Mortgage indemnity insurance (A guide)
In this brief guide, we are going to discuss what a mortgage indemnity insurance is and the benefits of having one.
What is a mortgage indemnity insurance?
A mortgage indemnity insurance is an insurance which your mortgage lender may require you to purchase (although some mortgage lenders will purchase this and not pass the cost on to you).
Mortgage lenders may require a mortgage indemnity insurance if you are deemed too risky to them because you are borrowing at a high loan to value rate or over a certain amount.
Usually, if your loan to value is more than 75% you will be required to get a mortgage indemnity insurance by your mortgage lender. If the value of your property then falls below the loan to value rate which you took out e.g 75% and you default on your mortgage then the insurance company will then payout to the mortgage lender.
Your mortgage lender could also claim on the mortgage indemnity insurance if you default on your mortgage and the mortgage lender has to repossess the property but us unable to sell it to recover the outstanding mortgage balance on your mortgage account.
If this happens the mortgage indemnity insurance company will usually come after you for the funds which they paid the mortgage lender. This is regardless of the fact that you are the one paying the premiums( if you are the one paying for the premium) on the mortgage indemnity insurance. This is known as subrogation.
The insurance company will usually ask the mortgage lender to chase you for the funds which the insurance company has paid out to the mortgage lender as a result of your default.
In some cases, the mortgage lender may charge a mortgage indemnity insurance fee and not actually purchase indemnity insurance but rather use that fee to offset any costs that would come about from you defaulting on your mortgage.
Mortgage indemnity insurances are not requirements by all mortgage lenders and if you are looking to get a mortgage without a mortgage indemnity insurance then you should ensure you have informed your mortgage broker so they can take this into account when suggesting mortgage products to you.
What is the difference between mortgage indemnity insurance and PPI?
Mortgage indemnity insurance is the opposite of Payment protection insurance(PPI) as Mortgage indemnity insurance covers the mortgage lender whilst PPI covers you. The cover provided is also different.
PPI provides cover if you become unable to make your monthly mortgage repayments whilst mortgage indemnity insurance covers the mortgage lender in the event the property prices fall below the loan to value which you initially took out on your mortgage.
Benefits of a mortgage indemnity insurance
Some of the benefits of a mortgage indemnity insurance are:
Mortgage indemnity insurance makes it a bit easier for you to get a high loan to value mortgages under circumstances where you may not have gotten them before.
Disadvantages of Mortgage indemnity insurance
Mortgage indemnity insurance does not cover you
Mortgage indemnity insurance can cost up to £500 depending on the size of your mortgage.
FAQs about the Mortgage indemnity insurance
Below are some of the most frequently asked questions about the Mortgage indemnity insurance.
Can you claim back mortgage indemnity insurance?
No, you cannot claim back mortgage indemnity insurance as it is an insurance which you are required to take by the lender to protect the mortgage lenders interest and therefore it cannot usually be missold.
What does indemnity insurance mean?
Indemnity insurance is essentially insurance which indemnifies one party against the losses of another. By paying the premium on the policy you are indemnifying yourself against the losses and passing that risk over to the insurance company.
There are various types of indemnity insurance including:
professional indemnity insurance
Private liability insurance
errors and omissions insurance.
How much is an indemnity insurance policy?
An indemnity insurance policy could cost from between £100 to £500 depending on the risk being indemnified.
If the risk being indemnified is the potential of negative equity or a mortgage default then the insurance company will usually provide a quote based on the properties valuation and other risk assessment factors such as the property market and economy factors.
Typically the cost of a mortgage indemnity insurance will be 6% to 8% of the equity you have in the property on purchase.
Note: Mortgage indemnity insurance does not cover the borrower nor does it protect you from negative equity. A lot of people have this misconception.
How to get a mortgage indemnity insurance
To get mortgage indemnity insurance you may either contact the mortgage broker who is making your mortgage application or you could contact an insurance broker.
In this brief guide, we discussed what a mortgage indemnity insurance is. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.