Life Insurance for Split Mortgages

What is a split mortgage?

Irish banks have offered split mortgages for borrowers who are having difficulty keeping up with the mortgage repayments.

If you can’t afford the full mortgage repayment each month but have the means to make a partial payment, the bank will split your mortgage in two (hence the name). You continue to make payments on one part of the loan (called the active part) while the bank sets aside or “warehouses” the mortgage balance until you’re in a better financial position.

If your bank has offered you a split mortgage, your agreement will contain the following paragraph:

Please note that your existing life assurance policy, should you have one, may need to be amended as it may not cover the extended term (if applicable) of your mortgage or the outstanding balance. We would therefore strongly recommend that you investigate this matter.

So, what does that mean exactly?

Let’s look at a practical example of life insurance cover for split mortgages.

Ann and Barry have a mortgage of €260,000, with eight years remaining.

Their bank has offered the following deal:

• Payback capital on interest on €140,000 over eight years – the active part
• Pause payments on the remaining €120,000 until their financial position improves – the warehoused part.

Why is their existing mortgage protection policy no longer adequate?

You see, the amount of cover on a mortgage protection policy reduces over time. Such a policy will clear the outstanding balance on a capital and interest mortgage. Here’s how the cover on Ann and Barry’s mortgage protection policy will reduce over the next eight years.

• Eight years remaining € 260,000.00 mortgage protection cover
• *5 years remaining € 176,368.91 mortgage protection cover
• Four years remaining € 145,081.70 mortgage protection
• Three years remaining € 111,917.26 mortgage protection
• Two years remaining € 76,762.95 mortgage protection
• One year remaining € 39,499.38 mortgage protection
• 0 years remaining €0.00 mortgage protection

Let’s fast forward three years when five years remain on their policy.

As you can see from the table above, *their mortgage protection is now  €176,000 but the outstanding balance on their mortgage will be roughly €211,000 (€91,000 left on the active account plus €120,000 on the warehoused account).

If either Ann or Barry dies at that stage,  their policy will not clear the full outstanding mortgage.

Even more worryingly, if we fast forward eight years, their mortgage protection policy will have ended, but they will still owe €120,000 on their mortgage. Due to their ages, it may be difficult, if not impossible, to get new life insurance at that stage.

What insurance do they need for a split mortgage?

For the active part, they need mortgage protection of €140,000 over eight years.

For the warehoused part, they need life insurance of €120,000 for at least eight years but really until they will be in a position to clear the mortgage.

What happens when their financial position improves?

The warehoused part will become active at that stage so Ann and Barry can buy a mortgage protection policy to cover the full mortgage.

Over to you…

If your bank has offered you a split mortgage or if you’re moving from a split mortgage back to a normal mortgage and need some help, please get in touch.

Complete this questionnaire or give me a call on 05793 20836, and I can go through your options.

Talk soon!

Nick