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Having taken out a mortgage on an apartment, the borrower must be aware that over the course of 15-20 years he will have to pay certain amounts to the bank. And the loss of work, health and other circumstances that may lead to insolvency will not matter.
Many people perceive the insurance that the bank requires as an increase in the cost of the loan, without thinking about what it actually is protection. And not so much the interests of the bank, but the borrower himself .
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What is mortgage insurance?
When issuing a long-term loan for the purchase of real estate against its collateral (mortgage), banks require this property to be insured.
Moreover, not only the collateral itself.
In order to minimize its own risks, the bank expresses a wish to insure life and health, as well as the risk of loss of ownership of the pledged property (title insurance).
At the time of the birth of mortgage lending in our country, insurers developed a comprehensive product that included: property insurance (which includes title insurance) and life insurance .
Insurance companies now offer comprehensive mortgage insurance, which includes all three types of insurance required by banks.
The property is insured against all risks , including a terrorist attack, which is not included in the list of insured events in a regular contract.
Apartment mortgage insurance does not apply to the insured's household property unless he/she has included it voluntarily.
Life insurance includes the risk of death from any cause and disability of groups 1 and 2 as a result of an accident.
Some companies include the risk of temporary partial disability.
The title provides insurance for loss of property rights as a result of various encumbrances (unaccounted heirs, incapacity of the former owner, seizure of property, etc.)
Title insurance applies only to secondary homes.
2 whole years
I decided to touch on this topic after the completion of my last case on recognizing the death of the insured person as an insured event with the payment of the corresponding insurance compensation. The case lasted 2 years from the date of notification to the insurance company of the occurrence of the insured event.
For 2 whole years, the relatives of the insured person were in the dark about what to do: continue to pay the mortgage, taking into account accrued overdue interest and penalties, or the court will decide to recognize the death of the insured person as an insured event - and the insurance company will pay compensation, i.e. will fully repay all debt to the bank. Before the death of the insured person, the mortgage payment period was exactly 10 years, and it was necessary to pay it for another 10 years.
For all 10 years, the borrower regularly paid 15,000 rubles monthly for the mortgage and 50,000 times a year as an insurance premium (life insurance and real estate insurance). Thus, the borrower’s insurance costs over 10 years amounted to 500,000 rubles, or ¼ of the value of the property. The purchased apartment cost 2 million rubles. The initial payment was 500,000 rubles.
In this case, the costs of life insurance were justified, but the insurance company voluntarily refused to recognize the case as insurable, and it took 2 years and 4 forensic examinations and a huge number of court hearings to prove that the case was valid.
The legal costs of the relatives amounted to 300,000 rubles, which were satisfied by the court in full (mainly the costs of forensic examinations) without taking into account the costs of the services of a representative. And if the relatives did not sue the insurance company, they would have to pay the mortgage from their own funds or sell the apartment for next to nothing, or completely abandon the entire inheritance.
What is required to be insured?
Article 31 of the Federal Law “On Mortgages (Pledge of Real Estate)” obliges the borrower to insure the pledged property.
And it's all.
Only insurance of the mortgaged apartment is mandatory for a mortgage. By law, the bank cannot require life and health insurance for the borrower and co-borrower, if any. So does title insurance .
Loans will become more expensive
The Association of Russian Banks criticized the idea of a regulator. Financial organizations believe that insurance costs will in any case be passed on to clients. As a result, loan rates may increase by 0.5-1%. In addition, banks will have to “spread” life and health insurance for debtors from risk groups to high-quality borrowers.
According to Pavel Gagarin, a member of the General Council of the public organization “Business Russia” , our loans will not become cheaper under any circumstances. “Nothing is getting cheaper here at all. Even after the key rate was lowered, loans, especially consumer loans, did not become cheaper. But here it is possible that when concluding new mortgage agreements or when refinancing old ones, banks or mortgage agents will be charged with insuring the property that is pledged under the mortgage. Naturally, if the bank does this, then it will shift these costs onto the client, and will include not only the objective cost of insurance, but also the preparation of relevant documents, etc.,” the expert argues.
