Last year, we came to know a mortgage broker who helps property buyers to apply for mortgage loans from several banks. We liked his service because he could get few quotations of mortgage loan from different banks for a property. With his service we were able to know which bank can offer the best package to us.
When we first met, we noticed that one of the businesses stated on his name card is “risk management”. We asked him what he does with risk management. “Oh, that’s actually about insurance,” he replied. We didn’t pay much attention at that time.
After a few months, when we wanted to sign up a mortgage loan through him for a property, things started to show that we have made a mistake by ignoring his side business in insurance.
Our mistake
The mortgage broker brought bank’s letter of offer of the mortgage loan to us in a rainy day. We didn’t read through the letter of offer in detail at that point of time and we assumed it should be quite a standard one.
After we signed the letter of offer, the broker claimed that we have to take up either a Mortgage Insurance (MI) or a Mortgage Reducing Term Assurance (MRTA) as it’s a requirement of the mortgage loan. He then showed us two packages of AIG’s MI and MRTA and explained to us the difference between them.
He highlighted that the premium of MI for our mortgage was not much different from the MRTA but they both serve the same purpose. However, we may surrender this MI in future when we sell the property and we can take back a certain percentage of the total premium invested.
It sounded very straightforward to us. We trusted him and signed up an MI with him on the spot.
It was until we talked to the banker when we sign the loan agreement for that mortgage loan, then we realised that we have made a mistake.
We asked the banker if it is the bank’s standard policy that borrower of each mortgage loan must buy an MI or MRTA. Answer from the banker surprised us – there is no such policy. If there is such a requirement it will be stated in the letter of offer.
Of course, as you can imagine, there was no such clause in our letter of offer!
We asked her to calculate the premium of bank’s MRTA for our mortgage. The result astonished us – it was almost ten times cheaper than AIG’s premium!!! We asked her why there was so much different. She replied AIG’s premium of MRTA is normally higher than banks’ and the factors used by the mortgage broker in his calculation may tend to inflate the premium of MRTA.
Why did he want to do that?
Conflict of interests
The reasons for his doing were indeed quite simple – conflict of interests. Obviously, his interest in the commissions that he could get from MI was higher than what he could get from MRTA. That’s why he inflated the premium of MRTA so that both premiums of MI and MRTA look not much different. He was showing an unfair comparison to us so that we tended to choose MI as if MI gave additional benefit for the same amount of money.
But most importantly, we could see his interest in insurance brokerage was higher than in mortgage brokerage. That explains why he dared to tell us a requirement that doesn’t not exist in our letter of offer – because he wanted us to buy mortgage insurance, most probably from him.
Lesson learnt
As discussed in our previous article “What is MRTA and do you really need it?”, you may or may not need an insurance on your mortgage. It depends on your investment strategy and plan. Our bad experience with this mortgage broker does not affect our view about the insurance itself. It taught us a lesson about working with people with different expertise and interests.
We do believe there are people who can master and do well in more than one job. But we never believe one can do well in jobs that have conflict of interests.
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{ 6 comments… read them below or add one }
Thanks for highlighting this…
Hi,
I am a mortgage broker. I would also do the comparison between difference of insurance available and we never force client to buy. I am not sure what MI mentioned is what type of insurance, but we would offer life insurance which may help accumulating the cash surrender value with better protection than the MRTA premium in long term. It depends on the customer’s need, if they are investors, we would still offer them, but it’s up to them to decide.
The decision power still lies with customer, and with due diligence, some customer didn’t buy, should they over-insured or intend to sell it off within short period of time. Well I don’t force them to buy too, but some financial institutions would, should they find insecurity withthe borrower.
Kong
Yes, I am facing this problem at this moment. Even though my broker is quiet a honest one. He didnt stated that the insurance is compulsory. However, he is very keen to approaching me to buy the MLTA which is even more expansive then MRTA. He is keen on both and happy to proceed it. But I am not so interested on both insurance and he will say something like, Eg, it is not good to have without insurance, dangerious if anything happen to you. I afraid after there is anything happen to you, I can responsible for this……
It has been still a delay for this at this moment. Reason I giving him is the calculation from the insurer, how the plan work. I asked about the indept details for this insurance plan to hold the purchase and decision. Due to the location wise, he seems not worth to come over my place to settle those explaination and I keep on refuse to met him in town area….
yes, bank will state clearly in offer letter if MRTA if mandatory. Its mandatory for some banks while its not for the other.
Hi,
I’m a mortgage broker, as i read your article, i believe your mortgage broker didn’t explain to you what is the benefit between MRTA & MLTA. In term of premium, yes, MLTA is much higher than MRTA, but of course there are lot of extra benefit if u take MLTA as your mortgage insurance.
MRTA
-coverage reducing
-if you want to refinance your property in future (maybe in 5-10 years time), you have to buy another one. By that time the premium will be much higher
-no yearly income tax exemption
-you have to pay your loan for 30 years (if your loan tenure is 30 years)
-you have to bear the interest payable for 30 years
MLTA
-coverage Level
-no need to buy another MLTA, because you can attach the insurance previously you bought with the new loan term
-yearly tax exemption
-reduce your loan tenure from 30 years to 25 years
-you only have to pay the interest payable for 25 years (if u calculate, there are lots of different amount of RM than 30 years interest payable
just my 2 cent
anyway its up to the customer to choose which is the best, as mortgage broker/advisor, we only can advice which is the best for your money in long term run.
TQ
I’m also facing the same problem like you, the broker quoted me the both MRTA & MLTA premium far higher than others. And also get informed by bank that the insurance is not compulsory in the loan package.
Finally, i terminate the MLTA during the grace period. Of cause, she call me back and blame.. etc.. then explain how their firm works.. However that has nothing important for me. As a consumer, i have my purchasing rights.