Payment Protect

An in-depth look at Payment Protect

main computerLet’s lift up the hood and look a bit closer at exactly how Payment Protect works, how the fees are calculated, and what any other benefits and risks could be.

An in-depth look at Payment Protect

An in-depth look at Payment Protect

Let’s lift up the hood and look a bit closer at exactly how Payment Protect works, how the fees are calculated, and what any other benefits and risks could be.

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.

EventWaived 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):

Term36 months60 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).

TermForecast 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.

EventRebate 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, the Lender gets a pro rata rebate of the Sales Commission and Management fee.

Protect RebatePaid ByTotal FeeRebateNet
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.

FAQS:

How are Lender Payment Protect fees paid to Harmoney?

The sales commission and management fees are paid by the Lender as a deduction on 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.