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

Getting Mortgage-Ready!

Applying for a mortgage can be a detailed and time-consuming process. The bank is eager to see that you can afford to take on a mortgage repayment and still have enough money left each month to enjoy your new home. To help you prepare for this process we have compiled a checklist to ensure that your application is successful.
 

• Your income - lenders will look at your annual income and some may take bonuses or overtime into account. Some lenders may factor in rental income if you plan to rent out spare rooms.

• Outstanding loans/Credit record - if you have other loans, this may reduce the amount of money you can borrow. Keep credit cards and personal loans paid on time. Missed repayments could affect the amount you can borrow for your mortgage and also your credit history.

• Savings Having a regular savings account in which to save your deposit is important.  The bank will also take into account if you are paying monthly rental payments on a property – it demonstrates your ability to support this level of monthly repayments. You should arrange to pay your rent through your bank account – even if you are living at home and making a contribution to the household.

• Day-to-day finances Make sure you manage your accounts so that you don’t go over your credit limit – this shows that you have been able to manage your finances effectively for a period of time before you apply for your mortgage. Lenders will look at any financial commitments you have, such as childcare costs. 

• The value of your house - this is the market value, or purchase price of your house.

• The amount you need to borrow - this is the difference between the amount you have saved to put towards the house (your deposit), and the purchase price of the house.

• Additional costs You will need to show how you can cover additional costs such as stamp duty, legal fees, valuation fees and any additional expenses that might arise during your application process.

Deposit required

• First-time buyer
  If you are a first-time buyer, a 90% limit will apply with a 10% minimum deposit. If there are two parties applying for the mortgage, both must be first-time buyers for the mortgage to be considered for these advantages. A Help-to-Buy incentive is also available and it is designed to assist first-time buyers with obtaining the deposit required to purchase or self-build a new house or apartment to live in as their home. It provides for a refund of Income Tax and Deposit Interest Retention Tax (DIRT) paid over the previous four tax years to first-time buyers. See the Revenue website for further information.

• Non-first-time buyers

  If you are not a first-time buyer, different rules will apply. A lender may lend up to 80% of the value of the property that you wish to buy. This means you need to have the remaining 20% saved for your deposit. Banks do have a discretionary option to allow some applicants to apply outside of this criteria.

To be continued...

3 things you might not know about Mortgage Protection Insurance

Mortgage Protection Insurance is life assurance cover that will clear your mortgage in the event of your (or your spouse’s) death. While it is obviously very necessary, taking out this cover often comes at a bad time for consumers, who are to the pin of their collars facing a new mortgage and all of the costs associated with a new house. For this reason, it is really important that you get the best (often the cheapest!) cover in place. Here are three points that you may not have known about mortgage protection insurance, that just might help you to get the right policy for you.

You don’t have to take out this policy with your bank. Your bank may arrange your mortgage for you. They may also insist on you having mortgage protection insurance in place as a condition of your loan. That is their right. However they cannot by law insist on you taking out this policy with them and cannot make the loan conditional on you doing so. You retain the right to take out any mortgage protection policy available in the market, once you ensure the required amount of cover is in place.

Now this is really important!

Your bank will usually have access to the policies of a single life assurance company. However your Financial Broker will have access to policies of all of the insurers in the Irish market, making sure that you get the very best / cheapest policy to meet your needs. Your bank must accept this policy.

Your cover does not have to decrease in line with the mortgage

The life assurance cover within traditional mortgage protection policies decreases in line with the outstanding mortgage amount. This is the minimum amount of cover that you must have in place – enough to clear the loan at any stage during the lifetime of the mortgage.

However you can have more cover in place. As part of a wider financial plan developed by your Financial Broker, you might choose to have a level amount of cover that will not fall, possibly for the original mortgage amount. In the event of death, the life cover amount will then be greater than the mortgage due, as some of the mortgage will have been repaid in the meantime. This excess cover is simply then paid to your estate.

