Insurance linked to mortgages: Are they compulsory? Are they legal? Are they worth it?

Solicitor in la Axarquía

Insurance linked to mortgages: Are they compulsory? Are they legal? Are they worth it?

We do not find in our daily practice, when we review the deeds of mortgages and other loans of our clients, that many of them did not only contract the loan in question with the Bank at the time. In the “take out a mortgage” package, as an extra, one or more insurance contracts are usually included, usually signed on the same day as the loan, or in the days immediately preceding and following it.

The company that sells us these insurances is not the Bank itself, as it is not authorised to do so, in the same way that an insurance company cannot grant us a loan. Despite this, the name and shareholding of the two companies, the one that gives us the money and the one that insures the house, can be strikingly similar. Using fictitious names as an example, We took out a mortgage with Banco Fresh Money S. A., and on the same day we signed a life insurance policy with Banco Fresh Money Seguros S. A. U. In many cases, this insurance company is a public limited company, whose sole or majority shareholder is the Bank itself. It may also be that the name of the insurer has nothing to do with the name of the Bank, but in any case, if a financial institution makes an effort to sell us insurance from a third company, it is only logical that there are commercial interests, of whatever kind, between the two companies.

What is really important and should be emphasised is that, contrary to what the bankers tell us at the branch when we are taking out the loan, it is not compulsory to take out insurance for the loan to be approved. And, in most cases, we will not be compensated for the reduction in the interest rate offered by taking out their insurance, as the price of the insurance will far exceed this reduction.

And yes, we have all heard that fire insurance is compulsory, that it is by law. But the truth is that this rule contained in the mortgage regulation (1), no es aplicable a los clientes (salvo, claro está, porque se obligan por contrato con el Banco a tener seguro contra incendios), sino solo a aquellas entidades financieras que quieran operar en el mercado hipotecario emitiendo bonos o cédulas. In other words, if the Bank wants to take our mortgage and negotiate with it with third party companies, in a different market from the one in which we as consumers operate and which escapes us, in this case the regulations stipulate that the mortgaged property must have damage insurance that covers the appraised value, and the Bank must also be the beneficiary of this insurance, even if it is taken out by the client on his or her own property. The same applies to the well-known prohibition on lending less than 80% of the appraised value. This is, as in the previous case, a requirement that mortgage regulations impose on financial institutions to issue securities in the mortgage market, i.e. again, taking our mortgages and chopping them up or making packages with them to negotiate and make profit with third companies in the financial sector, but it is by no means something imposed for all cases and “by law”.

While it is true that, in principle, the banks are free, based on their “risk” criteria, to grant or not to grant us financing, or to make the money cheaper or more expensive, it is also true that the banks are not free to grant or not to grant us financing, or to make the money cheaper or more expensive.There are a large number of banks that we can go to in order to compare the conditions that they all offer us and to be able to choose the most convenient one. In this, as in so many other matters that affect consumers, information and the possibility of comparing offers from different institutions will be our only strong point in the negotiation and the one that can save us a significant amount of money over the years.

As published by elEconomista.es, based on data from the web comparator kelisto.com, (https://www.eleconomista.es/empresas-finanzas/noticias/8841888/01/18/Adios-a-los-seguros-vinculados-a-las-hipotecas-con-la-nueva-ley.html), the fact of not taking out the linked products offered when taking out a mortgage can mean that we pay an average of 700 € more per year in interest on the loan. These linked products include not only insurance, but also pension plans, direct deposit of salary, minimum use of credit cards, etcetera. In many cases, these products form packages, so that, for example, it is useless to have your salary paid directly into your bank account and to have a credit card with them if you do not also take out home insurance from your friend’s company, because otherwise you will not have the full package that allows you to receive the bonus. In the same way, each insurance policy may, for example, reduce the interest rate by 0.5 %, but the maximum reduction allowed is 1.0 %. In the latter case, it will be the same for the purposes of the reduction in what we pay for the loan, to have 2 or 10 insurance policies taken out with the Bank’s insurance company.

The first question to ask is whether we really want the insurance that is being offered or imposed on us in order to access the loan. Take life, health or home insurance, for example. Do we want it? Do we need it? Don’t we have another insurance policy that is valid for the same thing? If the answer is that we do not see why we would want or need such insurance, the best thing to do is not to take them out or to cancel them as soon as we can, as generally the sum of their premiums will exceed the 700 average mortgage rebate per year. If we are interested in having these insurances in force, the question is whether it is profitable to have them with the Bank’s“friendly” insurer, or whether it would be better to have them with an insurer of our choice. In this case, it is best to go to an independent insurance broker, as they will most likely be able to get you the same insurance at a cheaper price, with the same or better cover and in a way that will still compensate you for the mortgage increase.

In any case, whether we have taken out the mortgage years ago or we are about to take it out now,it is essential to have an expert lawyer who, by analysing our specific case, will advise us on the best option for us. In our professional practice we have encountered everything. From people who do not even know that they took out insurance at the time, to others who do know, but believed that it was compulsory; to those who were told that the loan would be cheaper with insurance when the contract did not even include a bonus for taking out insurance; and even those to whom the bank left money within the mortgage loan to buy not only their house, but also to buy from their company friend the insurance that they had been told was compulsory.

Of course, there are also cases where insurance is convenient and provides a reasonable and competitive discount on what we pay for the money we borrow. Hence the importance of having an independent advisor to advise us and make us see what our case is and what our options are.

*Art. 8 of Law 2/1981 of 25 March 1981; and art. 10.1 of Royal Decree 716/2009 of 24 April 2009.

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