in the face of the increased competition, many of the players in the mortgage finance industry have adopted the strategy of advertising that they would provide up to 95% and 100% mortgage financing to prospective homeowners.

Such facilities suggest that would-be mortgagors would only now have to come up with a 5% deposit, or in the case of a 100% mortgage, no deposit at all in order to access mortgage financing, rather than having to provide the traditional 20 per cent deposit.

The reality is, however, that when they approach the mortgage company, they are then advised of their requirement to provide mortgage indemnity insurance to cover the top 15% to 20% of their mortgage loan. 

For many, this requirement becomes an additional cost relative to the mortgage process for which they had not catered. Additionally, they find themselves incurring this cost for something about which they are not very clear.

What is mortgage indemnity?

Mortgage indemnity is insurance coverage which a mortgage company may require and the cost of which is borne by the mortgagor as a one-time up front payment. 

This insurance coverage is designed to provide protection to the mortgage company in the event that, at some future stage, the mortgagor is unable to maintain his/her mortgage payments and the property has to be repossessed and sold.

If the property is sold for less than the amount that is outstanding on the mortgage, the company can make a claim against the mortgage indemnity to recover some or all of its losses. 

Mortgage indemnity insurance is effectively an additional form of security for the mortgage company. 

How is the premium determined?

The mortgage indemnity premium is generally determined by the mortgage company’s insurance provider. The mortgage company would provide its insurer with, among other things, the following details: 

• The amount of the mortgage loan. 
• The cost or value of the property, whichever is lower. 
• The loan to value ratio at which no mortgage indemnity is required. 

It is on the basis of this information that the insurance company will determine the premium payable which is calculated as a percentage of the amount of the loan that exceeds of the mortgage companys prescribed loan to value ratio (LTV). 

The LTV is expressed as a percentage of the amount of the mortgage loan over the value of the property. 

The LTV benchmark in the mortgage industry is generally 75% to 80%. It means therefore that mortgage indemnity insurance may be required where the amount of the mortgage loan that exceeds 75% to 80% of the property value. 

The implication for the prospective homeowner therefore, particularly given the current prices for housing, is that the larger the size of the mortgage loan, the higher the mortgage indemnity premium that may be payable. 

What happens when a claim is made? 

A mortgage company can make a claim after it exercises itspower of sale (i.e. where the company has actually sold the repossessed property) and the price obtained for the property is less than the balance that is outstanding on the mortgage, that is, there is a shortfall. 

The evidence shows that in most cases, the mortgage indemnity will cover the entire shortfall. If a shortfall occurs however, the mortgagor is still liable for any amount still outstanding, and as such he/she can be sued by the mortgage company to recover this difference. 

Does mortgage indemnity benefit the mortgagor? 

There is no doubt that mortgage indemnity insurance is designed to protect the mortgage company against possible losses in the event of default by the borrower. 

However, it is because of mortgage indemnity insurance that prospective homeowners are not only able to pay a lower down payment, but may also be able to acquire homes in areas and on terms that may otherwise be considered too risky. An example of this is 100% mortgages where mortgage companies would be unlikely to provide this type of financing without mortgage indemnity coverage.

The benefit to the mortgagor is that he/she is able to more readily realize their dream of homeownership, than if they had to save the required deposit before they can approach the mortgage company for financing. 

The critical issue for the prospective homeowners is that in choosing the company from which they would obtain mortgage financing, they must first inquire as to all closing costs, including the costs relative to mortgage indemnity insurance. They may very well find that some companies may choose not to make mortgage indemnity insurance a requirement, thereby making access to mortgage finance much easier and more affordable.