So, you’ve done it.
You’ve crossed that monumental threshold and bought a home. Congratulations! But let’s not pop the champagne just yet.
Owning a home isn’t just about picking out curtains and deciding where the sofa goes; it’s a financial commitment that could last a lifetime—or at least, a good chunk of it.
Now, here’s the question that’s probably lurking in the back of your mind but you’d rather not think about: “What happens to this mortgage if I’m no longer around?”
It’s a bit grim, we know, but it’s a question that needs answering.
So, in this article, we’re going to tackle it head-on. We’ll look at what happens if you, the homeowner, exit stage left without life insurance. We’ll also explore the life cover options that could act as your financial understudy, ensuring the show goes on, even if you can’t be there to take a bow.
Mortgage planning
Owning a home is not just a matter of property; it’s a long-term financial commitment that often spans decades.
While the prospect of homeownership is exciting, it also necessitates careful planning, especially when it comes to your mortgage.
One aspect that often gets overlooked is what happens to the mortgage if you were to pass away unexpectedly?
In this situation, life insurance can act as a safety net, ensuring that your family isn’t burdened with mortgage payments during an already difficult time.
But what if you don’t have life insurance?
What happens to the mortgage?
If you pass away without life insurance, the mortgage still needs to be dealt with.
The full debt will remain in place, with responsibility for the mortgage falling to any joint borrowers or your family.
In the UK, the lender has the right to request the full repayment of the loan upon the borrower’s death. Although this rarely happens as they will be sympathetic to the situation of losing a loved one.
Nevertheless, without life cover the mortgage debt remains and the lender will be expecting their usual monthly repayments.
The financial burden on the family
When a homeowner dies without life insurance, the financial implications can extend far beyond the mortgage itself.
Surviving family members may find themselves in a challenging position, having to manage not only the emotional loss but also a significant financial burden.
If the mortgage isn’t covered by life insurance, options may include:
Continuing Payments: Family members may choose to continue making mortgage payments, but this could strain their finances.
Selling the Property: In some cases, the family may decide to sell the home to pay off the mortgage, but this could be emotionally taxing and may not be feasible in a slow housing market.
Alter the mortgage: Some lenders may allow changes to the mortgage, to make payments more manageable for the surviving family, but this is not guaranteed.
Legal Action: If payments are not made, the lender could initiate repossession proceedings, leading to additional legal and financial complications.
How does life insurance help?
The best way to protect a mortgage in the event of death is by having mortgage life insurance in place.
These policies payout a lump sum of money (the sum assured) when one of the policyholders dies. This money can then be used to repay the mortgage debt and remove the financial burden.
The most commonly used policies are:
Decreasing term insurance
A decreasing term assurance (DTA) policy is a good choice for a repayment mortgage.
The amount you are covered for goes down each year, broadly inline with the balance on a repayment mortgage.
Premiums are fixed and the policy only lasts for a set number of years.
Level term insurance
Level term assurance (LTA) can be used to cover any mortgage type; interest only or a repayment mortgage.
It’s probably most suited to interest only, as the policy cover remains the same each year, like the interest only mortgage balance.
Premiums are fixed and the policy only lasts for a set number of years.
Single life policy
If there’s only a need to cover one person, then this would be a single life policy.
In the event of the policyholders death, the insurance company will pay the money out to their estate.
Alternatively, setting the policy up as ‘life of another’ will enable the money to go straight to another named person, speeding up the claims process.
Joint life policy
If you have a joint mortgage, it’s sensible to have both borrowers covered under a joint policy.
This is a one event policy.
This means that on the death of a borrower, the policy will payout, and then stop.
Is it expensive?
Considering how much money the insurer would need to payout if you did die, term assurance plans are not expensive.
But the cost does need to make sense and be affordable.
There are a few ways to save money with life cover and it’s best to seek some advice and work out which options are suitable.
