Why mortgage insurance is a must have

There is a popular quote by American musician Tom Waits which has become common in contractual lingo that goes: “The big print giveth and the small print taketh away.”

An article in a local daily recently suggested that up to 20 per cent of houses whose owners are servicing mortgages are not insured. The article attributed this to the failure by customers to renew the original policies written at the time of taking the mortgage facility.

This is surprising because in my many years in the mortgage space, it has always been mandatory that at the time a customer is signing on the dotted line of their mortgage documents, insurance is a crucial component of it.

There is reason for the industry to not only to be concerned but also act to avert a potential crisis in future, if not for anything else, to uphold the integrity of the mortgage market. 

The three common types of mortgage insurance covers are mortgage protection insurance, fire and perils insurance and retrenchment insurance cover.

The mortgage protection insurance covers death and permanent disability. This applies when someone passes on during the duration of the mortgage. The insurance company is obliged to pay up the outstanding mortgage balance, with the title deed being passed on to the next of kin.

The second type of mortgage insurance covers the building and provides that if anything were to happen to the structure due to perils such as fire, earthquake or floods, then the risks are covered.

The retrenchment cover, perhaps the most popular, means that the insurance company will continue servicing the mortgage premiums for the next six months after one loses their job as a result of normal retrenchment procedures like redundancy. The cover does not, however, apply when one is laid off due to indiscipline or delinquency.

While some financiers may have different grace periods, the thinking behind the six-months is that it is time enough to accord one the necessary mental capacity to readjust their life by, for instance, starting an income-generating activity from their gratuity payment or accumulated pension savings, or even disposing of the property for a profit.

Both the mortgage protection and home owners’ insurance covers are mandatory at the time of taking a mortgage. After the mortgage is fully paid off, it’s incumbent upon the borrower to continue covering their house.

The repercussions for failure to renew your insurance policy on your mortgage are grave. In case of sudden death, for instance, the next of kin would be required to take over the burden of servicing this mortgage, regardless of whether they are capable to do it or not, exposing them to the risk of losing the property altogether.

The writer, George Laboso, is the Head of Mortgage at Barclays Kenya