What types of insurance are issued for a mortgage?
In fact, several types of insurance are issued under mortgage agreements with credit institutions. Banks try to secure cooperation with clients by minimizing their typical risks as much as possible.
When concluding a mortgage agreement, the following types of insurance are issued:
- Real estate insurance.
- Liability Insurance.
- Life and health insurance.
Some banks also use additional types of insurance. First of all, this is not designed to reduce the risk of large losses. Secondly, such additional agreements can bring the lending institution more profit from each mortgage agreement.
When processing credit transactions, insurance plays an important role. Insurance companies offer several types of them. The banking organization agrees with them, while the future client bears additional financial expenses. Let's take a closer look at the mortgage loan agreement and determine what types of insurance are actually needed.
The main types of insurance that are issued for a mortgage are designed to reduce the bank’s typical risks
In practice, some types of insurance are literally imposed by banks and insurance companies, but the policyholder does not receive any real efficiency from having such a policy. When dealing with mortgage insurance, such techniques by insurers and credit institutions are extremely common.
Early repayment
If you decide to pay off your mortgage early, while periodically making insurance contributions, you can simply stop paying insurance. In this case, the insurance contract will be terminated automatically. Before making such a decision, carefully study the insurance contract so as not to provoke troubles associated with paying a fine. It is important to understand how to competently close a mortgage loan before the expiration date of the contract, while avoiding problems.
If the insurance premium, according to the terms of the contract, was paid immediately in full and was part of the body of the loan, you can not only stop all payments, but also return part of the insurance premium back.
For example, if you took out a mortgage for 12 years and were able to pay off the entire loan in 7 years, then you can return the insurance amount for the remaining 5 years. To do this, after paying off the mortgage loan, you need to generate and send to the insurance company a corresponding request accompanied by a document confirming the repayment of the mortgage.
Thus, it will not be possible to completely remove the burden and refuse to pay insurance premiums, however, with a competent approach, you can reduce costs and even return part of the insurance amount, subject to early repayment of the mortgage loan.
Borrower's life and health insurance
These types of insurance are not mandatory. But in some cases, banks force their clients to take out such policies. Life and health insurance of the future borrower. Implies the occurrence of the following insured events:
- Death of the borrower (if the citizen is not young, and the mortgage is designed for a long-term period; then he should think about this insurance). In case of disagreement, insure yourself in the event of death; obligations to pay the debt pass to the heirs, who will take over their rights after six months. Upon conclusion, the payment will be 100% of the remaining debt.
- Recognition of 1 or 2 disability groups. An insured event occurs as a result of illness or injury. If you take out insurance, the payment is 100%.
- Loss of temporary ability to work (during illness or treatment, the loan is paid for by the insurance company for the client). But there are certain restrictions and specific terms for the validity of this insurance event.
- Title insurance is an optional type. It is understood as insurance in case of “unexpected” heirs to the purchased property. Mostly, housing is purchased on the secondary real estate market, where there are frequent cases of fraud and manipulation of documents when concluding a purchase and sale agreement.
If the borrower does not want to be left with nothing, he will have to take out this type of insurance. When this insured event occurs, the client is paid an amount equal to 100% of the cost of the purchased home. In some cases, such insurance actually helps out a person who, due to health problems, cannot fully work and pay his obligations.
Legal provisions for mortgage insurance
The legislation recognizes only collateral insurance as mandatory. It refers to real estate purchased by the borrower with funds provided by a credit institution. The bank requires the citizen to take out this insurance in order to be reinsured against various insured events (disasters, damage, intervention of third parties).
Since this real estate is nominally owned by a financial organization, the bank itself will be the beneficiary in the event of an insured event. And in case of non-payment or refusal to repay the loan debt, the bank has the right to reclaim this real estate and put it up for sale. After sale, all funds go to pay off the existing loan.
But this does not mean that the client has an obligation to take out other types of insurance. In accordance with the Federal Law on the Protection of Consumer Rights, such conditions are considered an imposition. That is, the bank in this case commits a violation by obliging the client to take out insurance. The majority of clients agree to issue additional policies so that the bank does not refuse to provide them with collateral.
Despite the fact that insurance is not required by law, most often the client takes out it in order not to be refused a mortgage
In most cases, we are talking about obtaining insurance for the property itself. This kind of insurance costs clients more than other types. If a potential borrower refuses to take out this type of insurance, the credit institution may refuse to provide a loan. As a result, clients simply have no choice.
Can I just stop paying?
If we consider housing lending, then in this case refusal of insurance is simply impossible.
The fact is that insurance of collateral, which is existing or purchased housing, is mandatory by law. That is, real estate in this case acts as security for the loan, and there is no way to do without insurance. The bank takes such measures for a reason, because for the entire period of validity of the loan agreement, the real estate is the property of the bank. Any financial institution wants to have guarantees that the money for housing purchased on credit will be returned to it. If the property suddenly loses its value (flooding, fire, etc. may occur), then the entire amount will be paid to the bank by the insurance company.
You cannot simply stop paying for insurance, since the insurance company reports to the bank every year. If there are no payments for insurance from the client, the lender has every reason to terminate the contract and demand that the housing loan be repaid by the client ahead of schedule. That is, the bank will refuse to cooperate with a borrower who refuses to insure the home purchased on credit.
To avoid such troubles, we advise you to pay your mortgage insurance premiums regularly. If you wish, you can set up an auto-payment function from your salary card.
How is real estate insurance taken out with a mortgage?
An extremely important point is the procedure for obtaining insurance for real estate. If a client applies to a bank to receive funds to purchase housing, then before obtaining insurance, such housing must first be purchased. That is, the client is first given the amount to purchase the object, and only then is a requirement to insure it.
