Gio Has You Home And Hosed
Sydney Morning Herald
Tuesday August 16, 1994
GIO Australia, until recently basically a life insurance and general insurance group along with a building society, has moved aggressively into the home loan market - previously the jealously guarded domain of banks, building societies and credit unions.
During the next few months, GIO's 1.9 million policyholders will be invited by direct mail to look at its home loan offer, to review the competitiveness of their existing home loan arrangements and to weigh up the advantages of GIO's sleek combined home loan/home and contents insurance/mortgage insurance package. There are minimal fees, competitive interest rates and a savings account tied to payroll deductions.
The GIO's thrust into the cut-throat home loans market is being made through its building society subsidiary, GIO Building Society Ltd.
The package consists of a user-friendly "plain English" policy, full disclosure of all fees and penalties attaching to the loan, including the amount of commission paid to the salesperson, and a single application form for all three products. The three products are then linked to an automatic payment facility with the GIO.
The GIO offers to go to the home of the borrower if necessary to explain and process the loan, rather than borrowers being required to attend a GIO office. Also offered is first-year full replacement house and contents insurance cover for a flat $50, regardless of the insured amount. In year two and in subsequent years, the insurance premium will reflect the market rate.
While the interest rates offered do not undercut the market, the GIO home loan package threatens to turn the conventional home loan market on its head because of its packaging, convenience and user-friendliness.
And, as the GIO Building Society Ltd's managing director, Mr Ross Butler, explains, because the GIO's customer base is so wide and information about the home loan will be mailed out with insurance renewal forms and investment statements, it will cost very little to market.
"There will be only one document for all facets of the product," Mr Butler says.
The home loan offer will be distributed through existing policyholder statement mailing and, as a result, the cost of finding those 1.9 million potential home loan customers will be minimal - the cost of printing the information brochures. There is no need for costly customer research, identification and advertising - indirect costs which can mount up to hundreds of dollars per borrower.
The GIO loan package is available for both owner-occupied and investment properties. It can be used to buy a block of land, buy a home, refinance an existing mortgage and to finance home improvements. However, it will not be available to consolidate other debts or finance consumer expenditure.
The loan options include a variable, capped or fixed interest loan - the latter being up to five years. Loan amounts vary from $41,000 to $500,000, with a maximum loan-to-valuation ratio of 95 per cent. Mortgage insurance is required for loans of more than 80 per cent of valuation.
The interest rate options are:
* Variable - currently 8.75 per cent a year with a $1 application fee covering initial valuation and GIO legal fees, excluding disbursements. The rate applies from the date of settlement.
* Capped - 7.5 per cent a year for 12 months, with an application fee of$600 to cover valuation and GIO legal fees. After a year, the loan can be rolled over into a variable or fixed-rate loan at the market rate.
* Fixed - 8.65 per cent for one year, 10 per cent for two years, 10.5 per cent for three years and 11.25 per cent for four and five years. This loan carries an application fee of $600.
GIO Building Society's Mr Butler says that while the average home loan in the past was in place for about seven years, increased market activity and competition in the market has encouraged loan "churning", and the average home loan is now held for only about five years before refinancing.
The penalties spelt out in the loan document include an additional minimum$500 payment if the home loan is repaid early. If a capped loan is repaid in full within three years of settlement, an early repayment fee applies equivalent to one month's interest, based on the original loan amount. If a fixed loan is repaid in part or full before the agreed maturity date, there may be costs associated with breaking the fixed term based on the loss of earnings incurred by GIO.
Other charges associated with buying homes - stamp duty, charges relating to property purchase and mortgage, legal expenses, search fees and application fees - are identified and added up. And borrowers are told that they must have this amount in liquid form before embarking on the loan. The GIO will not add these expenses to the loan.
"Our aim is to inform borrowers of all the expenses they face so that they can avoid overcommitment," Mr Butler explains.
"We don't want them to get into something they can't afford."
© 1994 Sydney Morning Herald
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