A mortgage for most, especially young Poles is the only way to finance their own apartment. At the same time, banks are increasingly willing to offer loans on increasingly better terms. However, to “compensate” for lower interest rates or no commission, financial institutions offer a range of additional products for each loan, including mortgage insurance. In most cases, consumers base their knowledge of credit options only on information received from advisers working in banks, who are in fact sellers and they want the customer to take advantage of the insurance offered.
On many occasions, banks make it possible to offer preferential terms to customers due to the conclusion of a credit insurance contract. On the one hand, this can be understandable, since granting a mortgage for a bank involves a high risk, so any additional insurance for such an obligation reduces the risk of its non-repayment.
On the other hand, however, such a non-programmatic obligation for the borrower may have an impact on his possible future insolvency. Is insurance of the loan taken out obligatory? What exactly should it serve? And most importantly, is it worth it to the consumer at all? We will answer these questions in this article.
What is credit insurance and why is it used?
Credit insurance is a combination of insurance and banking services. It is to help repay the loan installments in the event of an unexpected random event specified in the contract or damage to the purchased property. Simply put, the insurance contract obliges the insurer to repay the loan installments in the event that the customer who has taken out the loan loses the ability to pay them back. Currently discussed collateral is the form most often used by banks. It replaced the old collateral from bills of exchange, movable pledges or sureties – of Jews.
The purpose of mortgage insurance is to protect the interests of both borrowers and (mainly) lenders, i.e. banks. Thanks to this additional insurance, the bank can be sure that the commitment undertaken by the customer will be met. Due to the fact that such insurance services are combined services, most types of mortgage insurance require an assignment to the bank. Which means that the lender is entitled to receive the benefit from the insurance contract.
Is insurance mandatory?
In recent years, the mortgage contract has its own legal act, i.e. this type of loan is regulated in detail and comprehensively by the Mortgage Loan Act and the supervision of mortgage brokers and agents (hereinafter referred to as the Mortgage Loan Act).
At the outset, it should be emphasized that the above law prohibits banks from making tying, and thus prohibits making the granting of credit conditional on the purchase of another financial product by the consumer. The lender may not make the conclusion of a mortgage contract conditional on the purchase of another financial product by the consumer. However, the lender is already allowed to offer more favorable credit terms if the consumer buys another of his financial products.
Exceptions have been made to the above prohibition, in addition to the right to require the borrower to set up a free payment or savings and settlement account, it is possible for banks to require certain types of insurance contracts.
In accordance with art. 9 item 2 and paragraph 3 of the mortgage contract, the lender may require the customer to conclude or have an insurance contract regarding the mortgage contract or transfer of receivables from this insurance contract to the lender.
At the same time, banks were obliged to inform the consumer about the possibility of choosing the offer of any insurer, corresponding to the minimum scope of insurance accepted by the lender. This means that the borrower has been free to choose insurance from the lender himself or any other insurance company.
Initially, the draft mortgage bill provided that lenders would only be entitled to require an insurance policy against fire and other random events involving real estate or loan collateral. Unfortunately, the law that entered into force changed this provision.
At present, the lender may require a “mortgage contract insurance contract”. This concept is not sharp and very broad. As a result, in practice, banks were given the option of imposing on borrowers the obligation to insure themselves against a number of circumstances.
This can be both property insurance against fire and other fortuitous events, life insurance, against job loss, low contribution insurance, and bridging insurance until a mortgage is established. Throughout the period since the entry into force of the Act, case law has come to the view that all these types of insurance are in practice allowed.
The so-called. bundled agreements that combine loan agreements with insurance contracts are called bancassurance. Banks will not always require this type of collateral, as it should be remembered that the very idea of a mortgage is to secure the bank on real estate purchased from borrowers money. If the loan installments are not repaid, the lender has the right to satisfy the client’s property.
However, even if the bank does not make the granting of the loan conditional on the conclusion of an insurance contract, it may make the favorable terms of granting the loan conditional upon it being decided on a policy. Usually, in such cases, an additional charge is still better for the customer than incurring a loan commitment on “standard” terms.
Types of credit insurance
The most common types of insurance required by lenders are:
life insurance, against job loss and accident – these types of insurance are usually required from clients who have unsafe or insecure work or their earnings are not stable, e.g. dependent on sales results. In addition, life insurance often depends also on the age of the borrower, e.g. in the case of pensioners;
fire, water and random events insurance – this insurance is required at all times to pay off the mortgage. Protection with this policy is broad and in its basic scope can cover even over 30 different risks. The sum insured is of course determined individually for each subject of insurance and constitutes the upper limit of the insurer’s liability subject to liability limits. The average cost of the basic policy fluctuates within 0.08% of the property value per year, with additional protection the cost of insurance increases;
insurance of low own contribution – this insurance is usually required from borrowers who have less than 20% of their own contribution. If they do not operate such amounts, the bank obliges borrowers to conclude this policy. As a result, the insurer assumes responsibility for the 20% of the customer’s debt. Premiums for such insurance amount to approximately 1.5–3% of the unpaid contribution and are calculated in advance for 3 years. Currently, banks are increasingly less likely to decide on this type of policy, because after the “franc scandal”, financial institutions were flooded with lawsuits from dissatisfied clients who believe that this type of policy does not fulfill the function of insurance – despite the fact that the client pays premiums, the bank is the insured and beneficiary. He is a party to the contract because he collects the benefits of protection, so why should the creditor pay the premiums ?;
bridging insurance – this is a type of temporary insurance. Its task is to protect the bank until the mortgage on the purchased property is established. After settling the formalities related to the land and mortgage register, the bank reimburses the cost of insurance to borrowers. By its nature, this insurance is the most expensive if the purchased property is still under construction.
Cancellation of credit insurance – is it possible?
As a rule, after signing the mortgage contract nothing prevents you from terminating your insurance contract. This can be done at any time. Unfortunately, such a resignation may have a negative impact on the costs of the contract. Before making a decision, you should first read the signed contract, the regulations of the bank and insurance companies, as well as the General Terms and Conditions of Insurance.
It is important to carefully calculate whether such a resignation pays off at all, as it may involve an increase in the margin or the interest rate on the loan. The use of insurance can effectively reduce the amount of the monthly loan installment, and additionally provide security in the event of an unexpected accident.
Mortgage insurance – summary
As mentioned earlier, banks often encourage us to conclude an insurance contract by offering preferential, even “promotional” terms of concluding a mortgage contract. The attractiveness of the mortgage can be externalized by lowering the interest rate, margin and commission.
Therefore, the discussed credit insurance can be a way for the bank to offset the discounts granted to the client. Often insurance can be risky and its conditions make it impossible to use the policy in the event of an accident. Of course, there are many insurance products that really guarantee protection, but at these prices are much higher.
It all depends on the individual preferences and characteristics of the borrower. Fortunately, the market offers a lot of various policies and there is plenty to choose from. Whether we decide to take out insurance or not, the most important thing is that each decision taken is preceded by a thorough familiarization with the terms of the contract or consultation with a financial advisor.