Interest only Year 1 & Mortgage Protection

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gianni

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Hi all, have searched for info on this on the forum but no luck.


I am currently trying to sort out Mortgage Protection for a property that I am buying. My mortgage is interest only for the first year. But what I can't figure out is what implications this has on the Mortgage Protection policy that I require.

From what I gather the 'standard' Mortgage Protection policies are for a decreasing capital sum but if the first year is interest only then the capital isn't decreasing in year 1. My lender has stipulated that this non-decreasing capital should be allowed for but I don't understand how to allow for it!

The brokers I approached said that the lender would have to clarify what level of cover they require...but when I approach the lender all they told me is what they would charge me for such a policy. I don't want to take their policy as I believe I can do better with a broker...as you can probably tell I'm not sure how to tackle this prob...
 
If this is an investment property then you should be able to find a lender who does not need mortgage protection life assurance cover. Such cover is normally only mandatory for owner occupiers although some lenders will (try to) insist that investors also take it out.
 
The mortgage in question seems to be interest only for just the first year and is presumably a repayment/annuity mortgage from year two onwards.

In general most property investors should probably be looking at interest only mortgages for the duration of the investment property mortgage (Interest only mortgage) and should probably not bother with mortgage protection life assurance.
 
ClubMan said:
The mortgage in question seems to be interest only for just the first year and is presumably a repayment/annuity mortgage from year two onwards.
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Yes, but they (the lender) will still require level term cover at the outset.
 
Not necessarily - they may allow the borrower to just put in place higher than the loan amount cover in the first place which will fall in line with the capital sums outstanding from year two onwards. For example - I borrow €400K but will be on interest only for the first year and I take out €400K+ cover in the first place.
 
I recently looked into getting interest only for a short time from the start of a new mortgage. I was told I had to have level term cover. I don't know if that was just the requirements of my own lender, but that's my experience.
 
The mortgage in question seems to be interest only for just the first year and is presumably a repayment/annuity mortgage from year two onwards.
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yes this is correct, incidentally I am not an investor - this is a owner occupier property.


I recently looked into getting interest only for a short time from the start of a new mortgage. I was told I had to have level term cover.
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I have queried this with the lender but all they are doing is responding to me with their quotes on what their product costs rather than giving me an indication of what level of cover they require. I have queried it twice now and they are saying it is €x for year 1 and €y for the subsequent years... I tried to contact different people in the institution but all of these queries seem to get diverted to the same person...

My e-mail is down at the min but when it comes back I will retrieve the details of the quote that the lender is giving and post it - maybe that will shine some light on things ?
 
If the lender has given you quotes then you can base your original sum insured, for comparison purposes, on what they are quoting.

Most mortgage protection policies guarantee to repay the mortgage provided interest rates do not exceed 6% (you can elect for a higher rate with some companies). You do not know, therefore, whether there will be a defecit or surplus on the payout of the policy at any particular date in the future.

I would just take a guess at increasing the original sum insured by a couple of % and running with that. I do not have a scientific formula for working out what you need, but you could probably use one of the mortgage calculator sites with particular emphasis on the annual payments(balances) page.
 
gianni said:
this is a owner occupier property.
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OK - so mortgage protection life assurance is mandatory here (with only certain exceptions).
I have queried this with the lender but all they are doing is responding to me with their quotes on what their product costs rather than giving me an indication of what level of cover they require.
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The level of cover that they require is presumably such that the cover at the end of the first year at least covers the loan amount. If this means putting higher than this amount of cover in place from year one to allow for the fact that the first interest only payment year won't reduce the capital outstanding then I can't see the problem with that.
I have queried it twice now and they are saying it is €x for year 1 and €y for the subsequent years... I tried to contact different people in the institution but all of these queries seem to get diverted to the same person...
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Why not threaten (preferably if you could and would actually follow through if necessary) to go to another more cooperative lender if they are messing you around?
 
Why not just TELL them that you want mortgage protection at (say) €400k, okay so first year is interest only so cap outstanding will still be €400k but under the mortgage protection pol the cap reduction is not very fast so there would still be at least €390k cover in place I mean it is not exactly end of world for the bank if something does happen I am sure they can get the missing €10k from sale proceeds of your house.

Sounds to me like the whole thing is being made a hell of a lot more complicated than it needs to be!
 
I would have thought that since the cap depriciation in year 1 was so small that a standard decreasing term policy for the mortgage over the term (disregarding the interest only in year 1) would have sufficed. But on my loan offer there are some 'Special Conditions' which state that I must have adequate cover to take account of the interest only option.

Sounds to me like the whole thing is being made a hell of a lot more complicated than it needs to be!
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Never a truer word spoken!
 
Here's the easiest solution (in my view):

Arrange your own level term cover and forward to lender.
At end of IO period, cancel level term policy (unless you feel you need this type of cover) and switch to basic mortgage protection.

If the bank don't accept level term cover for the amount borrowed, tell them to go to hell and borrow elsewhere-I can't see why they won't.
 
The bank are supposed to make this clear on the loan offer. I've seen quite a lot of loan offers where the circumstances are the same as yours and they require either a level term assurance policy or a mortgage protection policy with 105% cover. I thought this was fairly standard now with the lenders as so many of them are offering interest only for 1 or a few years. Can't understand how they can't give you a straight answer. Can you ask to speak to an undewriter with the lender.

As CCovich said, there is nothing to stop you from effecting a level term assurance policy and when you revert back to capital and interest repayment, effect a mortgage protection policy and cancel the 1st one.
 
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