Payment Protect for Lenders
Payment Protect is no longer available on new loans from 1 April 2020
Loans with Payment Protect attached prior to 1 April 2020 will not be affected.
The repayment waiver that offers borrowers financial protection and lenders the opportunity to increase your returns.
A closer look at Payment Protect
How many repayments could be waived?
This table is an overview of the benefits that are offered for each claim type.
There are two levels of Payment Protect available to borrowers: Partial and Full. Partial includes death and terminal illness, while Full cover also offers disability, illness and involuntary redundancy.
| Event | Waived Payments |
|---|---|
| Death and terminal illness | The borrower's remaining loan repayments |
| Disability, illness | The borrower's remaining loan repayments until they can work again, with a maximum of 24 months repayments waived. |
| Involuntary Redundancy | The borrower's loan payments while they are out of work due to redundancy with a maximum of 5 months repayments waived. |
Payment Protect pricing
Payment Protect pricing is driven from the claims rate with an added risk margin for lenders, and operating costs added to get the Payment Protect retail rate (fee):
| Term | 36 months | 60 months |
|---|---|---|
| Individual (Complete) | 7.24% of loan amount | 9.88% of loan amount |
| Individual (Partial) | 5.92% of loan amount | 8.18% of loan amount |
| Co-Borrower (2x Complete) | 9.34% of loan amount | 12.75% of loan amount |
| Co-Borrower (2x Partial) | 7.64% of loan amount | 10.56% of loan amount |
| Co-Borrower (1x Complete 1x Partial) | 8.49% of loan amount | 11.66% of loan amount |
Payment Protect Fee = Claims Rate* + Risk Margin + Operating Costs
*The claims forecast claims rate was provided by a registered actuary specialising in repayment insurance.
This was completed for each Borrower type and cover type combination. The fee is then calculated as a percentage of the principal loan amount.
Forecast waiver claims rate
The waiver claims rate is the forecast value of waivers shown as a percentage of the Payment Protect fee paid by the borrower. For example, for individual borrowers, 21% of the Payment Protect fee paid by borrowers is expected to be claimed as principal and interest waivers. The waiver claims forecast rate is calculated on a portfolio basis, but actual performance may vary (refer risks section).
| Term | Forecast Claims rate |
|---|---|
| Individual (Complete) | 24% |
| Individual (Partial) | 24% |
| Co-Borrower (2x Complete) | 33% |
| Co-Borrower (2x Partial) | 33% |
| Co-Borrower (1x Complete 1x Partial) | 33% |
The claims rate analysis and forecasts were provided by a registered actuary.
Payment Protect Fees
Harmoney receives a Sales Commission for arranging the sale of the Payment Protect. The commission is set at the industry standard rate of 20% for arranging the sale. There is also a Management fee of 15% of the Payment Protect fee. This is for Harmoney to conduct fair and transparent claims assessment and processing; effective complaint and dispute settlement procedures; and appropriate supervision of claims-related services. The sales commission and management fees are paid paid by the lender as a deduction on settlement of the loan. You can see more details here.
On full loan prepayment by borrowers, Lenders get rebated the Payment Protect Sales Commission and Management Fee pro-rata as per the table. The same rebate formula is used to calculate borrower rebates is to calculate investor rebates. Click here for more information.
| Event | Rebate Rule |
|---|---|
| Rewrite | The sales commission and management fee are rebated on a pro rata basis.* |
| Prepayment | The unused portion of the management fee is rebated on a pro rata basis.* |
| Charge off | The unused proportion of the management fee is rebated on a pro rata basis.* |
| Full Waiver | The unused proportion of the management fee is rebated on a pro rata basis.* |
* See Rebates section for details.
Payment Protect Fee rebates to borrowers
If a borrower prepays their loan in full before the end of the term they are entitled to a pro rata rebate of Payment Protect Fees for the remainder of the loan term, using a formula prescribed in the Credit Contracts and Consumer Finance Act (CCCFA). The same formula is used to calculate Lender fee rebates whenever a rebate is due. The refund is calculated as follows:
Fee Rebate = (p × s × (s + 1)) ÷ (t × (t + 1))
Where:
- "p" is the amount of the fee
- "s" is the number of whole months in the unexpired portion of the period for which the Plan applied
- "t" is the number of whole months for which the Plan applied.
