Key Post What happens to your mortgage application if you get declined for life insurance?

This comes up on Askaboutmoney from time to time so I thought I'd write a post on it.

The Consumer Credit Act 1995 makes it a requirement that you must have life insurance cover to get a mortgage to buy a home for your own occupation. There are two occasions when this requirement can be waived.

• You are over 50 years old.
• You cannot get life cover or you can only get life cover at a significantly increased premium.

That does not mean that if you qualify for a waiver under either of these conditions, the lender is obliged to lend to you. It just means that the lender has discretion in those circumstances to decide to waive the requirement for cover. If you qualify for a waiver under the above conditions, you then have to ask your lender to see if they will agree to one. If any of the following circumstances apply to you, bring them to the attention of your lender as they may help your case: -

• You are the non-earning partner on a joint application.
• Your partner's income is almost sufficient to pay the mortgage without a contribution from your income.
• You have other life insurance cover in place, e.g. an old policy or Death in Service cover in your place of work. While Death in Service cover cannot be assigned to a lender, it may help them to decide to waive life cover on you if they know it's there.
• Even after buying the property, you'll still have significant savings.
• You are borrowing a low percentage of the value of the property.

Put another way, if you are married with kids, the sole earner, borrowing 92% of the purchace price, using up all your savings and have no life cover, a lender is not going to be keen to give you a mortgage. If you die, they can in theory repossess the house to recoup their loan, but no lender wants to evict a grieving widow(er) and children.

On the other hand, if you are a two-income couple with death-in-service cover at work, you're more likely to get a mortgage with a waiver of life cover.

If you have a medical condition that you think might affect your ability to get life insurance cover, make enquiries to a life insurance company or Financial Broker before you apply for your mortgage. You might find that your medical condition is not one that life insurance companies are too worried about, if it doesn't impact on your life expectancy. Or maybe you can get cover with a small loading on the premium.

If you find that you can't get life cover, bring this to the attention of your bank when you're applying for your mortgage. Don't leave it until the last minute when you've already got a formal loan offer and exchanged contracts to buy a property to find out that the bank might not lend to you after all.

Other information that might be relevant: -

• If you are getting a mortgage to buy an investment property, there's no legal requirement to have life insurance cover, although the lender still has discretion to make it a condition of the loan.
• There's a UK life insurance firm called Pulse, underwritten by Lloyds, who specialise in providing cover for people that can't obtain it from the "normal" life insurance companies. They cover people with all manner of health issues, dangerous occupations etc. They can issue policies denominated in Euro and do trade in Ireland through some Financial Brokers. Pulse only issue policies with a 10 year term which is shorter than most mortgages, but you might be able to convince your lender to give you a mortgage with a 10-year policy rather than none, and a promise that you'll apply for another 10 year policy at the end of it.
• There's a suggestion on Askaboutmoney in another post here about what to do if you find yourself stuck and desperate to obtain a mortgage without life cover.
• A lender cannot make it a condition of a loan offer that you take insurance with the lender's own insurance company. You are always free to shop around.

Liam D. Ferguson

Great post Liam.

I have had experience with banks accepting Pulse Ltd. policies even though the term was short of their mortgage term. Also I found Pulse Ltd. quotations to be quite competitive considering they are taking on risks that other companies have declined to take on.

Well done Liam

I wonder should the bit about getting life cover before you sign contracts, be given more prominence?

In fact, I wonder should the thread Preparing for a mortgage application be amended to include it?

If I am looking around at houses and not sure about my life insurance position, should I start the process immediately? Try to get the policy in place before I even apply for a mortgage just to make sure that it doesn't delay things?

Do some life policies want you to be free of illnesses for 5 years? If I had an illness 4 years ago, should I wait until the 5 years is up? Or maybe pay for the expensive cover and then shop around, a year later.

Brendan Burgess said:

I wonder should the bit about getting life cover before you sign contracts, be given more prominence?

In fact, I wonder should the thread Preparing for a mortgage application be amended to include it?

Click to expand...

I've put some bold-facing in, if that helps.

I can't amend the mortgage application post as it's older, but feel free to tinker with it.

Brendan Burgess said:

If I am looking around at houses and not sure about my life insurance position, should I start the process immediately? Try to get the policy in place before I even apply for a mortgage just to make sure that it doesn't delay things?

Click to expand...

Yes, definitely. If you have a medical condition that you think might cause you trouble getting life insurance, apply for the life insurance first.

Brendan Burgess said:

Do some life policies want you to be free of illnesses for 5 years?

Click to expand...

Not really. Any illnesses will be treated on a case-by-case basis.

Good man Liam always good to know

Really great post Liam!

This to me seems to be an area that is open to interpertation by the various lenders. I do believe that a person has a right to get an exemption for life cover under section 126 of the consumer credit act 1995 and I have helped several clients get loans with both banks and County Councils by directly referencing a complaint that FSO commented on back in 2006.

That said I have a personal friend that was having problems last year due to her health condition and was refused a local authority loan because of this. She was refused the loan and I made representations to the loan officer. The loan officer dragged their heals on this appeal and then the particular housing loan scheme closed at the end of the year. This now has resulted in a complaint to the Ombudsman Office so hopefully I might be able to shed some further light on the situation in the coming months.

The following is taken from the FSO report [broken link removed]

I received a complaint that in 2000 the Complainant and his wife took out a mortgage to purchase a residential investment property. The Loan Offer stated that mortgage protection was required as part of the General Conditions of the loan. The Complainant queried at the time whether such protection was compulsory for a mortgage where the purpose of the security offered was not the family dwelling. Indeed, he stated that the FSP wanted a policy for both the Complainant and his wife. When this was queried, a policy in his name alone was accepted by the FSP reluctantly and as a concession. The Complainant stated that he was given no option but to take out the policy as the loan was contingent on it and it was clearly stated by the provider at the time that this was in fact compulsory for all mortgages.

In 2005 the Complainant discovered that thisinformation was incorrect as it is clearly provided under the Consumer Credit Act 1995 - section 126 (2) (1) – that mortgage protection policies are compulsory only for private dwellings. On bringing this to the FSP’s attention, he indicated that the FSP, with some reluctance, terminated the policy. He then sought a refund of the premiums he had paid with some interest but the FSP was not amenable to it. He then referred the matter to me. Following further correspondence between the FSP, the Complainant and this office, the matter was settled to his satisfaction. Accordingly, I did not have to carry out a formal investigation of this complaint.

It seemed to me, however, that this could be an area where a systemic issue could arise, not alone for this FSP, but for other FSPs. My concern was whether all commercial lending was subject to this type of mortgage protection policy when in fact it was not necessary. I fully appreciate and understand that certain conditions will apply to investment properties, be they a house or otherwise. I communicated with the Financial Regulator as it may be appropriate for the Regulator to carry out a general review of all FSPs to establish whether mortgages on investment properties (particularly houses) were inappropriately subject to a requirement that a mortgage protection policy be taken out

While I accept that this complaint relates to investment properties vis a viz the same logic applies to people who cannot get life cover due to medical condition