Saturday | February 28, 2015

The perils behind mortgage insurance

Published:Sunday | November 11, 2012

Cedric Stephens, Contributor

n purchasing my house, I utilised the National Housing Trust's (NHT) Joint Financing Mortgage Programme. I borrowed J$3 million from that entity and J$2 million from another institution. One of the loan conditions of the other institution is that I must insure the house for the equivalent to the two loans or j$5 million. Is this legal? From my knowledge of the NHT loan agreement, there is an insurance component in their mortgage agreement. Shouldn't the sum insured for the insurance for other institution be set at J$2 million?


Your questions suggest that you are trying to reduce your monthly non-NHT loan mortgage payment.

You appear to be happy with the NHT loan. Even though that loan is bigger, the monthly amount that you pay - which includes an insurance charge - is less. This is because the interest rate on the NHT loan is much lower.

The monthly amount that you pay the participating institution is higher even though the loan is smaller. This is due largely to the higher interest rate that you pay on that loan.

There are two reasons why I selected your questions for discussion in this week's article. One is that Hurricane Sandy provided a grim reminder of how exposed our island, and even places in the north-eastern United States, is to losses from hurricanes, floods and other natural disasters.

Damage estimates

Some estimates suggest that Sandy caused losses of J$5 billion locally. Damage estimates in the US were put at US$20 billion. I have seen NHT ads in this newspaper telling borrowers who have suffered losses how they should go about making claims for hurricane damage.

Extreme weather events like Hurricane Sandy are occurring more frequently - a point that many of us here and in the US seem to be ignoring. Incidents like these influence the cost of insurance.

My guess is that the J$3,400 to J$4,200 per month that you pay for perils insurance under your two mortgages is partly due to what insurers and others see as the increased threats.

Persons who ignore those dangers or fail to buy insurance have to rely on government or seek what financial institutions call hurricane recovery loans.

I see a link between your first question and the discussions that are taking place between the government and the International Monetary Fund (IMF).

We - meaning the government and the people - have to agree to do certain things in order to borrow money from that institution.

The money will only be paid when the government has signed a document stating that it has agreed to comply with the conditions that the lender - the IMF - has imposed.

In your case, you have already signed a loan agreement. By so doing you have agreed to abide by the terms or conditions of the loan.

Questioning the legality of a condition of that agreement now after you have signed it will get you nowhere.

Lenders impose loan conditions that protect them, not borrowers. Your non-NHT lender required you to insure your house for J$5 million instead of J$2 million because it is in their interest to do so.

Financial institutions are set up to make money - lots of it. There is evidence in many countries which shows that the interests of borrowers like you often play second fiddle to the main job of making money.

My cynical guess is that this is exactly what is happening in your case. I hope that even though I have not answered your questions directly that you now that you now have a much better understanding of the 'game'.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Send feedback to or SMS/text message to 812-7233