Unknowingly Under Insured – Restructured Mortgage Holders
Mon Jul 16 2018
As Financial Brokers you’ll be very aware that as a result of the recession around 1 in 8* mortgage holders, at its highest in 2013, fell behind on their payments. Leading protection specialist Royal London contends that many families who fell into mortgage arrears during this time may now be underinsured on their mortgage protection policy. Regardless of whether they are still in arrears or have entered into restructuring arrangements with their lender.
Thousands of struggling mortgage holders left financially exposed
According to the Central Bank of Ireland the number of private dwelling house mortgage accounts that were classified as restructured at end-December 2017 was 118,477**.
Proposition Lead at Royal London, Barry McCutcheon, commented: “We believe a significant proportion of the over 100,000 families who have found themselves in this position may not have reflected these changes in their mortgage protection cover, and therefore have become underinsured as a result. As you will know, mortgage protection policies generally cannot be restructured, and in most cases a new policy would need to be put in place to reflect the fact that the mortgage isn’t reducing or to match the revised mortgage agreement. Essentially, this could understandably come as a great source of shock and worry for a client who is a surviving spouse. This unknown underinsured amount could mean they are left with a shortfall on their mortgage at a time when they can least afford it. And while it’s quite possible that the lender would write off the uninsured balance in such an instance, it would be unwise for any mortgage holder to rely on the possibility of such “generosity” on their behalf.”
In arrears and underinsured
Royal London looked at a couple who had taken out a €300,000 mortgage for 30 years in 2004, the couple also took out the equivalent amount of mortgage protection***. In 2014 their bank agreed to switch them to interest only for 4 years and they then returned to full repayments in 2018. Should either pass away, the individual left behind would currently have a shortfall of €11,569 – that being the difference between what they owe and what a typical mortgage protection policy would cover.
Barry explained, “When the interest only period ends, the lender will re-establish repayments in one of two ways. They may extend the term sufficiently to ensure that if the homeowner resumes the monthly repayments at the original amount the loan will clear, usually after an extra couple of years. Or they can increase the regular repayment amount so that the arrears are repaid over the original mortgage term. Either way, there’s likely to be a shortfall. The higher the repayment, the quicker the shortfall may reduce.”
There are a number of situations where mortgage holders in arrears enter into special agreements with their lenders. It would then be necessary to review or amend the mortgage protection cover in place to avoid any underinsurance. The 118,477** restructured mortgages are currently subject to measures, like the following, which are designed to help the homeowner stay in their home.
- Interest Only – over one year (probably beyond 2 years) regardless of whether the term is extended or repayments are increased in the remaining years
- Interest Only – up to one year
- Reduced Payment (less than interest only)
- Reduced Payment (greater than interest only)
- Term Extension
- Arrears Capitalisation
- Payment Moratorium
- Deferred Interest Scheme
- Split Mortgage
In addition, there are 28,946** homeowners that are in long term arrears (over 720 days) and are therefore likely to have a far greater shortfall in their mortgage protection, assuming that they’ve maintained the premiums on their policy.
Barry finished by saying: “This is an issue which can potentially affect thousands of families. We’ve been highlighting it in the media recently and received some widespread coverage. It’s aimed at prompting mortgage holders who may not have considered that they may be underinsured before now to speak with a Financial Broker. That way they can ensure they have the appropriate and adequate financial protection in place to protect themselves and their family. As always, we focus on promoting the services of Financial Brokers in the media to support your businesses, in the knowledge that the advice you offer to consumers means they will find the best solution to meet their individual needs.”
* Central Bank, Residential Mortgage Arrears and Repossession Statistics: Q2, 2013
** Residential Mortgage Arrears and Repossessions Statistics: Q4 2017 https://www.centralbank.ie/docs/default-source/statistics/data-and-analysis/credit-and-banking-statistics/mortgage-arrears/residential-mortgage-arrears-and-repossessions-statistics-december-2017.pdf?sfvrsn=4
*** Mortgage runs down monthly at 3.5% p.a. and the mortgage protection policy runs down monthly at 6% p.a.