Mortgage loans are always associated with significant risk for both the borrower and the bank, because during the repayment of the loan there can be the most unpredictable situations that negatively affect the successful repayment of the debt: reduction in client solvency, loss or damage to the collateral property. Mortgage insurance provides insurance coverage for the collateral, the life and health of the payer and many other situations.
With the help of insurance, both parties increase the guarantee that the loan agreement will be executed in full, and the bank's client will become the full owner of the property.
General provisions on insurance when making a mortgage agreement
The acquisition of mortgage insurance entails a benefit for both the lender who seeks to protect himself from cases of non-repayment of the debt, and for the borrower who receives long-term obligations to repay the credit line. The insurance contract gives the borrower a greater share of confidence that the duties towards the bank will be fulfilled even under the most negative scenario - loss of income, loss of health and ability to work, and even in case of death.
On how the insurance is issued and what insurance claims it covers, the conditions of the mortgage offer will largely depend. Moreover, no mortgage transaction is complete without insuring a collateral object. It is necessary to understand what mortgage insurance is and how to reduce the cost of it without the risk of problems with the lender.
Mortgage insurance is the coverage of certain insurance risks
Mortgage insurance is the coverage of certain insurance risks of the bank and its borrower. The peculiarity of the mortgage is the obligatory execution of the pledge for the entire crediting period, and hence the obligatory insurance of the object.
At the preparatory stage for a mortgage transaction, many borrowers underestimate the value of the insurance contract. Meanwhile, annual insurance premiums are quite significant, and given that the mortgage has been paid for decades, mortgage insurance turns into a costly undertaking.
Careful consideration of the search for the insurer and negotiations on reducing the cost of insurance in the early stages of negotiating the transaction will save you from overpayments and problems with the bank. Due to the diversity of offers of insurers, with due diligence, the borrower will be able to optimize their insurance costs for the next few years.
There are several insurance programs for mortgages, but only one of them is mandatory. In order to understand whether mortgage insurance is required, refer to the provisions of the law:
- life insurance cannot be carried out under duress (art. 935 of the Civil Code);
- the obligation to insure property arises only in relation to mortgage objects (Article 31 of the Federal Law No. 102-FZ).
No other types of insurance are not provided by law, which means that the requirements of the bank for the need to purchase additional insurance options are illegal. Nevertheless, most borrowers pay for various other insurance options, with their own reasons for this:
- in case of refusal of additional voluntary insurance, the bank may not approve the transaction;
- in the absence of insurance, the bank approves the transaction, however, the conditions for issuing loan funds will be more stringent and at a higher percentage.
Often, assessing their ability to obtain a loan and comparing the overpayment of increased interest with the value of the policy, the borrower decides to agree with the requirement of the bank.
When mortgage insurance has its own characteristics:
- Duration Insurance coverage should be provided for the entire maturity of the debt to the bank.
- The amount of insurance compensation must match the cost of the loan or the price of the property at the time of the appeal.
- The contract is concluded for 1 year with the subsequent prolongation during the whole credit period.
- The determination of the amount of the annual fee is calculated each time before renewal. The lender transmits information about the balance of the debt in the insurance, which further makes the calculation of the payment.
The main types of insurance for mortgages
The standard package of insurance required by the bank includes the following insurance programs:
- real estate issued in the pledge;
- the life and health of the borrower;
- property rights (title insurance).
In addition, banks may insist on insurance coverage:
- risk of loss of income;
- civil liability in case of damage to property of neighbors;
- the risk of non-repayment of debt to the creditor as a result of delay, breach of contractual obligations;
- damage to the lender in the sale of housing is lower than expected.
The cost of concluding an insurance contract is fully borne by the borrower, and the policy implies an exemption from the need to continue to fulfill credit obligations when an insured event occurs - the debt is covered by the insurance premium.
Thus, the conclusion of an insurance contract for a mortgage is a necessity by virtue of the law, but it is important to distinguish compulsory insurance from additional options of the bank. Refusal to conclude an agreement with the insurer may serve as a reason for refusing to open a credit line by the bank or lead to a rate increase. In any case, a potential client of the bank assesses all the risks and consequences before agreeing or rejecting various types of insurance coverage.