Here is an example:
Payment Protect Borrower Fee $1,000
Payment Protect Sales Commission $200
Payment Protect Management Fee $150
Loan Term 36 months
Borrower prepays in full month 12 and gets a pro rata rebate of the Borrower Payment Protect Fee. As the loan is prepaid because it is rewritten, the Lender gets a pro rata rebate of the Sales Commission and Management fee.
| Protect Rebate | Paid By | Total Fee | Rebate | Net |
|---|---|---|---|---|
| Protect Fee | Borrower | $1,000 | $450 | $550 |
| Sales Commission | Lender | $200 | $90 | $110 |
| Management Fee | Lender | $150 | $68 | $82 |
| Net Payment Protect Income | $358* |
*In this example net income from Payment Protect is $358 as there has been no claims. The net income figure does not include interest income on the unfunded amount.
Let's look at some examples:
There are two examples below of a loan with Payment Protect attached vs a loan without it. The first example is a loan where no waiver is applied. The second shows a loan that has a waiver event. Both examples are illustrative and do not represent the actual cashflows.
Loan without a waiver event occurring:
| Protect Impact | Without Protect | With Protect | Variance | Notes |
|---|---|---|---|---|
| BORROWER LOAN | ||||
| Loan Amount before Payment Protect Fee | $10,000 | $10,000 | $0 | No change |
| Payment Protect fee (Borrower) | $0 | $750 | +$750 | The Payment Protect fee (paid by the Borrower) is calculated as a percentage of the loan amount (rounded to the nearest $25). |
| Total Loan Amount (principal) | $10,000 | $10,750 | +$750 | The Borrower Payment Protect fee is added (capitalised) to the loan amount |
| Lender Funded Amount | $10,000 | $10,275 | +$275 | Lenders do not fund the Total Loan Amount. They fund the loan amount before Payment Protect + the Lender Payment Protect Fees. |
| LENDER INCOME | ||||
| Payment Protect Fee | $0 | $750 | +$750 | Payment Protect Fee income |
| Interest | $2,742 | $2,948 | +$206 | Lenders receive interest on the Total Loan Amount although they have only funded part of it. |
| Lender Income | $2,742 | $3,698 | +$956 | Payment Protect Fee + interest Income increases Lender income. |
| LENDER EXPENSES | ||||
| Payment Protect Lender Fees | $0 | -$275 | -$275 | Lenders pay a 20.00% p.a. sales commission and 15.00% p.a. management Fee to Harmoney (each is rounded to the nearest $25) |
| Waiver | $0 | $0 | $0 | This example assumes no repayment waivers apply |
| Lender Fee (Tier 2 17.50%) | -$480 | -$516 | -$36 | Lending Fees increases as the borrower pays more interest. |
| Net expenses | -$480 | -$791 | -$311 | Lenders incur $311 more in expenses on this Payment Protect Loan. |
| TOTAL | ||||
| Returns (pre-tax) | $2,262 | $2,907 | +$645 | Lender return increased $1.54 per note, due to Payment Protect |
Loan with a waiver event occurring:
| Protect Impact | Without Protect | With Protect | Variance | Notes |
|---|---|---|---|---|
| Borrower Loan | ||||
| Loan Amount before Payment Protect Fee | $10,000 | $10,000 | $0 | No change |
| Payment Protect fee (Borrower) | $0 | $750 | +$750 | The Borrower Payment Protect Fee (paid by the Borrower) is calculated as a percentage of the loan amount (rounded to the nearest $25). |
| Total Loan Amount (principal) | $10,000 | $10,750 | +$750 | The Borrower Payment Protect Fee is added (capitalised) to the loan amount |
| Lender Funded Amount | $10,000 | $10,275 | +$275 | Lenders do not fund the Total Loan Amount. They fund the loan amount before Payment Protect + the Lender Payment Protect Fees. |
| Lender Income | ||||
| Payment Protect Fee | $0 | $750 | +$750 | Payment Protect Fee income |
| Interest | $2,742 | $2,948 | +$206 | Lenders receive interest on the Total Loan Amount although they have only funded part of it. |
| Lender Income | $2,742 | $3,698 | +$956 | Payment Protect Fee + interest Income increases Lender income. |
| Lender Expenses | ||||
| Payment Protect Lender Fees | $0 | -$275 | -$275 | Lenders pay a 20.00% p.a. sales commission and 15.00% p.a. management Fee to Harmoney (each is rounded to the nearest $25) |
| Waiver | $0 | -$761 | -$761 | In this example, two month's repayments waived due to Borrower redundancy. The forecast waiver rate for individuals taking Complete Cover is 24% of the Payment Protect. Note: The forecast waiver rate for individuals taking Complete Cover is 24% of the Payment Protect fee paid by the Borrower (e.g. $750 X 24% = $180). |
| Lender Fee (Tier 2 17.50%) | -$480 | -$516 | -$36 | Lending Fees increases as the borrower pays more interest. |
| Net expenses | -$480 | -$1,552 | -$1,072 | Lenders incur $1,072 more in expenses on this Payment Protect Loan. |
| Total | ||||
| Returns (pre-tax) | $2,262 | $2,146 | -$116 | Lender return is reduced 28c per note, due to the repayment waivers |
Loan Terms used in examples: Interest Rate 17.50%, 36-month Term, Payment Protect Borrower Fee 7.24%
Lenders' Tax treatment for loans with Payment Protect
The tax treatment for Payment Protect will be different for each Lender, depending on their personal circumstances and whether the Lender is a cash basis or non-cash basis for New Zealand income tax purposes. Therefore it is recommended that independent tax advice is sought before participating in Payment Protect loans. The information below is supplied as guidance only.
