What is mortgage protection?
Mortgage protection is obligatory for most mortgage holders in Ireland. So what exactly is it and why do you need it?
What is mortgage protection insurance?
Mortgage protection, also called mortgage life insurance, is a form of life insurance that’s designed to pay off the outstanding balance on your mortgage in the event of your death.
The policy runs for the same length as your mortgage and ensures that if the worst happens, and you die before your mortgage has been fully repaid, a lump sum will be paid out to cover the balance that’s remaining.
If you’re buying a property by yourself you’ll take out a single policy. If you’re buying with your partner you’ll need a joint or dual life policy where two people are insured under the one plan.
Give me an example
Let’s say you’re buying a house for €250,000. You have a 10% deposit and therefore take out a mortgage of €225,000, which you’re repaying over 30 years.
In this example, you'd need a policy with cover of €225,000 over 30 years.
With mortgage protection the amount you’re insured for decreases each year to broadly match what's left on your mortgage.
So if you were to die in year one, almost €225,000 would be paid out as that’s what would still be outstanding on your mortgage. If you were to die in year 15, around €125,000 would be paid out. However if you died towards the very end of your mortgage, maybe only a few thousand euro would be paid out as that’s all that would be left on your mortgage. It is for this reason that mortgage protection tends to be cheaper than other forms of life insurance.
It’s also important to know that money will only be paid out if you die. If you get seriously ill or can’t afford your mortgage repayments nothing will be paid out (though there are other forms of insurance such as specified illness cover and mortgage repayment protection for this).
How does mortgage protection differ from life insurance?
As described above, with a mortgage protection policy the level of cover reduces each year.
With life insurance the level of cover remains constant and can even increase each year to help keep up with inflation. It is for this reason that life insurance usually costs more than mortgage protection.
Who needs to take out mortgage protection?
In general everyone who takes out a mortgage in Ireland must get mortgage protection as your lender won’t allow you to officially draw down your mortgage until it’s in place.
Many prospective home buyers are often unaware of this requirement and scramble at the last minute to try get a policy in place so they can move into their new home.
So if you’re looking to buy your first home, our advice is to arrange cover as early as possible in your mortgage journey.
Are there any exceptions?
There are some instances where mortgage protection isn’t always required such as
- You’re over 50 or
- You’re buying an investment or buy-to-let property as opposed to your own home
- You cannot get mortgage protection due to health issues, or can only get it at a much higher premium than normal or
- You already have enough life insurance to pay off your mortgage if you die. This might be through other insurance that you have or through any death-in-service benefits provided by your employer
In these instances it's at the discretion of the lender as to whether they'll require cover.
When you purchase mortgage protection insurance it’s important to know that the policy will be assigned to your bank or lender. In other words, they become the owner of your insurance plan and not you.
Once your policy has been finalised your insurer will send what's called a “Confirmation of Assignment” letter to your bank, which effectively means that the cheque for your mortgage can then be issued and you can get the keys to your new home.
In the event of your death, your bank or lender is paid first and any balance remaining is then paid to your beneficiary.
Who sells mortgage protection?
There are lots of providers who sell mortgage protection in Ireland such as Aviva, Irish Life, New Ireland, Royal London, and Zurich to name a few.
Many banks also sell mortgage protection. They don’t underwrite the policy themselves but act as a retail channel for a life insurance provider and tend to be quite expensive.
By law, you’re under no obligation to take out mortgage protection from the same lender that’s giving you your mortgage and you’re free to shop around for the best value.
Do I need to undergo a medical examination to take out mortgage protection?
It depends. If you’re in fairly good health then the answer is usually no.
However if you have a history of illness, are over a certain age, or are applying for a large amount of cover then you may need to undergo a medical examination or complete an over-the-phone medical questionnaire, which will be organised and paid for by the life insurance company.
Your life insurance company may also have a medical questionnaire sent to your doctor for him or her to complete.
How much is mortgage protection?
The cost of your policy will depend on several things such as the size of your mortgage and therefore the amount of cover you need, how long you need the policy to run for, your age, your health status, and whether you want single life cover or joint/dual life cover.
Smokers will also pay more for cover than non-smokers, so another good reason to try kick the habit!
How do I apply?
You can apply for mortgage protection through bonkers.ie. We deal with all of the main mortgage protection providers in Ireland meaning we can find you the best quotes available for the cover you need.