If you need a mortgage loan to buy your home, you will be required to take out two mandatory insurance policies: Property Insurance and Life Insurance. Therefore, when calculating the total amount you will pay for the loan, be sure to include this cost in your monthly mortgage payment. However, while these insurances are mandatory, you are not required to purchase them from the lender providing your mortgage.
Why are insurance policies mandatory when taking out a mortgage?
The bank lending you the money to buy your home wants to ensure two things:
- That it will recover the loan amount if something happens to you.
- That the property does not lose value while you still owe money.
If you default on the loan and the bank needs to foreclose, it must be able to sell the property and recover the loan amount.
This is why banks require two different types of insurance: Life Insurance and Property Insurance.
Life Insurance
Life Insurance associated with the mortgage has the bank as the beneficiary, and the insured capital corresponds to the loan amount. This means that if something happens to you, the bank will activate the insurance policy, and the insurer will reimburse the outstanding loan balance.
Since the bank receives the full remaining debt amount, your heirs will inherit the property free of any financial obligations, meaning they will not be burdened with debt.
Property Insurance
For those who do not take out a mortgage, Property Insurance is not mandatory. In fact, in terms of real estate, the only legally required insurance is fire insurance for condominium properties.
However, fire is just one of many potential incidents that could affect a property, with floods being one of the most common. If such an event occurs, the damage to the property can be significant, potentially reducing its value if repairs are not carried out.
Therefore, Property Insurance ensures that the property does not lose value in the event of an accident such as a fire or flood. Since this insurance covers repair costs, the value of your home is preserved. This means that if the bank forecloses on your property due to non-payment, it can still recover the loan amount by selling the home.
It is important to note that, in the case of Property Insurance, the insured capital is not linked to the mortgage amount but rather to the market reconstruction cost of the property. This is the value used by the insurance company to calculate compensation in case of damages.
You do not have to purchase Property Insurance from the bank providing the mortgage
Indeed, you do not. The financial institution granting your mortgage may have an interest in selling you insurance through them—since banks often have affiliated insurance companies and earn commissions—but they cannot require you to purchase insurance from them.
To make their offer more attractive, they may reduce the mortgage interest rate (spread) if you bundle the insurance with your loan. The cost of the insurance they offer will be detailed in the European Standardised Information Sheet (FINE) provided to you.
However, you are free to purchase your insurance from any provider offering better conditions. You simply need to ensure that the insurance policies meet the bank’s required terms. Therefore, it is advisable to request insurance quotes from different providers under the same conditions set by the bank.
Then, compare the total cost, including both the monthly mortgage payment and insurance premiums, and choose the most cost-effective option.
Get in touch with Lead Kash
If you need a mortgage, talk to us. Lead Kash takes care of the entire process for you, comparing offers from different institutions and, in the end, presenting you with the best solution to achieve your goal. And the best part? This service is completely free for you. Get a simulation, talk to us, and let us simplify your life!
