# Mortgage protection -when does it kick in?



## Tremblay (14 Aug 2011)

I lost my husband and our mortgage was covered by a life assurance policy. However, I had to pay 10 months mortgage after my husband died. The mortgage providers claimed a "shortfall" as the reason, but our mortgage was never in arrears. Can I take a case against them? Is the financial regulator the next port of call?


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## hastalavista (14 Aug 2011)

Sorry to read about your loss.
Mortgage protection policies [MPP] are normally done on a reducing balance basis so as the insured value drops off in line with the reduction in principal on the mortgage.

However a reducing balance MPP assumes a certain interest rate on the loan so say the MPP was done on 6 % and the actual loan was done at 7% then the 2 will get out of sync.

For example a 1000 euro loan over 10 years

at 5% the principal outstanding at the end of year 5 will be 562
at 6%.....................................  ....................................574
at 7%.......................................  ..................................586

so if the mpp was at 5 and the loan at 7 then the shortfall would be 24 [586-562]

I would ask the bank to see the math and get details of the insurance policy as well: there may have been a mismatch in the term of the loan and the policy
HTH


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## Tremblay (15 Aug 2011)

*Many thanks*

This is really helpful, thank you. I will get the information off the bank immediately. At least I should be able to get some clarity.


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## hastalavista (15 Aug 2011)

Glad to help, its a simple exercise if you get the numbers so dont take any bs or guff in pursuit of the reconciliation.


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## Brendan Burgess (15 Aug 2011)

This is a very interesting question, and just to get my own head around it, I thought of the following example. 

Take a €100,000 mortgage over 2 years at 40% interest

The repayments are a fixed €6118 per month. or €147k in total. 

At the end of year one, you will owe €60,000. 

Now take a €100,000 mortgage at 0%. The balance at the end of year 1 will be only €50,000. 

So as the interest rate falls, there is a higher element of capital in each repayment.  As the rates rise, there is a smaller element of capital, so the amount outstanding at any time will be higher. 

I presume intersest rates have fallen since you took out the mortgage? If so, it seems odd that there is a balance due. It should be the other way round. 

Brendan


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## hastalavista (15 Aug 2011)

The other wrinkle here is that if you wanted to be quoting " very competitive" MPP rates, from an actuarial perspective, the longer the policy is in place the higher probability that it will require to pay out so a lower rate in the MPP calculation just might suit....


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## Panacea (15 Aug 2011)

Whilst largely irrelevent to the OPs position if the borrower goes on interest only for a period this can also result in a shortfall.

Only mentioning this as a family member got a policy update statement recently and was noticed a chunky difference between the level of cover and the balance on the mortgage .... they were interest only for the first year of their mortgage and then extended this for another two years. I presume the policy would have factored in the interest only for the first year and then the balance amortises over the remaining 19 years so three years in there is now a difference.


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## Sumatra (16 Aug 2011)

Tremblay, can't understand this loss. You mention mortgage protection and life assurance.  You mention a shortfall - but from where? Was loan increased by extra borrowings at some time? Was it clearly identified that YOU had a legal obligation or liability to cover the shortfall. A mere moral obligation is not enough.


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## Sunny (16 Aug 2011)

Sumatra said:


> Tremblay, can't understand this loss. You mention mortgage protection and life assurance. You mention a shortfall - but from where? Was loan increased by extra borrowings at some time? Was it clearly identified that YOU had a legal obligation or liability to cover the shortfall. A mere moral obligation is not enough.


 
Hastalavista explained it well. It all depends on the mortgage rate you have/are paying and the assumed rate on the MPP. People are generally over/under protected on these policies. As he suggests, get all the documentation and get some help on the sums to make sure the insurance company made the correct payment. I am actually surprised the bank came after you for the difference. Doesn't happen very often in my experience as they tend to write it off.


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## Sumatra (16 Aug 2011)

Hi Sunny. I don't think so. Tremblay said "I lost my husband and our mortgage was covered by a life assurance policy."

Both types of policies can be used as a form of mortgage protection. That aside the amount payable on the policy in the event of a claim is not the subject of discussion or negotiation because the amount is clearly stated on the policy document. What is vague is whether Tremblay had a legal obligation to pay for the shortfall herself. I too am surprised.


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## hastalavista (16 Aug 2011)

The title uses the words Mortgage Protection which is the key to this.

On a reducing balance  term assurance MPP  the amount is not clearly stated on the policy document as it depends when it called upon.

On a level term assurance MPP the amount to be paid out is fixed.

There is no way the policy can be construed to make the policy make up for the short fall.


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## Sumatra (16 Aug 2011)

It may well be key but life assurance (commonly used to protect an interest only loan or otherwise by choice) can also be used as mortgage protection. You'll even see loan offers which mix up the two types of assurance within the same paragraph. However, whether the posters husband had one or the other isn't really relevant to her question. 

In passing, attached to a mortgage protection policy schedule there is another document usually called the 'schedule of life sum insured' which clearly shows the sum at risk at any given time during the term of the policy and that is the amount that is paid on death. 

If there is increased borrowings, missed payments etc then the lender can ask for the existing policy to be increased to cover the amount outstanding or where this is not possible, to request an additional policy with a suitable sum assured to cover the revised outstanding balance that isn't covered under the existing policy.

You could say the lender had a responsibility to inform the borrower that the policy (which I assume they had in their possession as assigned to them) was insufficient or you could take the view that under the loan agreement it was the borrowers responsibility to ensure the loan was protected at all times.

If the death claim / will etc took 10 months to sort out then perhaps your lender didn't consider the loan ceased on your husband's death but rather on the date they received the proceeds from the policy? Interest would be added to the sum assured on the policy from date of death to claim settlement. Were you just asked to pay the mortgage as usual until the claim was settled?

We don't know if Ms.Tremblay had a joint loan with her husband but what we all seem to agree on is that it is most unusual for a lender to request the surviving partner to make up the balance given that on paper the amount seemed relatively small. Ms Tremblay may have felt she had a moral obligaton to clear the balance but legally I don't think so. 

My guess is it may not have been extra borrowing or arrears but simply for some reason it took 10 months to claim on the policy and clear the loan.

Ms. Tremnbley, no harm if your next port of call is to ask your lender for a copy of their complaints procedure. Follow it and put your complaint in writing to the lender and see what happens.


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## Tremblay (17 Aug 2011)

Thank you all for your contributions. I am going to request the paperwork and follow your advice. I need to get clarity on what I was actually charged for. All the above helps and I am very grateful to you all.


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## Sumatra (17 Aug 2011)

You're very welcome and we all wish you the best. Look after yourself.


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## hastalavista (17 Aug 2011)

sumatra said:


> you're very welcome and we all wish you the best. Look after yourself.



+1


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