If this is handled by a mortgage agent who works for a bank, the financial institution can easily include insurance services in the total cost. “And if this service is added to the body of the mortgage loan, then, accordingly, the calculation base for interest will be higher. Or the bank will not charge money for this service, but will simply increase the interest rate. Apparently, insignificantly, maybe 0.5-1% per annum. But the fact that there will be an increase, not a decrease, is quite obvious. In any case, the costs will be borne by the client. The bank will take the cost of insurance and the cost of all services for registration and, most likely, will include this in interest, which in any case will more than cover all the real costs of a financial institution for obtaining this insurance,” Gagarin emphasizes.
What to do if the bank does not reduce the mortgage rate?
In turn, the chairman of the construction committee of Business Russia, Vladimir Koshelev, does not rule out that shifting the costs of mortgage insurance to banks could worsen the competitive environment in the insurance industry, because the bulk of the mortgage insurance portfolio will go to organizations affiliated with financial institutions.
“It is inevitable that the interest rate on the loan will increase in order to compensate for insurance costs and, therefore, reduce the availability of mortgages as a social project for the general population,” he adds.
The insured amount is equal to the loan amount increased by 10%.
If the loan is issued in the amount of 1,000,000 rubles, then the insured amount will be equal to 1,100,000.
The borrower can take out insurance for the loan amount or for the full cost of the apartment.
The bank will claim to pay only that part that is equal to the mortgage debt. The rest will be received by the policyholder upon the occurrence of an insured event.
As the loan is repaid, the insured amount will decrease.
The disadvantage of incomplete insurance (when the insured amount is less than the actual value of the home) is that this amount may not be enough to cover the damage.
If you want to find out where and how you can get a mortgage with government support, we advise you to read the article.
When concluding an agreement, a schedule for payment of insurance premiums is drawn up, which is subject to agreement with the bank. Payment is made once a year, on the date indicated in the schedule .
Failure to pay the fee will result in the contract being terminated for the duration of the delay. The policyholder has the right to apply to the insurer to postpone the payment of the next premium. An additional agreement is drawn up and the bank is notified about it.
The first installment can be paid in installments, but only with the written permission of the bank. Banks provide this opportunity in exceptional cases.
As the sum insured decreases, the annual insurance fee also decreases..
The average tariff rate for property insurance starts from 0.1%, for life insurance from 0.15%, and for title from 0.2%.
How to calculate the insurance amount yourself
The size of the insurance payment is directly influenced by the amount insured - it must be multiplied by the tariff for using borrowed money in order to ultimately find out how much you will have to pay for a year of insurance protection.
The sum insured consists of two components:
- the balance of the loan body as of the date of conclusion of the agreement;
- interest per year of using the loan.
It’s easy to calculate mortgage life insurance on your own. For example, a borrower took out a mortgage for 1.5 million rubles at 13% per annum. Its insurance amount for 1 year of loan servicing will be: 1.5 million rubles + 1.5 million rubles. X 13% = 1.695 million rubles.
Let’s say that in a year the debtor partially repays the loan up to 1.3 million rubles, then for the next period he will need to extend the contract for a smaller insured amount - 1.469 million rubles. This means that the amount of the insurance payment will also decrease.
What influences the tariff?
The rate for title insurance depends on how many transactions with the apartment were made for its purchase and sale. If the apartment belonged to only one owner, the tariff may be equal to the base rate.
The insurance company independently sets the cost of life insurance for the mortgage.
The life insurance rate for a mortgage depends on age, profession, hobbies and health status.
In the medical questionnaire, the policyholder needs to answer a number of questions regarding his state of health and lifestyle (bad habits).
For men the basic tariff rate is higher than for women.
The rate will change over the years - the older the insured person, the higher the rate.
The first question in the questionnaire is the height and weight of the person being accepted for insurance. If the ratio is violated (high weight with short stature, or vice versa, too low weight), the tariff will be increased.
Moreover, the insurer has the right to require a medical examination . Each company has a list of diseases for which it does not accept insurance.
