Bank pays home owner R300,000 after being caught in insurance rip-off
In fact, I'd go so far as to say that thousands of South Africans may have lost their homes after falling into default on their mortgage loans, when in fact what was killing them was the insurance policies they were forced to take out as part of the loan. One Joburg man recently woke up to this fact and when he challenged the bank, his account was credited by more than R300,000 (on an outstanding loan of R900,000).
At this point, anyone with a home loan should rush to check what insurance policies they were sold when they took out the loan. You might just find that the bank sold you an insurance policy without giving you a competitive choice – as required in terms of the Financial Advisory and Intermediary Services (FAIS) Act.
Joburg home owner queries his insurance policy and gets R300,000 refund
Case in point: Joburg home owner Pieter Frans questioned Standard Bank why his monthly instalment was R15,000 a month when his outstanding home loan balance was just R900,000. On closer inspection, it turns out he was sold a credit life policy at the time he took out the mortgage loan which was costing him R5,000 a month in premiums which were added to the mortgage loan repayments. Had he been given the option to purchase a competitive insurance product, he would be paying just R800 a month in insurance premiums, saving himself more than R4,000 a month. When questioned about this, rather than put up a fight Standard Bank credited his mortgage account by more than R300,000, reducing his outstanding mortgage loan to R600,000. That’s a substantial amount of money.
Forcing a customer to purchase a particular insurance policy when taking out a home loan is illegal in terms of the FAIS Act. It is not illegal for a bank to insist the home owner take out insurance, but it is illegal for the bank to push a particular product on the customer.
When granting a home loan the banks often force the customer to maintain two insurance policies: one to cover the outstanding balance of the loan (credit life) and another that secures the structure of the house (home owners’ cover, or HOC). The bank is required by law to tell consumers they can choose any insurer they like, but they often side-step this legal nuisance by burying the insurance purchase in the small print of the home loan. In other words, the customer has no real choice. Customers simply regard the insurance as an element of the loan over which they have no control. As such, they end up paying for policies chosen by the bank.
For many consumers, this is seemingly negligible, since the insurance premiums are just a few hundred rands a month, forming a small part of the overall loan repayments. There is also a common misperception that all the policies are essentially the same. But in Frans’ case, the insurance premium was actually making his repayments unaffordable. Had he not taken action, he might well have lost his house by defaulting on his mortgage loan. But what was really killing him was the insurance premium.
At this point, if you haven’t already rushed off to grab a copy of your home loan agreement to see what insurance policies you were sold, you should do it now. You can then go to www.hippo.co.za for a comparative quote, and perhaps save yourself hundreds – if not thousands of rands – each month. No-one can force you to stick with an insurance product when you can get a better deal elsewhere.
Here’s another case in point: In 2013, Mr and Mrs Myburgh of Joburg applied for debt review and were granted a debt restructuring order. In terms of the order, their home loan instalments were reduced, but the credit provider insisted on the maintenance of the credit life policy and HOC, with premiums being debited to their home loan account.
Despite paying in excess of what was required under the debt restructuring order, over a period of three years between 2013 and 2016, the outstanding balance on their home loan account increased from R450,000 to R620,000. On closer analysis, it was established that of this increase of R170,000, a total of R90,000 was due to insurance premiums being debited against the home loan account. If the interest attracted by these accumulated premiums was added, it meant that more than half of the increase was due to insurance.
Here’s another case, this time involving Mr and Mrs Khumalo. The Khumalos were shocked to discover that despite paying R57,000 in instalments over the 18 months to January 2015, the outstanding balance on their mortgage bond actually increased by R5,000 to R445,000. How was this possible, they asked? When this was investigated, it emerged that the bank was not recovering the premiums as part of the instalment. The bank was forced to do a full and proper reconciliation of the account, at which point the home loan account was credited with R35,000. That's how much the banks can gain from these little "tricks".
Leonard Benjamin, a lawyer with a background in insurance, says there are dozens of ways the banks are ripping off customers, sometimes with devastating consequences. Many South Africans have fallen into default on their mortgage loans, often because they were sold unaffordable and inappropriate insurance.
He advises all consumers to interrogate their home loan statements to see what impact the premiums are having. Things to look out for include:
Get a comparative quote
The first thing to do is check whether you are getting value for money from your insurance. The premium paid on the credit life policy is likely to be higher because it will be issued without underwriting (in other words, the insurance company is taking the risk on its own book rather than someone else's). The insurer typically applies an exclusion clause for pre-existing conditions, meaning that for a certain period, (usually two years) if there is a claim arising from a medical condition that already existed when the policy was taken out, there will be no cover. As a result of the higher risk the insurer charges a higher premium. It is easy to obtain a comparative quote, based on the outstanding home loan balance. If the premium for the comparative quote is significantly less, then it should be offered to the bank in substitution of the credit life policy.
If the premium is charged to the home loan account, check that it is being recovered as part of the instalment. If not, (and this has been the case for some time), the consumer must get the bank to correct its error.
Check for inflated premiums
If the consumer is either not paying the instalment, or paying a reduced instalment under a debt restructuring arrangement, first ensure that the premium is not inflated (as discussed above). Thereafter make sure that any premium is not debited to the home loan account, but to a current account instead. If necessary, the consumer should ask the debt counsellor to intervene with the bank to arrange this. It may seem that this makes little difference, but for so long as the consumer is not paying the full instalment, the premium is being capitalised and added to the outstanding balance of the account. This means that the premiums themselves attract interest, which increases their indebtedness. This results in an increase in the monthly instalment and the arrears. As a consumer has a right to reinstate the agreement by paying in all arrears together with certain costs and charges, it becomes more and more difficult to catch up if the arrears increase.
If the home loan account balance is increasing, even though regular instalments are being paid, the consumer must immediately contact the bank to have it investigated as it is likely that the account is being incorrectly administered.
Check your insurance policy now before problems accumulate
If the insurance premium is increasing even though you are paying your monthly instalments, you definitely need to look at replacing the credit policy with another one with a fixed premium. Consumers who do not deal with the issue are simply deferring the problem. They will either be paying too much to settle the bond when they sell the property one day, or there will still be a balance owing on the home loan account at the end of the bond repayment period, even if every instalment has been paid when it is due.
You don't need expensive lawyers to handle this for you. If you find your insurance premiums going up when your outstanding mortgage loan is going down, you know something is wrong. Get a competitive quote on www.hippo.co.za and if you find a suitable and cheaper product there, inform the bank to stop deducting insurance premiums through your mortgage payments. Also, did the bank discuss the insurance alternatives with you? Were you given a chance to shop around for competitive quotes? If not, then you masy have grounds to claim a refund of the insurance premiums you paid.
If you need help with this, email here.
Some names have been changed to protect the identity of the consumers.
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