To reduce risks, credit institutions prescribe in the loan agreement the client’s obligation to insure the purchased object immediately after receiving the keys and documents for it. And the client signs this clause of the contract. His obligation now arises by virtue of the loan agreement. An important point is that the lending institution must provide the borrower with several insurance companies to choose from. The latter, in turn, enters into an agreement with one of them on more favorable terms for him.
Credit institutions do not have the right to point to any specific insurance company. Moreover, some banks have their own insurance companies to which they prefer to send their clients. Examples:
- Sberbank insurance.
- Alpha insurance.
- VTB insurance.
- Renaissance insurance.
- Tinkoff insurance.
The client is given a sum to purchase the object, and only then is required to insure it.
These and other banks in almost every case insist on obtaining insurance from their companies. This requirement is also considered a direct imposition of services, which is also a violation. The client, having agreed to issue an insurance policy, has the right to independently choose an insurance company. Banks cannot limit people's choices. The company can be anything. The main thing is that it provides appropriate services.
Return of mortgage insurance
Such bank requirements for a mortgage are quite logical, but often clients are literally forced to enter into agreements:
- life insurance;
- insurance of property rights (title).
The interest of banks in the mandatory conclusion of insurance contracts is as follows:
- protection of your property (the apartment remains the property of the financial institution until the full amount of the loan is paid) and lifting the ban on sale;
- good income from receiving premiums - many large private banks control companies where they force their clients to insure themselves;
- If an insured event occurs, the insurance company will, under any pretext, try to reduce the amount of payments to the owner of the mortgage loan.
Note!
A personal insurance contract has its advantages for the borrower - in the event of an injury or long-term disability, payments under it will help pay off most of the monthly payment debts.
How is the insurance amount calculated?
As already noted, the amount of the insurance policy can be quite significant for the borrower. Therefore, most bank clients do not want to take out insurance - it is very expensive for them. As a rule, the amount is calculated based on the cost of the apartment. Both the current market value of the property and its cadastral price can be taken into account.
This insurance procedure costs a citizen up to 1.5-2% of the mortgage amount. These funds must be available at the time of concluding the contract. Additional costs will include notary services when registering a pledge and state fees for state registration. There is a nominal payment for the policy - when the client pays separately for the policy, and the inclusion of the insurance fee in the interest rate. The second option involves the following procedure:
- The bank calculates the interest rate.
- The bank offers the client to take out insurance.
- The client agrees to the registration.
- The bank assumes the responsibility for issuing the policy.
- All costs are included by the credit institution in the interest rate.
This option is convenient because the client does not need to spend a lot of time selecting an insurance program and drawing up a contract. The credit institution will do everything on its own, after which it will provide the client with all the necessary documents. This option is even more profitable in some ways than paying for insurance without the direct participation of the bank.
The amount of insurance directly depends on the valuation of the property (current market value or cadastral price)
A special calculator is often posted on the websites of credit institutions, with the help of which each potential client can pre-calculate the cost of an insurance policy. Such calculators usually provide approximate results. The exact amount is always calculated only during the insurance process.
Life insurance policy
Often, domestic banks offer their clients at the same time to insure their life and health, as well as the life and health of loan guarantors.
Often, borrowers sign such terms without even reading them. However, every client has the right to refuse personal insurance. In a separate article we will tell you how to do this. Before signing a loan agreement, we advise you to read it carefully in order to waive the clauses with which the lender imposes personal insurance on you. Before making your final decision, check out the current offers from several banks. It is best to entrust the task of finding profitable mortgage offers to a credit broker, or use the services of a lawyer - this way you can conclude a loan agreement on the most favorable terms for yourself.
We would like to emphasize that, in accordance with the resolution of the Central Bank, each borrower has the right to refuse personal insurance when signing a loan agreement. Moreover, the law provides for a period of 5 days from the date of conclusion of the contract, during which the client can refuse the insurance services imposed on him by the lender. The only exception is a comprehensive insurance contract, refusal of which is impossible.
Banks take various actions to persuade a client to purchase an insurance policy. If you refuse it, your interest rate may simply be raised, or your loan application may be rejected altogether.
As a rule, any bank cooperates with several insurance companies at once, and persistently offer the borrower to buy insurance from one of them. Remember that you have the right to choose the insurer at your own discretion, and not at the direction of the lender.
How to refuse insurance when applying for a mortgage
Insuring an apartment with a mortgage is the responsibility of the client or the bank. Article 31 of the Federal Law “On Mortgages” states that in the case of collateral relationships, the issuance of a policy is a prerequisite. At the same time, it is important that it is the collateral legal relationship that appears: when the pledgor and the pledgee participate in the transaction. All other types of insurance are simply imposed by credit institutions.
Some clients, having successfully concluded a mortgage agreement, do not want to spend additional money on obtaining a policy. Having paid it once to get the bank’s approval, such clients decide to terminate the contract with the insurance company in order to reduce their costs. The policy is issued for 1 year, and each subsequent year the client will have to contact the insurer again to obtain insurance.
Such attempts do not bode well for clients, as they directly imply a violation of the terms of the mortgage agreement. Clients are required to report annually to their lender regarding policy underwriting. If the credit institution does not receive this data on time and discovers that the client is using the collateral without insurance, then it (the credit institution) will have the right to terminate the contract.
about the author
Anatoly Darchiev - higher education in economics with a specialty in “Finance and Credit” and higher education in law in the direction of “Criminal Law and Criminology” at the Russian State Social University (RGSU). Worked for more than 7 years at Sberbank of Russia and Credit Europe Bank. He is a financial advisor to large financial and consulting organizations. Engaged in improving the financial literacy of visitors to the Brobank service. Analyst and banking expert. [email protected]
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