I have a query about mortgage protection policy. I have just over six years left on my mortgage. The outstanding balance is about €59,000. A rough valuation of my house is about €325,000.
I’m paying €30 for mortgage protection. Can I have no mortgage protection policy in place at all given the value of the house outweighs the outstanding balance?
If I were to default on my mortgage payments, the bank would surely get its money if they had to repossess the house. Paying my mortgage repayments is not an issue, I just feel I don’t need the insurance policy.
MD
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Keeping tabs on household bills and cutting out unnecessary spending is always a good idea as we try to balance our household budgets. And, as you say, it is not always just a question of making the numbers fit: even where we can comfortably afford our current spending, there is no good reason to waste money on pointless spending when it can be put to better use elsewhere – invested for instance.
Having said that, our hands are tied when it comes to some things – and that includes your mortgage protection policy.
Although there are clearly very good reasons for such policies in the early years of a home loan when things are tight all round and the bank’s exposure to us is significant, the pressure can seem less imposing when we are closer to the end of the term.
In your position, you have a long history of meeting your mortgage commitments in full and on time. Just six years shy of mortgage freedom, you might think it is superfluous as there is plenty of equity in the property to ensure the bank could easily get paid if all came to all.
But that’s not really the point.
The purpose of mortgage protection insurance is to protect both the lender and your family or successors in the unfortunate event that you die before the mortgage is fully paid off. That is it. It doesn’t cover loan arrears arising from illness or unemployment, just repaying of the loan on your death.
Where a couple buys a home, normally such policies are worded to pay out on the death of the first partner in recognition that finances generally could become fairly tight for a surviving spouse or partner. It suits both them and the bank to ensure the home loan is not one of those things.
The way these products are structured, they match the amount outstanding on your loan – not the value of your property which, hopefully, rises over time.
So, when you took out the mortgage, it would have covered about 90 per cent of the value of the property. As you paid off the mortgage, the amount covered reduces year by year. If your outstanding balance is €59,000, that is what the mortgage protection policy would pay out if you were to die this week.
The bank would get its money and any surviving family – or your estate if you are single – would get your home unencumbered by debt.
If you accelerate payments either by making additional payments or making payments higher than the monthly sum due, you could find the policy providing greater cover than the outstanding balance.
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But more importantly than common sense, it is a contractual commitment to which you agreed when you drew down the mortgage in the first place. And, under consumer legislation that came into force in the late 1990s, it is now a legal requirement for most people.
Section 126 of the Consumer Credit Act puts the onus on the mortgage provider to arrange a mortgage protection policy before releasing funds to a homebuyer purchasing their principal private residence, or family home.
There are some exceptions.
Anyone over the age of 50 at the time they draw down the loan is exempt from the requirement, as are those borrowing for property other than a family home or, in Revenue parlance, a principal private residence.
Anyone who would struggle to secure insurance – for health or other reasons – or who would be hit with a premium “significantly higher than that payable by borrowers generally” can also get a mortgage without mortgage protection being in place – though you would imagine lenders might be careful of lending to anyone considered uninsurable.
The other exception is where the home purchaser has independently secured an acceptable mortgage protection policy elsewhere, which they are perfectly entitled to do.
So, no, it is not something you can simply dispense with on the grounds of financial management or household budgeting.
At €30 a month, and just over six years left on your loan, it might be academic for you but mortgage holders in general should certainly shop around for a better deal on their mortgage protection premiums – especially if they originally took the policy out through their lender.
Policies secured through lenders will, as a general rule, be noticeably more expensive than the same cover sourced directly in the market.
Your lender does have to be assured that the policy is fit for purpose but, given that these are fairly straightforward policies provided by a number of long-standing players in the markets, that should never be an issue.
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Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice.
