Don't sign mortgage contracts without protection

Housebuyers risk losing their deposit if they do not get mortgage protectionfirst, writes Laura Slattery

Property buyers could risk losing thousands of euros if they sign purchase contracts before securing mortgage protection, financial advisers warn.

People with a history of ill-health or a predisposition to certain illnesses must rely on lenders' goodwill if they are deemed "uninsurable" by life assurance companies.

They may also be forced to accept premiums that are double, treble or even four times rates offered to healthy people and face delays in completing a sale if the life assurer requests medical check-ups.

If lenders refuse to issue loans without a mortgage protection policy in place, borrowers who have signed a contract to buy could lose a deposit of 10 per cent of the property price.

Mortgage and life assurance intermediary Mr Joe Pitcher says he is advising clients not to enter into contracts without first seeking mortgage protection - a type of life assurance that clears the mortgage in the event of the borrower's death.

On a property worth €250,000, a deposit of €25,000 could be jeopardised. "For a young couple, it would wipe them out," says Mr Pitcher. "It would wipe any of us out. €25,000 is not something that any of us would like to lose."

People who have been declined or offered only postponed mortgage protection can get a waiver on the requirement to have life cover, but lenders do not have to accept the waiver.

Mr Pitcher says he has had several difficulties with lenders who turned around and withdrew loan approval, which is issued conditional on a mortgage protection policy being in place.

Some lenders, including Permanent TSB, have adopted a stricter approach on this recently, he says.

In the case of one couple of first-time buyers who had been approved for a mortgage by Permanent TSB, the male partner had an adverse medical history and was only offered deferred cover after a two-year waiting period, during which the assurance companies would monitor the progress of his condition.

His partner secured a mortgage protection policy on her life, while he signed a waiver, but because he was the principal earner and had no previous life cover or savings, the bank did not accept it.

The intermediary eventually secured a mortgage on the couple's behalf from First Active.

In another case, a borrower had paid a deposit on a property he bought off the plans but was refused life cover and subsequently the mortgage.

"A lot of solicitors are insisting that people secure life cover before they sign a contract, but not all of them are," Mr Pitcher says. "In this case, they didn't insist."

Again, he was able to place the mortgage business elsewhere. "But what if no other bank would do it? It's very much buyer beware," he adds.

According to Mr Michael Dowling of financial advisers Sullivan Dowling, 99 per cent of people approved for a home loan only go looking for mortgage protection after they have signed a contract, posing a danger that they might forfeit their deposit.

One in 20 people who apply for life assurance will either be refused cover or told they must pay a higher premium, according to industry estimates.

Mr Dowling says he has not encountered a lender who has refused to go ahead with the mortgage, but lenders will re-assess the application if someone is uninsurable, he says. Problems may arise in future cases, he believes.

"We've been working on the basis that lenders are taking a practical view and we are appealing to them on a case-by-case basis," he says.

Another grey area is when someone with an adverse medical history is offered a mortgage protection policy - but at a prohibitive price.

Borrowers who are told they must pay up to four times the standard rate for a mortgage protection policy may find that the added cost means they cannot afford the repayments on the mortgage for which they have been approved.

Reputable brokers will always give clients a breakdown of the full costs involved in securing a mortgage, Mr Dowling says, but the estimated cost of mortgage protection will be based on the standard rates offered to 95 per cent of people.

Loaded premiums could leave a borrower overstretched if they had already managed to squeeze the maximum loan possible out of the lender.

Mr Dowling has had one case where what should have been a €40 monthly premium for one of the two borrowers went up to €120 a month because of a loading.

"It was a touch-and-go situation whether they could afford the mortgage," he says.

Following negotiations, the lender approved the loan on the basis that there was a full amount of cover on one life and a smaller amount of cover on the life of the person who was being quoted the loaded premium.

The credit risk decision lenders make can vary. Mr Tice O'Sullivan, adviser with online intermediary Primafinance.ie, says he knows of one case where a lender insisted that the person must have cover, but another where a lender went ahead and granted a mortgage to an uninsurable sole borrower.

But borrowers' problems don't end with a loan approval. There are good reasons why lenders insist on mortgage protection.

Where there are joint applicants, one borrower may be left financially exposed if his or her partner is refused life cover.

In the event the uninsurable partner dies, the surviving partner may struggle to meet mortgage repayments.

If the surviving partner cannot meet the repayments alone, they may have to negotiate lower repayments over an extended term or sell up.

Selling up only occurs in extreme cases, says Mr Dowling, but it is these worst-case scenarios that lenders worry about when they refuse a loan, Mr Pitcher notes.

"If the husband is the principal earner and he dies without mortgage protection, lenders will have great difficulty evicting the surviving wife," he says.

"The court would say 'you entered into this knowing this gentleman had no cover'.

"She would still owe the money, but there isn't a judge in the land who would force an eviction order."

A spokesman for Permanent TSB said the bank had changed its policy for customers over 50, who are not required by law to have mortgage protection in place.

Permanent TSB now requests that people over 50 who do not want cover state in writing that they have been advised of its benefits.

Otherwise, the spokesman said, a widow, widower or partner might complain that they were badly advised.