Mortgage Indemnity Protection/Guarantee

Overview

Mortgage indemnity protection, also known as mortgage guarantee insurance, is a policy that safeguards a mortgage lender against financial loss if a borrower defaults on their loan. This type of insurance is particularly common when a borrower has a low deposit or a high loan-to-value (LTV) ratio.

Key Concepts

The core idea behind mortgage indemnity protection is risk mitigation for the lender. Key aspects include:

• Lender Protection: It covers potential shortfalls if the property is repossessed and sold for less than the outstanding mortgage balance.
• Borrower Payment: While it benefits the lender, the cost of the policy is usually borne by the borrower, either as a lump sum or spread over the mortgage term.
• High LTV Loans: It’s often a requirement for mortgages where the loan amount exceeds a certain percentage of the property’s value (e.g., 75-80%).

Deep Dive

Historically, this insurance was more prevalent. However, changes in lending practices and the introduction of government-backed schemes have altered its landscape. The policy essentially provides a financial backstop, making lenders more willing to approve loans with higher risk profiles.

Applications

This protection is most frequently applied in scenarios such as:

• First-time buyers with small deposits.
• Borrowers seeking mortgages with low equity.
• Situations where standard lending criteria might otherwise prevent loan approval.

Challenges & Misconceptions

A common misconception is that this insurance protects the borrower. It does not cover the borrower’s risk of default; it protects the lender. While it facilitates borrowing for some, borrowers should be aware of the additional cost.

FAQs

Q: Does mortgage indemnity protect me as the borrower?
A: No, it protects the lender.

Q: Who pays for it?
A: Typically, the borrower pays.

Q: When is it usually required?
A: For high loan-to-value mortgages.