Saving Mortgage Insurance for First Home Buyers

This blog is to publicise an idea I had that would reduce mortgage insurance for a large proportion of first home buyers. I have forwarded this idea to Arch Bevis my local Labour MP, but he just sent me back a letter saying that the government was spending $1.2 Billion here and $500 million there etc......... and did not address this idea at all. So I will explain it quickly to you, then include the letter I sent to my local labour member and hopefully if enough people see this and promote it maybe it will happen.

Firstly: At present a first home buyer can have no deposit, but provided they have somebody (typically a relative/parent) prepared to go guarantor for 20% of the value they do not have to pay mortgage insurance. NOTE: This money does not have to be provided as the deposit, they can still borrow 100% somebody just has to go guarantor so no actual money has to change hands.............

Secondly: Nowadays people tend to have been in the workforce for some considerable time before they buy their first homes and so will have accumulated some funds most probably significant funds in their superannuation before they go to buy their first house. So........

Thirdly: First home buyers should be able to use their superannuation to go 'guarantor' for as much of the deposit as possible reducing the amount they need to pay in mortgage insurance. This would not cause significant increases in demand for property prices where the extra money saved would simply be eaten up by increased house prices, and it would mean first home buyers have a chance of keeping some or most of their first home owners grant rather than simply handing it over in mortgage insurance as currently happens if they are not fortunate enough to have parents with the equity to go guarantor for the 20% deposit or are unwilling to. Just as per with the arrangement where parents go guarantor, no money actually changes hand and the money stays in their superannuation for their retirement. If the situation arose where they were going to lose their house they could access their super anyway so the net effect on super is essentially neutral - the main effect is that first home buyers pay much less in mortgage insurance (which I believe has to be one of the most profitable insurances and which is 'money for jam' so to speak).

Please find below the email I sent to my local Labour member and if anybody is interested I will post his reply.....

Dear Arch,

Before explaining my policy idea I need to lay the basis for it. At present a person can get a 100% loan on a property without paying Mortgage Insurance if they have a parent or other such benefactor who has the equity and is willing to provide guarantor for 20% of that properties value, without any money actually changing hands and which of course would only be called upon in the instance of a mortgagee sale where the sale price did not meet the amount borrowed against that property under which circumstances the person who went guarantor is liable for the difference up to the pre-defined maximum of 20% of the properties purchase price.

Given that on say a modest $265,000 property the mortgage insurance is about equivalent to the first home owners grant, I would suggest that in a large percentage of cases the first home owners grant (given one has to have 20% deposit before not requiring mortgage insurance) goes directly to fund the mortgage insurance of many first home buyers.

Now I know there is a principle that ones Compulsary Superannuation cannot be touched except in the direst and very specific circumstances, I understand that suggesting anything involving Compulsary Superannuation is almost taboo, but I would suggest that Mortgage Insurance is one of the most profitable forms of insurance provided in the market and any measure that reduces the amount that a first home buyer has to pay in Mortgage Insurance is a good thing and that first home buyers are getting older and may have significant amounts in their compulsary superannuation I would suggest that just as a parent can go guarantor for a percentage of the deposit without actually handing the funds over except in a mortgagee sale, that one allows home buyers to provide their compulsary superannuation accumulations as a form of guarantor, hence reducing the exhorbitant mortgage insurance fees. In most cases this would never be used, and as I understand it if one stands to lose ones house one has a reasonable chance of accessing their super to avoid doing so in any case - so I would suggest that the actual affect on the nations superannuation savings would be negligible by introducing a policy such as this, but the majority of especially first home owners would benefit greatly in reduced mortgage insurance costs - which is just dead money........... or easy money for the insurer. I am sure if the actuaries got to work and calculated the "Expected Value" of what the average borrower would lose from their superannuation it would be miniscule in comparison to the "Expected Value" of most first home buyers income insurance. Noting that Mortgage Insurance definately and definitively reduces a persons wealth by the amount paid - even more considering people effectively have to borrow it and pay it off over the life of the mortgage making the actual cost multiples of the original mortgage insurance amount.

