Life Insurance and Mortgages
In Ireland, most mortgages are secured by a legal charge on the property and an assignment of the proceeds of a life insurance policy.
Let's consider these two forms of security and how they might impact home buyers.
A Charge on your Property
A charge against your property is a right that the lender has to be paid first in the event that your property is sold. For example if you decided to sell a house on which you have an outstanding mortgage, the buyer would need to be happy that there was no debt attached to the property and when his or her solicitor searches the property they will discover the charge registered against the property by your lender. So this charge is there to protect your mortgage lender and to notify any buyers of the existence of your mortgage.
A charge also gives lenders the right to take possession of the house, in the event that important terms of the mortgage contract are broken, typically failure to keep up repayments .
Unfortunately we have witnessed this right of lenders being tested to its limits here in Ireland in recent years, following the recession, with many people losing their home because they are unable to keep up payments on their mortgage.
In fact every mortgage contract has the following stark warning:
You may lose your home if you do not keep up payments on any loan secured on the house.
The repossession can be very slow (running in to many years) with courts really only allowing this remedy if all reasonable efforts have failed.
Life Insurance as security for a mortgage
In general, lenders are required to ensure that they have an assignment of a life insurance policy as security for a home mortgage loan. The most common form of life insurance policy used is a Mortgage Protection Policy.
The level of life insurance cover falls as your mortgage is repaid in such a way that the cover level is sufficient only to clear the balance on your mortgage. There will be no additional pay out above the mortgage balance in normal circumstances. (Exceptions would be where you have paid off some of your mortgage earlier than expected)
The main exceptions are as follows:
- The borrower is 50 or older when taking out the mortgage
- The borrower is unable to get life insurance or the cost of taking out life insurance is prohibitive
- It is at the lenders discretion to decide if they want to lend if life insurance is not available as security.
Our Mortgage Brokerage business comes in contact with these situations all the time.
Examples of cases where life insurance has not been available to clients but where we succeeded in arranging the mortgage facility with a competitive lender are:
- The client was diagnosed with cancer during the course of the mortgage application.
- The client was postponed life insurance due to a recent cancer diagnosis that occurred before the mortgage application
Lenders have different approaches to approving mortgages in these circumstances.
Some are more lenient than others. Sometimes, in the case of a joint mortgage, the level of income split between the applicants is an important consideration in the decision
The fact that we deal with a range of lenders and all the major life insurance companies is also very important. Life insurers also differ in their risk assessment of medical conditions. We may have a case declined for cover by one Life Insurance Company, that is accepted by another, or a decision from a third insurer where cover is postponed by another company pending the outcome of further tests or the passage of time.
In certain circumstances we can use specialist insurers outside the Irish Market who may underwrite the policy a higher premiums for a reduced term, and this may be also acceptable to a lender