Tax returns
Harmoney does not pay income tax on the Payment Protect Fee on behalf of lenders. Lenders are responsible for including the Payment Protect Fee as income in their income tax returns and for claiming any deductions referred to below that are available to them. Lenders should seek independent tax advice when preparing income tax returns.
Tax treatment
The tax treatment of a Payment Protect loan is different for lenders taxed as a cash basis person and those taxed as a non-cash basis person (see definition below)
| Item | Tax Treatment: Cash basis | Tax Treatment: Non-cash basis |
|---|---|---|
| Payment Protect Fee | Taxable income when received, over term of loan | Taxable income, income spread over term of loan under the financial arrangements rules |
| Sales Commission | Deductible expense when charged (i.e. at commencement of loan) | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Management Fee | Deductible expense, deductions spread over term of loan as prepaid expenditure | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Lender Fees | Deductible expense, deductions spread over term of loan | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Waiver of Principal (inc. waived Payment Protect Fee) | Deduction for interest which has been included as taxable income but not received (if any), at conclusion of loan No deduction for waived Principal or Payment Protect Fee unless Lender is a dealer in financial arrangements or carries on a business of lending. |
Cash basis person
A lender is a cash basis person for an income year if:
- The value of the lender’s income and expenditure in the income year under all financial arrangements to which the lender is a party is $100,000 or less; OR
- On every day of the income year, the absolute value of all financial arrangements to which the lender is a party added together is $1,000,000 or less; AND
- The result of applying the following formula: (accrual income – cash basis income) + (cash basis expenditure – accrual expenditure) to each financial arrangement to which the lender is a party at the end of the income year and adding the outcomes together is $40,000 or less.
If a Lender is not a cash basis person the lender will be a non-cash basis person for tax purposes.
FAQs
How are Lender Payment Protect fees paid to Harmoney?
The sales commission and management fees are paid by the ender as a deduction on the settlement of the loan.
Who manages the claims process?
The claims process is managed in-house by Harmoney claims specialists. This ensures that the customer experience is consistent, fair and transparent and that the process is compliant with regulation.
Is this repayment insurance?
No. This is a repayment waiver. The agreement is only to waive the right to collect repayments, although the terms of the policy have some similarities to loan repayment insurance.
Can Borrowers cancel Payment Protect?
No. The only way borrowers can cancel Payment Protect is by repaying their loan in full.
What happens when a borrower “rewrites” their loan with Payment Protect?
The lenders are rebated their Payment Protect fees as described in the rebates section above.
Can a loan be rewritten if repayments are being waived or there is a claim outstanding?
Borrowers cannot re-write their loan when repayments are being waived or if there is a claim outstanding.
How is this treated for tax purposes?
As the tax treatment for Payment Protect will be different for each Lender, depending on their personal circumstance (e.g. cash basis, non-cash basis etc). It is recommended that independent tax advice is sought before participating in Payment Protect loans.
What is the unfunded amount on Payment Protect loans?
The unfunded amount is the difference between the loan amount owned by a borrower and the amount funded by lenders. Take for example a $11,000 loan that includes $1,000 Payment Protect Fee. The unfunded amount on this loan is $11,000 - $10,350 = $650. The lender only funds $10,350 ($10,000 paid to the borrower on settlement + $350 Payment Lender Protect Fees paid to Harmoney) of a total loan amount of $11,000.