Some example premiums from Aviva.
| £250,000 | £300,000 | £400,000 | £500,000 | |
|---|---|---|---|---|
| Age 25 | £8.50pm | £9.60pm | £11.80pm | £14.00pm |
| Age 35 | £12.20pm | £13.99pm | £17.57pm | £21.16pm |
| Age 45 | £24.78pm | £28.97pm | £37.33pm | £45.70pm |
These premiums are for illustration purposes only. Cover shown is a decreasing term insurance, over 25 years. Male, non-smoker. Correct as at September 2023.
Can you add life insurance to your mortgage?
Taking out a mortgage involves lots of options and choices.
In this article, we’ll explore this topic in detail, examining whether it’s possible to add life insurance to a mortgage, the pros and cons, and alternative options you might consider.
Does everyone need life insurance?
This is a great question, with a very short answer.
It depends.
In cases involving a mortgage, we would suggest that the need for life cover should always be discussed.
If it’s a joint mortgage, and there are children or dependants at the property, then we believe life cover is important.
A single person, with no dependants, would rarely need life cover, but they may choose to take it so their family are not burdened with sorting the mortgage out.
Do you need life insurance to get a mortgage? No, lenders are not allowed to make it a condition for approving a mortgage. You can read our full article here.
Options for the mortgage
We have mainly focused on the life cover options when a borrower dies. Here’s what is needed for the mortgage side.
Single borrower
The monthly mortgage payments still need to be paid.
Without life cover the most likely outcome is that the property is sold and the sales proceeds used to settle the debt.
Money will be needed to pay the mortgage in the meantime.
Joint borrower
When one borrower dies, then the full responsibility of the mortgage is passed to the surviving borrower.
They will need to make the monthly payments, and eventually arrange for the debt to be fully repaid.
Losing one income is likely to put a huge strain on the household finances.
Buy to let
Who needs life cover for a buy to let? Well ‘need’ is a relative thing.
If a family member dies and gifts you an investment property, aka buy to let, then you will also inherit any mortgage associated with the property.
Yay!
Single borrower, joint household
This is a tricky one. As there is only one borrower, the mortgage company doesn’t automatically have someone to take over the loan.
Having a will in place can mean that the surviving partner can continue living in the property. However, they will need to apply to take over the mortgage and will have to pass the affordability tests etc. Very much like a transfer of equity.
Contact the lender
Even if you don’t have all of the facts to hand, when a mortgage borrower dies it is important to contact the lender as soon as possible.
By doing this you will have some extra time to gather up all of the necessary information and then see if there are any life policies to claim on.
Lenders will have processes for when a borrower passes away. One part will be to show some leniency to the timing of monthly repayments and then chasing any arrears.
Sole name
What happens
We’ll cancel any direct debits paying the mortgage. We don’t expect the monthly payments to be made at this time This means the mortgage will fall into arrears. We are required by the Financial
Conduct Authority to write and tell you. You don’t need to take any action when you get these letters
Making payments
Mortgage payments will remain due. However, we don’t expect you to make them for up to 18 months from the date the person died to allow you time to get probate. Please note, the amount owed will increase
If you wish to still make mortgage payments while probate is obtained, this can be arranged.
Mortgage options
Once probate is in place, you have the option to pay the mortgage off.
Joint names
What happens
If the mortgage is held in joint names, the monthly payments will continue.
If the person left on the account needs to change or discuss the monthly payments, speak to one of our Advisers
Usually the mortgage will transfer to the name of the remaining owner. Sometimes this is more complicated, if so, we’ll advise you on the next steps
Making payments
Mortgage payments remain due. But we appreciate some people find it hard to keep payments up to date, while trying to look after the estate. If payments aren’t made, the account will fall into arrears and the amount owed will increase. This could affect your credit rating. We’ll let you know if your account is in arrears
If you’re struggling to pay it’s really important you speak to one of our Advisers
Mortgage options
You have the option to pay the mortgage off or you may wish to take out a new mortgage.
