Unknowingly Underinsured - Restructuring Mortgage Protection

A new study undertaken by a leading life company has found that many families who fell into arrears on their mortgage during the recession may now be underinsured on their mortgage protection policy.

The impact of the recession resulted in around 1 in 8 mortgage holders, at its highest in 2013, falling behind on their payments.

As mortgage protection policies generally cannot be restructured, in most cases a new policy would need to be put in place to reflect the fact that the mortgage isn’t reducing or to match the revised mortgage agreement.

While no one likes to keep considering issues relating to their own or loved ones’ mortality, it’s important that policy owners take the time to reassess if their cover is adequate especially if they have a family with an ongoing need for a home to consider.

The case study looked at a couple who had taken out a €300,000 mortgage for 30 years in 2004, the couple also took out the equivalent amount of mortgage protection.  In 2014 their bank agreed to switch them to interest only for 4 years and they then return to full repayment in 2018. Should either pass away the individual left behind would currently have a payout shortfall of €11,569 – that being the difference between what they owe and what a typical mortgage protection policy would cover.

When the interest only period ends, the lender will re-establish repayments in one of two ways. They may extend the term sufficiently to ensure that if the homeowner resumes the monthly repayments at the original amount the loan will clear, usually after an extra couple of years. Or they can increase the regular repayment amount so that the arrears are repaid over the original mortgage term. Either way, there’s likely to be a shortfall. The higher the repayment, the quicker the shortfall may reduce.

There are a number of situations where mortgage holders in arrears enter into special agreements with their banks where it would be necessary to review or amend the mortgage protection cover in place to avoid any underinsurance. Some options designed to help the homeowner stay in their home are as follows;

  1. Interest Only – over one year (probably beyond 2 years) regardless of whether the term is extended or repayments are increased in the remaining years

  2. Interest Only – up to one year

  3. Reduced Payment (less than interest only)

  4. Reduced Payment (greater than interest only)

  5. Term Extension

  6. Arrears Capitalisation

  7. Payment Moratorium

  8. Deferred Interest Scheme

  9. Split Mortgage