Is mortgage insurance essential?

Experts believe the South African property market is still booming, with many properties enjoying up to 20 percent year-on-year increase in value. Amidst this growth, there is an increasing need for property buyers to understand the risks associated with property ownership. Raising the awareness amongst home-owners will hopefully change consumer behaviour and help eradicate home repossession.

The risks facing both existing and first-time homebuyers are not always property-related. Indeed the South African property market is still expected to see healthy growth in 2004, albeit at a slower rate than in 2003. The risks are those that many homebuyers generally don't consider: illness, death, retrenchment and unemployment.

While none of us know when disaster is going to strike, we should bear in mind that it can, and does, happen and very often the first thing that is affected is our mortgage repayment.

Most South Africans don’t have enough money saved to pay for just one month’s worth of expenses, and if there are no savings, liquid assets need to be sold. Within three months, if mortgage repayments are not met, most banks will generally begin foreclosing proceedings, forcing homeowners out on the street.

Disaster strikes often
Looking at the statistics available, disaster strikes alarmingly often in South Africa.

Accurate SA home repossession statistics do not exist, but we can gauge the extent of the problem by looking at current indicators. Statistics from Stats SA shows that we are a nation with extreme debt problems. In 2002 there were 1 621 463 summonses issued relating to private individuals’ bad debt, totalling a monetary figure of over R6-billion.

The figures recorded in the first half of 2003 do not paint a rosy picture either. Looking specifically at mortgage debt, one of the four major retail banks annually has bad debt provisions to the sum of R1.6-billion relating to mortgage loans. Working on an average house price of R350 000, this amounts to 4600 mortgages going bad, and many people facing having their home repossessed.

Illness and disability affect a large sector of our population. Six percent of South Africa’s population is disabled, amounting to more than three million people, with the vast majority falling in the economically-active population.

Some 42.1 percent of the economically-active population in South Africa are unemployed. The current increase in job retrenchment, especially in the mining and export industries as a result of the strong rand, means that unemployment figures could soon increase further.

According to the Medical Research Council (MRC), South Africa’s death rate has jumped by almost 68 percent in the past six years, from 272 000 in 1998 to 457 000 in 2003. The increase in figures can largely be attributed to South Africa’s HIV/Aids epidemic. Alarmingly, deaths among women between the ages of 20-49 (one of the group’s most at risk for contracting HIV/Aids) have increased by an astounding 168 percent.

The executor becomes responsible
In the case of a homeowner’s death, where comprehensive life cover has not been provided, the outstanding home loan balance becomes a debt on the deceased estate. The executor of the estate is responsible for the monthly installments, but if there are not adequate funds in the estate, the bank will foreclose on the house, forcing dependents to move out of the family home.

With these statistics in mind it is easy to see the importance of ensuring that you have adequate insurance cover in the event of your death, illness or unemployment. For absolute peace of mind, mortgage protection insurance should be an integral part of the home-buying process, not an after thought or non-essential, as is currently the case.

Article by: Iona Minton