False information provided in the form will result in refusal to pay insurance coverage and termination of the insurance contract.
In property insurance, payment can be made only by agreement with the bank.
The actions of the policyholder do not differ from the standard ones prescribed in the rules. Before deciding on payment and its amount, the insurance company coordinates this issue with the bank.
According to the law, only the owner or a person having an insurable interest can be a beneficiary (Chapter 48, Article 930 of the Civil Code of the Russian Federation).
In our case, in terms of debt, the bank becomes the beneficiary of the loan, but only in case of total damage.
If the damage is partial, the owner of the apartment will receive payment. These conditions must be specified in the policy.
Read the article about what an encumbrance on an apartment is and what its features are here.
Recalculation in case of early partial repayment of the loan
Often a mortgage is taken out with the participation of maternity capital. With its help, part of the loan is repaid.
Accordingly, the loan amount is reduced and on the date of the next payment, the payment schedule for insurance premiums must be revised .
A new loan repayment schedule is submitted to the insurance company, on the basis of which recalculation is made.
If there are several such early repayments throughout the entire mortgage loan insurance period, you need to contact the insurer each time
Who needs insurance and why?
The bank tries to protect itself from the risk of loan non-repayment.
A borrower who finds himself in credit bondage for a long period cannot foresee all possible adverse events.
In the event of his death, the obligation to repay the loan will fall on his heirs.
When concluding an insurance contract, the insurance company will repay the loan.
When purchasing an apartment on the secondary housing market that has been in transactions several times, there is a risk of losing it as a result of various encumbrances.
Insufficient verification of the purity of the transaction can overnight deprive you of housing, for which you still have to pay and pay the bank.
For a small fee (compared to potential losses), you can protect yourself from all possible risks associated with loss of property, life and health.
Choosing an insurance company
Now there is no such thing as accreditation of an insurance company with banks, but there is a list of requirements for them.
As a rule, the bank “unobtrusively” offers a list of insurance companies with which it cooperates . The secret is simple - the bank, as an agent, receives a commission for each insurance contract concluded.
If the borrower has a valid life insurance contract, the bank, when issuing a mortgage, does not have the right to require the conclusion of another one from “its” insurance company.
You can find a bank where such a policy will be accepted unquestioningly. In this case, it is necessary to draw up an additional agreement with the insurer on introducing a new beneficiary into the contract - the bank - in terms of the loan debt.
You may be interested in an article about what mortgage refinancing is; you can read about it here.
Which policy can you cancel in the second year?
Since life and health insurance, transactions, as well as protection against the inability to continue repaying the loan due to job loss are voluntary, the borrower must renew it every year solely voluntarily.
You can refuse the above types of insurance in the second, third and subsequent years.
However, refusal is not always without consequences.
Art. 958 of the Civil Code of the Russian Federation establishes that the policyholder may cancel the insurance contract at any time.
Banks do not benefit from the borrower's lack of insurance. Therefore, they are developing various wordings in contracts, as well as schemes of tripartite agreements that minimize the possible refusal of insurance.
There are two extremely common ways to counter refusal to renew insurance every year:
- Increasing the interest rate on the loan.
- Conclusion of a collective insurance agreement with installment payment.
Who is entitled to return mortgage insurance and under what conditions?
Increase in interest rate
When concluding an agreement, the borrower is offered two options to choose from:
- lower interest rate on the loan, but with life insurance;
- without life insurance, but the loan rate is 1-2% higher.
Consequently, if you cancel life insurance for the second or every subsequent year, the bank increases the interest rate on the loan and the monthly payment increases.
What is more profitable: with or without insurance? ►►
Another banking loophole.
A collective agreement is an agreement between the bank and the insurance company, as well as the borrowers. In the case of a collective agreement, the borrower is not the policyholder. It “connects to the program” of the bank and insurance company.
It is very difficult to get insurance back under a collective agreement. It is almost impossible to cancel an installment plan agreement.
Let's compare the mortgage insurance rate and the increased loan percentage when canceling the policy