There are many other benefits available

One of the benefits of taking out your Mortgage Protection insurance through your Financial Broker is that you can tap in to their knowledge of all of the plans that are available in the market, and access features that might not be available through the policy offered by your bank.

There are many other potential feature and benefits available through different insurers in the Irish market, and some of these features might just be very important to you. So talk to your Financial Broker and get the best policy in place for you!

What would you do to save €2000 a year ?

The Central Bank of Ireland recently announced that there are over 100,000 households with mortgages, who could get a better deal by simply switching their mortgage. What most banks rely on is that people will not want to have to go through the hassle of switching, but have you really considered enquiring about reducing your monthly mortgage cost?

Example:

If we use a mortgage of €240,000 on a house worth €300,000 (80% Loan to Value) and a variable rate of 4.5%, the rough cost of interest payments per year is €10,800. Currently, one Mortgage provider offers 3 year fixed rate of 3.6% for mortgages that would yield an annual saving of €2,160. That’s €180 a month less in interest repayments just by moving mortgage providers!

Is there a lot of work involved?

The first step is to put in an enquiry to see if it’s worth your while. This is not a lot of work and shouldn’t take long. If you decide the savings are worthwhile, you would then have to consider if you wanted to proceed with an application.

In this regard, the real question you should ask is “am I prepared to put in a little work getting documents together to make monthly savings on our mortgage?”. Your mortgage provider is hoping that you are prepared to pay more to avoid the hassle involved in switching to a cheaper provider.

Isn’t there a huge cost involved?

There are costs involved but the main costs are usually the legal ones. Some mortgage providers now cover up to €2,000 of potential legal costs. This would make the process far less costly. But even if you had to cover the entire legal fees, if you were saving over €2,000 a year, it would still be a cost saving exercise.

Can I make any other savings?

There is a good chance that many people took mortgages out directly with the banks and were required to take out Life Assurance (e.g. Mortgage protection). In many cases, this was not the cheapest cover available. By reviewing your mortgage you can also review your Life Cover.

How do I know if it’s worth my while?

If you have a mortgage that is currently 90% below the value of your property (90% LTV), you may be able to make substantial annual savings. The lower the Loan to Value (LTV), the better the rate/savings you will be offered.

I am interested, what do I do?

If you contact me by phone/email, I can begin a pre-enquiry. This shouldn’t take long and all you are doing is seeing if it’s worth your while. You are not obliged to proceed and will not incur any cost at this stage. Asides from a few minutes of your time, what do you have to lose?

If you have a Mortgage you should read on...

I had a text from an old friend recently asking if I would like to play some football with him. I was delighted as I have been looking to get into a local 5-a-Side group recently. The day after the game, while nursing sore limbs, I got a call from my friend. He said that he had long thought of reviewing the life assurance policy that he took out when he setup his mortgage and it only occurred to him after playing football with me that I was a financial adviser who could possibly save him some money.

He emailed me his basic details – Date of birth, smoker status, total cover and remaining term on the plan. He was paying €49.49 per month and very long story short when I quoted him a current price it was coming in at €17.07 per month. There were numerous reasons why the cost decreased, but he was extremely surprised by the significant drop in cost.

There are other reasons where the topic of Mortgage Protection can come up in conversations. I met up with a person in their late forties, to discuss their Pension needs. During the meeting they asked me “are you obliged to have Mortgage Protection cover with a mortgage”. There are certain exceptions, but in general your mortgage provider would expect you to have a policy to cover your mortgage.

This client didn’t have any mortgage protection cover and stated that in the event of her husband’s death she would get “half of his pension”. I asked would this, coupled with her current salary be enough to service her current mortgage. It certainly made her think and she asked me to send her out a quote for mortgage protection cover. Much to her surprise, it was relatively cheap at €28 per month for both herself and her husband.

I suppose what I am trying to say is that its prudent to regularly  consider either taking out new or reviewing your life assurance needs.