In this proposal I can only see home owners winning and mortgage insurers losing. Of course most superannuation is based on share market investments and so the amount calculated as guaranteed will be smaller than were their superannuation held as cash in the bank (a very conservative superannuation position unlikely to be held by most young people) so there may have to be some derating of the actual balance of their insurance when calculating how much of a guarantee it can provide, but I doubt that would be a significant hurdle.

Also on another note: The rental market: My separated-wife and I still live together simply because in todays rental market, both of us would have trouble finding anywhere to rent (and it would be a significant step down for both of us). Also tenancy agreements are such that at the end of a lease a landlord need only give 2 weeks notice that one must exit the property, which is all fine except when there are no other properties for rent. Even the property we are in we were extremely fortunate in that the landagent knew it was coming onto the market and let us apply before it had, and promised us not to submit or accept applications from anybody else unless we were rejected, so our landlord only got to see our application and accepted it. But we had frantically been trying to rent anywhere given the 2 weeks notice and were faced with what so many are, 10s, 20s or 30s of applicants for every property we applied for and as I had just become unemployed at the time our prospects of finding a property seemed very bleak, even the property we got, had the landagent not taken pity on us we would never have got it if we had been up against most other renters e.g. 2 Accountants, or 2 nurses or 2 anything else. (Needless to say we bought him a bottle of very nice red!!). This is why even though we have separated fortunately we still get on well enough to live together (in separate rooms now though) and treat the household as any unrelated flatmates would.

I am unsure if you saw insight last night, but the situation is dire out there and the fact that Australia has Hundreds of thousands of people who are homeless, as well as the fact that the very poorest are extorted in boarding houses, caravan parks etc...... for an example given last night at a caravan park for a crappy little 1 room bungalow (and not bungalow like you imagine in Fiji, but bungalow like you think of a expanded and converted outdoor dunny) and they have to pay $250 per week simply because that is the bottom of the market not based on any concept of value for money - I mean if they paid double the money $500 they could probably rent a property uncomparably better given the one they were in was so shocking but for $500 I am sure they could get a multi bedroom house with nice bathroom, good kitchen, multiple bedrooms so all the kids and parents don't sleep in the one room is I am sure you agree repugnant. I also know a few people who lived in a boarding house on Merthyr Road that has just been sold (if you are familiar with your eletorate I am sure you know the property), the new owner kicked everybody out, and put up all the rents as far as I know - the rents were already $150 for a tiny little room - how is even a single person on the dole meant to survive when this is the cheapest accomodation out there and it leaves them less than $100 a week for food and bills and transport etc....... even a concession public transport ticket is 1% of their weekly income or about 2.8% of their remaining $100. Whereas we pay about 2.5 times what they pay and have a beautiful apartment. So it is simply a matter of the poor being totally extorted, the reality is in terms of percentage of income or value for money the poor rather than paying the least percentage of income or getting the best value for money pay the highest and get the least living in such deplorable conditions and are totally at the mercy of predatory landlords who care nothing for the welfare or standard of living of their tenants or providing them with accomodation remotely justifiable to the price.

