QUESTION: I am 36 years old. I have an insurance policy valued at $3 million. I also have savings of $500,000. I don't have any outstanding debt. I really want to get a mortgage so I can own a house but I am not sure whether I should use the insurance or what approach I should take. Your advice will be appreciated.

- Jennifer

PFA:

Home ownership is a major goal of many persons and insurance is a major risk-management tool of many, but there is not necessarily a link between the two in the way you are thinking.

I am not sure what you mean when you say your life insurance policy values $3 million. You could mean that it has a cash value of that amount or, if it is one of those policies with an investment component, you could mean the value of the units, but I doubt it.

In either case, it would have to be a big policy and you would have to have had it for a pretty long time.

I believe you are referring to the face value of the policy - the basic sum insured. This would represent the minimum sum that would be payable to your beneficiaries in the event of your death.

That cannot be used to secure a loan. Loans are secured by the cash value of your policy. It is not easy to obtain a loan against the investment portion of your policy primarily because values fluctuate with the performance of the securities in the investment fund.

In the case of an interest-sensitive policy, whose cash value is driven by the yield of the interest-earning securities in the fund, it is possible you could secure a loan - but not a mortgage - against the value of the policy because such values would increase though not necessarily at the same rate in every period.

How can you secure a mortgage then? The best security for the funds to be borrowed to purchase the house is the property being purchased. But there are several steps to be followed to borrow the funds.

Long-term financing

Mortgage financing is long-term financing which is offered primarily by building societies and the National Housing Trust (NHT), but also by credit unions.

Any financial institution lending money will want to satisfy itself that the prospective borrower is able to make each payment in full and on time.

Whereas credit unions tend to lend up to a fixed dollar amount, building societies tend to lend a percentage of the purchase price or valuation, whichever is lower.

The percentages vary by institution and the particular lending programmes of the institution.

Nevertheless, it is normal to be able to borrow up to 85 per cent of purchase price or valuation, whichever is lower, but higher levels are available in the market. There is at least one case where 100 per cent financing is available. You need not be a member of a building society to secure a loan from it.

The lending institutions have what is called a pari passu arrangement with NHT whereby they combine to lend the required funds, but the trust has set dollar limits on how much each borrower can access - a maximum of $3.5 million per individual, or $7 million where two contributors combine for the loan application.

Like the other institutions, it allows persons to join to borrow its funds. Because the trust lends at lower rates than the other institutions, borrowing a portion of the funds from it effectively makes the mortgage cheaper.

Here are some of the conditions required to be met to get a mortgage. Your gross salary should be about three times the monthly mortgage payment. You would be required to show proof of income, whether you are in the employ of another or you are self-employed.

You should have the deposit to pay to the vendor. This is usually 15 per cent of the purchase price. You would need to borrow the difference from the mortgage-lending institution.

There are other costs and requirements, including legal costs, and charges payable to the Government, which you would have to bear. Proof of your age is also required, as is a valuation report, with photograph, done by an approved valuator, a registered commissioned land surveyor's report, property tax certificate, a sales agreement, and a copy of the certificate of title.

It seems you may need more funds to help you realise your very good dream but that is no reason to give up.

Oran A. Hall is the principal author of 'The Handbook of Personal Financial Planning'. Email: finviser.jm@gmail.com