Loans are available in all sizes. However, few would argue a home loan is the largest we will ever take out. Most people cannot buy a property without one. But what kind of insurance should you consider if you are about to take out such a loan?
This is one of several important questions people often ask when faced with this scenario. Here, we provide answers to some of the most common questions that might have crossed your mind.
Getting insurance for your home loan
There are several forms of insurance you could opt for if you take out a mortgage:
- Life insurance
- Cover in case you are diagnosed with a critical illness
- Income protection insurance
- Buildings insurance
Buildings insurance covers the cost of rebuilding your property should something happen to it. It may be required as a condition of taking out your loan. You can swap to another insurer later if you wish. For example, once the annual insurance cover falls due, you might shop around for a more competitive quote that provides the same level of cover.
Critical illness cover is designed to provide a payment if you are diagnosed with any of the illnesses covered by that policy. Always read the small print though – not all forms of illnesses are covered. For example, some cancers may be covered while other forms are not.
Life insurance is designed to trigger a lump sum to be paid to your surviving partner or your estate if you die during the period covered by the policy. This is a good idea if you are the main earner. If you were to die, your husband or wife would receive the payment. This would enable them to pay off the home loan in its entirety, or at least to pay off most of it.
Income protection insurance assists you in continuing to make your home payments if you were to lose your job. Again, there are specific scenarios that are covered here, such as redundancy. If you quit your job, the policy would not pay out.
Always read the small print for all such insurance policies. Understand how they work and assess which ones you should get. Not all situations are the same – some people may benefit more from some than others. Buildings insurance should be the minimum you have, however.
Is mortgage insurance worth it?
Many would say it is. As we can see from the above examples, these policies can make all the difference between going through rough financial times or being able to rely on an injection of cash to get you through them. Money does not make all situations better, but it can ease financial worries at tough times.
Can mortgage include renovation costs?
There are properties where you can happily move in without even taking the lid off a pot of paint. At the opposite end of the scale, some properties cannot be lived in until thousands of pounds’ worth of renovations have been completed.
This means you may need to buy a property and consider how much you will need to stump up in renovation costs too. Unfortunately, you cannot typically get a home advance to cover the renovation costs on top of the current value of the property. If this is the situation you are in, you could consider reaching out to a specialist lender who focuses on such scenarios. Otherwise, you would need to get a loan to enable you to buy the property and seek out another loan to cover the renovation costs.
Is mortgage protection the same as PPI?
Much has been written about PPI in recent years. Known by its full name of payment protection insurance, it was designed to provide cover for various things (home payments, credit card payments, and so on) if you were made redundant or became too sick to work.
This type of protection can include various elements. For example, some people may have agreed to a life insurance policy and critical illness cover, rolled into the overall loan protection product. There is also a chance the cover might have included another element, the PPI element. As such, not everyone has (or had) this cover. If you currently have a home loan, you should check the details of any cover you have to see whether it includes PPI.
Is mortgage insurance compulsory?
Lenders will require you to get buildings cover, but you do not necessarily need to get life cover to ensure a payout is made if you were to die during the overall term. It may be suggested as a good idea, but it is not compulsory in the UK.
Can mortgages be transferred to another person?
Yes – this can occur in several situations. For example, it might mean adding someone onto an existing mortgage – common if someone enters a new relationship and already has a loan. Upon combining lives and homes, this may be the natural step to take. Removing someone can also be done.
There is also an option to transfer the loan to someone else. This Transfer of Equity procedure will require professional legal advice, however, since no two situations are likely to present the same circumstances. Such a transfer will only be ideal if the person the loan is transferred to can show they can afford it. As such, they would need to go through a similar process to that completed by someone applying for a home advance to start with.
How mortgages work when moving house
Can mortgages be transferred to another property? Absolutely – this is how many people in the UK move. Unless you have been in your property for many years and have already paid off your loan (or are about to do so), chances are you will want to move at some point. When you do, the mortgage will essentially go with you.
The way your loan moves will depend on whether you want to increase the value of the loan to buy a bigger property. Alternatively, you might have equity in your existing property that you can put towards the new home. Be aware that transfer fees might be included when you make the switch. By speaking to your lender, you can find out which fees apply – if any – and how the process will work.
Does mortgage protection cover redundancy?
Redundancy is a huge event in anyone’s life. Some people may have an inkling they are about to be made redundant, while for others it will come as a huge shock. Either way, it will likely cause some financial struggles until the person gets back on their feet. If there is a loan to pay on the property the person lives in, the financial worries can become far bigger.
There are forms of insurance that provide up to 12 months cover if you are made redundant. It should be noted that such policies only cover involuntary redundancies. This means you would need to be made redundant against your wishes for the policy to be triggered. If you were offered a redundancy package and decided to take it, you would not receive a payout from the policy.
The idea is the payment would cover your home loan repayments for up to a year while you get back on your feet. As the largest outgoing you will have each month, this can make a huge difference. As we mentioned earlier though, make sure you read the entire policy – especially the small print – to ensure you know where you stand.
Can mortgages cover stamp duty?
The rules surrounding stamp duty have changed in recent years. Some properties at the cheaper end of the market now do not attract any stamp duty at all.
However, if we suppose you want to take out a loan to buy a property that will attract stamp duty, that means there is another sum you need to find on top of all the other related moving costs you’re dealing with. Would it make sense to put the stamp duty you owe onto the amount you borrow to buy your property?
This can be done, but it is not necessarily a wise choice. Regardless of the amount due in stamp duty, you will be adding it to a loan amount you will pay off over many years. It may not seem like a lot to add, say, £5,000 onto a loan for £200,000, but the extra few thousand will incur interest over the life of your loan – perhaps 25 years or more. You could end up paying more in interest than you did in stamp duty, depending on the final figures.
The rule of thumb is to pay the stamp duty if you can. However, some people find adding it to their loan is the only way they can cover it. At least know in advance how it will affect your monthly payments – and the total amount you will eventually pay.