Here we go, my last paragraph - the housing minister on insight last night probably came across well to the average intelligence Australian, but if you had half a brain and listened to her the poor people in these circumstances of limited intelligence or education probably saw her as a white knight, rather than spitting her for what she said. Look at all the great Engineering Projects that happen in the world in phenomenal time frames (I know I've been involved with some of them in Australia) this whole "it took a long time to create, it will take a long time to fix is bullshit". I am sure if Kevin Rudd went to the Australian people and said we have a crisis in this country 250,000 to 300,000 people live on the streets every night in this country and most low income earners are paying over 50% of their income to live in third world conditions I am going to take $5 Billion dollars from the proposed tax cuts and fix this problem. Not by building low income ghettos, but by rapidly and sensibly creating a stock of quality low rent properties (I measn you are going to give the $5 billion in tax cuts, so the returns on the properties shouldn't be a major concern) to create an Australia where we know more people are going to have a roof over their head not less (which is the way it is leaning) and which would also force other low income accomodation providers to clean up their act or go out of business - he would be applauded by the Australian People not regarded negatively for reducing the (stupid tax cuts that the Liberals forced you into) by $5 billion for such a worthy cause. These home saver accounts etc....... aren't going to do anything for people who have nothing left to save, and nothing to prevent the number of homeless increasing - you need to increase supply to fix these problems!! And $5 billion in the first year would be a good start - admittedly tradesmen would be difficult to get hold of - but compared to the poor conditions construction workers get in Arab countries I am sure they would willingly come here on temporary working Visas if we treated this as another Snowy Hydro type endeavour to make Australia a fairer place and reduce poverty (except of course unlike the snowy workers these ones would have to go back, but at $35 to $40 per hour for carpenters and plumbers I am sure they would come, we would just have to plan this like a major project e.g. accomodation logistics etc......... $31 Billion in tax cuts as a core promise - if you don't want to break it, put it to a referendum - I am sure you would find where Australian Hearts really lie - that is why I couldn't stomach the Howard Government no longer when workchoices bad enough when the economy was good, but if economic conditions changed and unemployment rose would have been used ruthlessly by employers to the detriment of practically everyone, except the very few still in a strong bargaining position - and voted Labour, but I believe the problem was Howard not the Party so much, (for instance unlike practically everyone else I liked Costello and do believe he had a strong social conscience, but was forced to toe the Howard line and did so faithfully - a flaw in his character I believe. Hockey just lied and lied and lied, but once again I believe he had no choice due to Howard. But anyway now you are in government and it is up to you to bring the humanity back and how you can do that is by ditching in part if not in full the $31 Billion in tax cuts Howard cornered you into promises - and as long as you use that money wisely when the opposition comes at you about core and non-core promises you can come back at them from the high moral ground and say are you prepared to go around all these families that were living in cars and third world accomodation and kick them out of their houses to live on the streets or the way they were - if not then SHUTUP!!! If you can find equally worthy things to do with the rest of the $31 Billion do that too - send a study to Holland to look at how they treat and look after their elderly and then compare it to here - that would be another worthy cause that a portion of $31 Billion (which is a huge amount of money!!) and if the opposition comes at you ask them who would want their mother/grandmother to be treated the way it used to be before you implemented these changes. AS LONG AS YOU SPEND THE MONEY WISELY AND WITH A HUMANITARIAN HEART THE ELECTORATE WILL NOT HOLD IT AGAINST YOU THEY WILL ADMIRE YOU FOR BREAKING THIS PROMISE - EVERYONE KNOWS THIS IS NOT A PROMISE KEVIN RUDD WOULD HAVE MADE WILLINGLY AND IF YOU HONOUR IT IT WILL SHOW THE LABOUR PARTY STILL DANCES TO HOWARDS TUNE - WE WERE SICK OF HOWARD BECAUSE ALTHOUGH TIMES HAD BEEN PROSPEROUS UNDER HIM WE KNEW THE COUNTRY WAS PAYING A PRICE WITH ITS SOUL FOR HAVING HIM IN THE TOP JOB - AS LONG AS YOU SHOW THE HUMANITARIAN SOUL WE HAVE ALL MISSED FOR THE PAST 10 YEARS BUT RELUCTANTLY HAD TO VOTE FOR ANYWAY (I mean up till now Labour was a disaster and Beasley would have fucked the economy faster than the spread of myxamytosis through a rabbit colony).

Anyway I apologise for it being so long, I hope you either reply with what is wrong with my ideas or some feedback that demonstrates it actually has been read. And if you take up the idea on using super to reduce Mortgage Insurance can you please name it the "Carl Louwrens" Bill so everyone knows who to thank - ha ha.......