Interest-only mortgages put insurance in doubt
Published 12/04/2011 | 05:00
UP to 50,000 mortgage holders who have been forced to switch to paying the interest only on their mortgages were warned yesterday that they may need to change their mortgage protection insurance.
If they do not, their mortgage may not be properly insured if they die and a claim is made, Caledonian Life said.
Mortgage protection is a form of life insurance that pays off your mortgage if you die.
Most people opt for a form of mortgage protection cover that reduces over time, as the amount you owe on your mortgage goes down. This is called "reducing term cover", and is the most common and the cheapest form of life cover.
People with this cover who are now only paying the interest on their mortgage may find that the amount of mortgage protection cover they have is falling every month.
But the size of their mortgage will no longer be falling if they have switched to paying the interest only and not the capital. Thousands of people are paying the interest only on their mortgages, according to the Central Bank.
Many homeowners struggling with repayments have been forced to switch to interest only on their mortgage in an effort to make ends meet.
Paying the interest only can see monthly repayments for someone with a €300,000 mortgage fall by €1,000 a month.
Greg Dyer, of life assurance company Caledonian Life, said homeowners who are now only paying the interest on their mortgages need to have a form of mortgage protection called "level-term". This is a more expensive type of mortgage protection policy but it gives the same amount of life cover throughout the mortgage term.
It is usually used for an interest-only mortgage or an endowment mortgage, where the original mortgage amount is still owed until the end of the mortgage term.
Mr Dyer warned: "A level-term policy is for a set amount of cover and unlike regular mortgage protection cover, doesn't decrease when capital payments on your mortgage have been suspended.
"With sufficient level-term cover in place, an interest-only mortgage will be cleared should you die.
"Not a thought anyone likes to dwell on, but one that we need to be aware of to ensure our loved ones are financially protected."
He explained that if a person bought a house with a mortgage of €300,000 in 2007 but switched to interest-only terms in 2008, the deficit between the sum insured on their mortgage protection cover and the amount outstanding on the mortgage could be as much as €27,522. If the mortgage holder were to die the lender would not be satisfied with a shortfall of tens of thousands of euro that is still owed on the mortgage.