A mortgage indemnity policy provides insurance for the lender, but is paid for by the borrower. It provides protection for the lender in the event it makes a loss following possession because the proceeds of sale are less than the outstanding mortgage debt.
The lender’s risk is clearly greater where the amount borrowed represents a higher proportion of the property value. The typical benchmark in recent years above which most lenders will charge an indemnity premium has been 75% loan to value (LTV). Competitive pressures in the mortgage market more recently have led many lenders to adjust their position on mortgage indemnity.
Some have simply increased the threshold to 80% or 85% LTV before charging a premium, while others have raised the threshold even higher to 90% or 95% LTV, but have calculated the charge from 75% LTV. Where a premium is charged, this can usually be added to the mortgage loan at the outset, rather than having to be paid at completion. This gives the benefit of reduced outgoings initially, although interest will be charged on any amount added to the loan.
Other lenders have completely removed the cost of an indemnity premium, either by putting in place the cover but then paying the premium themselves, or by simply choosing not to cover the risk and effectively self-insuring.
An important point is that wherever a lender’s claim is paid by the insurer following a loss on sale, the borrower is liable to be pursued by the insurer for the amount of the claim. This is known as the insurer’s ‘right of subrogation’ and applies whether or not the borrower has paid a premium. Only where the lender is self-insuring will this right not apply because there is no insurance cover in the first place.
In the early 1990s, there were many instances of lenders’ losses being paid by insurers and borrowers being pursued for the amount of the claim. In the current climate it would be easy to think the need for MIG has gone away, but we should not forget the lessons of the past and clients should fully understand the implications of mortgage indemnity.