Liam Croke: Restructure your mortgage and your life policy as well

Liam Croke: Restructure your mortgage and your life policy as well

If you have restructured a mortgage, which altered the repayment and or term, ensure your life policy is adequate

The number of mortgages in arrears, thankfully continues to decline, and one of the reasons for this, is the number of mortgages which have been restructured. And that is where a bank would offer arrangements such as interest only facilities, extending the mortgage term, capitalising the arrears, reducing the interest rate, split mortgage etc.

And according to the most recent data released from The Central Bank, 118,477 mortgages have been restructured with 87% of mortgage holders meeting the terms of their restructure.

The arrangement with the highest compliance rate were those offered an interest only facility for greater than one year, and some of the lowest surprisingly were those offered payments that were less than interest only and those who were offered permanent rate reductions.

Whilst the figures for compliance are welcome, the restructuring arrangements can lead to mortgage holders being under insured and exposed to a shortfall in the event of one party to the mortgage dying.

This anomaly has been raised on more than one occasion by the insurer Royal London, who have pointed out that unlike a mortgage, a mortgage protection life assurance policy is not as flexible and is more difficult to amend, and unless you effect a new policy reflecting the new restructuring arrangement you have entered into, a gap is likely to exist between what a life policy will cover you for and what is outstanding on your mortgage.

If for example, you got into difficulty with your monthly mortgage repayment, and your lender offered you an interest only facility, it means the amount you owe is not reducing. But your mortgage protection policy will not recognise this unless you changed it, and it assumes your mortgage is continuing to reduce each month, and the level of cover it provides reduces largely in line with it.

If for example, a couple took out a mortgage of €250,000 for 25-years in 2008 and because they had difficulty repaying it, in 2013 their lender agreed to an interest only facility for a 5-year period, it means should either pass away, there would be a shortfall of c. €34,000, which is the difference between what they owe and what a typical life policy would pay out.

If this did come to pass, the bank, are still owed €34,000 and unless they decide to write this amount off, the surviving person would have to either come up with the shortfall themselves or they would be left with a mortgage and repayments based on a balance outstanding of €34,000.

Be mindful as well if your arrangement was a term extension because a mortgage protection policy is designed to run for the same length of time as your mortgage, and if your mortgage term is now 25 years but your existing policy covers you for 20, you could be uninsured for the remaining 5 years of your mortgage.

The difficulty for people however, is that when they are going through a process with their lender looking for reduction in their mortgage payment, it can be very difficult, stressful and time consuming completing standard financial statements etc. and if an arrangement is granted, they are so relieved they may not think about their life policy and whether it is sufficient or not, unless prompted by their bank to make changes to it, and if not, unbeknown to them, a gap begins to develop and gets bigger the longer the arrangement continues.

If you did enter into a restructuring arrangement and the life policy you have assigned to your mortgage is a term assurance one, this may be enough, because with this type of policy the level of cover remains the same for the duration of the mortgage, and a shortfall could only arise if significant arrears were added to the amount owing. So, if you entered into an arrangement with your mortgage lender, which altered the repayment and or term, you need to make sure the life policy you have in place is adequate. And I know, for some, they don’t want to add to their outgoings. They are under pressure in the first place to make repayments which is why they are in a re-structure situation, but there are things you must pay, and life assurance is one of them. And if you are in discussions with, your, lender about re-structuring your mortgage payment, you need to factor in what the additional cost of taking out life cover is, to bridge any shortfall that may arise. The good news is that the amount should be small, but every amount counts so I’m not discounting the size of the increase and what it means to some people, but you need to factor this in to your future outgoings and your discussions with your lender.

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