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Financial Dictionary - Insurance bundled with the mortgage
Insurance bundled with the mortgage
Insurance bundled with the mortgage relates to those policies that are either compulsory or highly recommended when taking out a mortgage loan.
To address this issue, we will first talk about the Mortgage Law (Ley Hipotecaria), as it has shed some light on the regulation of these loans. Although this regulation does not specifically regulate insurance, it does lay down that you must take out certain products when arranging a mortgage, although the bank's mediation is not obligatory and you can purchase them from another company. In other words, it prohibits selling these insurance policies as a condition for granting the loan, but it does allow the bundled selling of complementary products to lower the interest rate and improve the conditions of the mortgage loan.
Now you know which house you want and how much you need, calculate your mortgage.
That said, when signing a mortgage loan you will have to cover certain risks that guarantee your payment to the bank in the event of certain incidents, for example a fire, or the loan holder dies.
The following types of insurance are mandatory:
- Minimum insurance cover for damage to the property (e.g. fire insurance),
- A policy as a guarantee that the obligations under the mortgage contract will be fulfilled (i.e. payment protection insurance, or life insurance).
In addition, the bank can offer you certain insurance policies and optional products to lower the interest rate of the mortgage. This is called bundled selling (if each product is offered separately), or tied selling (if the products are offered in an indivisible package).
Although the following are not compulsory, these are the types of insurance that are usually included in the bank's proposal in order to offer better conditions:
- Home insurance: in the case of damage insurance, this covers the property's structure or building; and if it is fully comprehensive insurance, this also insures what is inside, in household contents.
- life insurance: this covers the debt in the event of the holder's death, profound disability or permanent incapacity;
- Payment protection insurance: this covers non-payment of instalments if the debtor becomes temporarily disabled or unemployed.
- Other secondary insurance (such as health or car insurance), and other products such as credit cards, pension plans, salary paid directly into your account, etc.
Logically, taking out these types of insurance bundled with a mortgage will have an additional cost, but you will have to do the maths to see if they compensate the loan's lower interest rate overall.