One of the most common questions that we get asked by our customers is “do you need life insurance for a mortgage?”.
The simple answer is ‘NO’ and it is a myth that you are required to take life insurance to get a mortgage. On the other hand, it is strongly recommended that you should take out a life insurance policy to protect your mortgage, especially if you have children.
Your mortgage is likely to be the biggest single debt that you hold in your lifetime and therefore the largest financial obligation. If you die then your mortgage debt will be passed on to your family.
Here are the answers to some of the most common questions about mortgage life insurance and busting those myths.
What is mortgage life insurance?
Life insurance comes in two main forms which are decreasing term assurance (mortgage life insurance) and level term assurance (family life insurance).
Decreasing term assurance (mortgage life insurance) was created in the late 19th century to protect mortgage loans provided by banks. A mortgage life insurance policy is specifically designed to protect a Capital & Interest (Repayment) mortgage.
The term ‘decreasing’ means that the amount of cover will reduce at roughly the same level as your mortgage balance. This means that this type of life insurance policy is specifically to protect the outstanding figure to clear your mortgage.
If you die and your mortgage life insurance pays out a lump sum then your home would then be debt-free for your family. Ultimately you would not want to leave debt on your property to your loved ones if you are no longer around to help with paying the mortgage.
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Why do some mortgage lenders ask for life insurance?
There are some lenders who still have a requirement for certain borrowers to hold a life insurance policy for a mortgage. This can be if there are specific circumstances that mean there could be a higher risk against that particular loan.
If you have been asked to take life insurance to protect your mortgage then you should definitely question ‘why?’.
One of the main reasons why you might be required to have a life insurance policy to protect your mortgage is where there are other credit risks (e.g. debt management plan). Some lenders might also have their own requirements but you can also, therefore, consider alternative lenders.
Is life insurance required when buying a house?
Historically you might have been asked to take out life insurance when applying for a mortgage. This was more prevalent in the 1960s and 1970s when mortgage interest rates and risks were higher.
It is a modern-day myth that this is still the case but the actual reality is that this is no longer the case. Some mortgage brokers might also tell you to take life insurance or even very strongly recommend you take life cover.
If you have got children then you should definitely consider taking out life insurance to protect your mortgage. As we have explained above, this simply means that your family would not have a debt on your family home if you were to die.
The other potential outcome is that your family may be required to sell the property or it may even be repossessed if they can’t keep up mortgage repayments.
Can my mortgage be refused if I don’t have life insurance?
You shouldn’t be refused a mortgage just because you don’t have life insurance in most circumstances. Whilst we cannot cover every situation, as a general rule in 99% of applications, there are no requirements to take life insurance for a mortgage.
If your mortgage lender refuses to lend based on you not having life insurance then you should definitely ask why.
There are a number of reasons why you might be refused a mortgage, such as:
- Credit history
- Adverse credit
- Property construction
- Valuation reports
You should generally receive a letter or some notification from your lender to explain the reason for your mortgage decline.
Do you need life insurance for a mortgage UK?
There are some countries that still require you to take life insurance when you apply for a mortgage. Some of the countries that we are aware of that require you to take life insurance with a mortgage are:
- Middle East
If you purchase a property abroad then you might also be required to take life insurance to get a mortgage.
The UK is not currently one of the countries that require you to have a life insurance policy for a mortgage. It is possible that the rules might change in the future so you should always check the latest rules and regulations.
Do you need life insurance for a repayment mortgage?
You are not required to have a life insurance policy regardless of your mortgage type.
The most common type of mortgage in the UK is a ‘repayment’ (capital and interest) mortgage. This simply means that over the term of the mortgage you are paying an element of capital and an element of interest.
At the end of the mortgage term, your mortgage will have been fully cleared and you will therefore own your property outright. A decreasing term life insurance policy is specifically designed to protect a repayment mortgage.
Do you need life insurance for a second mortgage?
A second (charge) mortgage or secured loan is where there are two lenders on the same property.
There are a number of reasons why you might want to take out a second mortgage, including:
- Home improvements
- Debt consolidation
- Purchase other property (e.g. holiday or investment)
- Gifted loan
The same rules should apply for ‘second charge mortgages’ as they are for first charge mortgages. Ultimately you shouldn’t need to take life insurance to get a second mortgage on your property.
Free mortgage life insurance advice
If you still have questions about how to get the best mortgage life insurance to protect your family home then you can contact our friendly experts on 0800 009 6559.
Our team is passionate about getting the BEST protection for our customers regardless of their health, lifestyle, and occupation.