Mortgage Insurance
As the property market in the UK continues to push ahead, the average cost of a UK home has grown to some £150,000, substantially more than the historical mortgage lending guideline of 2.5 times joint income. This has seen the risk factor associated with mortgage payments rise, and increased the need for mortgage insurance, both for the lender and the home owner. There are really two types of mortgage insurance, which offer protection to both parties and give that extra piece of mind in the event of unforeseen circumstances.
The two types of insurance are :
General Mortgage Insurance
When you bear in mind that some first time buyers may be taking out loans in the region of £150,000 plus, the need to for protection in case of death, disability of unemployment needs to be addressed when the original mortgage is agreed.
Mortgage insurance is a basic form of protection, and in return for premiums paid by the home owner (often added to the customers monthly mortgage repayment figure) the customer will be safe in the knowledge that should any of the above circumstances occur, then their mortgage will be either paid off in full, or at the very least payments covered while unemployed with limited income.
As well as offering the lender the guarantee that they will receive their money in full, no matter what the circumstances, in the case of joint mortgages it can take away some of the financial pressures of life for the remaining partner, ensuring they have a roof over their heads and own their own property.
Private Mortgage Insurance
This is an insurance which is taken out by the customer, commonly associated with mortgages which are more than 80% of the value of the property. In the event of default, this guarantees that the lender will not only be able to repossess and resell the property to cover the outstanding mortgage, but they will be guaranteed a top-up repayment, in the event that there is a short fall in sale proceeds against the outstanding mortgage.
The cost of such an insurance is often between 0.20% and 0.90% of the amount borrowed, depending upon the value of the mortgage against the value of the home.
Conclusion
For the first time buyer the purchase of a property, and the borrowing of a substantial amount of money, may well be the biggest one off investment of their lives. The protection of mortgage insurance is vital in order to ensure that payments are kept up to date as much as possible, and in the event of one income earner passing away, or not being able to work for a considerable period of time, there is the added cover of total repayment of any outstanding mortgage.
Recent events in both the US, and to a lesser extent the UK, have highlighted the necessity to have such arrangements in place. The property market can be a very volatile area of the economy, and when you consider that mortgages make up the bulk of the UK’s £1.25 trillion of personal debt, is it a market which needs to be treated with great care.
