Real estate credit: beware of the weight of borrower insurance

Posted Apr 11, 2022, 7:45 AMUpdated on Apr 11, 2022 at 2:09 PM

The cost of a loan is made up of two variables: the interest rate and that of the borrower’s insurance. If the loan applicant generally thinks only of getting the best rate, he is sometimes less careful about the cost of borrower insurance. However, there is on this item of expenditure, the means to achieve substantial savings.

Usefulness

In the event of a mortgage, it is advisable to take out borrower insurance. This coverage covers the monthly payments in the event of work stoppage and disability (temporary or permanent) of the borrower. And in the event of death, this insurance pays the capital remaining due, so the living co-borrower and/or the heirs no longer owe the bank anything.

Namely: when you borrow two, you can choose to insure 100% on each head. Thus the coverage will compensate the entire monthly payment of the current credit. As a measure of economy or inequality of income within the couple, it is possible to opt for different quotas either 50%-50% on each head or 70%-30%. In the first case, in the event of health problems, only half of the monthly payment will be covered by the insurer.

The fact remains that this insurance weighs heavily in a budget. The reason ? It is paid each month for the duration of the loan, and its cost is fixed because it is often calculated on the basis of the capital borrowed. In the end, this expense sometimes represents half or more of the total cost of credit.

Paying attention to this recurring expense is all the more important as it is now included in the calculation of the debt ratio that the banks scrupulously watch. Because today to get the green light from a lending institution, this ratio must not exceed 35%, including the cost of borrower insurance.

Concern of the moment: an “out of the ordinary” insurance rate (which applies to people over 50, people with a health problem or practicing a risky profession), added to rising interest rates, contributes to increase the Annual Percentage Rate (APR). These cumulative effects inflate the APR, making it higher than the usury rate which has not yet integrated the rise in rates (in the 2nd quarter of 2022, it stood at 2.43% for a loan between 10 and less than 20 years and at 2.40% for a loan of 20 years or more). In this case, financing becomes impossible.

In addition to age, the amount of the premium is determined on the basis of the state of health of the future borrower who must generally answer a medical questionnaire. Based on these answers, the insurer can request additional medical examinations in order to better analyze the risk and calculate the premium.

New: from June, the health questionnaire no longer exists for insurance linked to a loan of less than €200,000 provided that the borrower finishes repaying before his 60th birthday. This simplification of formality will allow everyone to have automatic and faster access to coverage.

Two Versions

The insurance rate is determined on the basis of a scale which crosses the age, the sex of the borrower, his state of health and the fact that he is a smoker (or not). The general rule is simple and unstoppable: the older you get, the more the prices increase. According to the broker Magnolia: the average rate is 0.36% for a person aged 35, 0.40% at 40, 0.45% at 50, etc.

This insurance comes in two versions. First, there is group insurance, systematically offered by the lending bank. This solution is the most common (80% of credit insurance) because it is the simplest and fastest to set up. But it is also possible to look elsewhere. “This consists of taking out “individual insurance” with an external insurer, in other words one that is not within the bank’s fold. This is called insurance delegation,” explains Astrid Cousin, spokesperson for Magnolia, an insurance broker.

Offered by credit brokers and also accessible “solo”, this alternative often allows you to make great savings.

For example: for a loan of €200,000 over 240 months at 1.30% taken out by a 30-year-old person, group insurance is billed at 0.36% in a group contract and 0.10% in the context of a delegation. Opting for the second solution here saves €10,000. And for some profiles, it can be even much higher (see box) “In theory, delegation is legally possible but it is often difficult to accept by the bank”, admits Astrid Cousin. If the lending institution is reluctant, it is better to strategically lay low to be sure of obtaining credit. This means accepting the bank’s insurance, even if it means terminating it a few months later to take out another less expensive one.

Savings example

For a 34-year-old couple, each employed, non-smoker, and 100% Death/Incapacity/Invalidity insured, borrowing together €220,000 at the rate of 1.05% over a period of 20 years.

The interest cost of the loan is €24,004. The average cost of borrower insurance offered by the bank is €24,640 over the term of the loan (i.e. an effective annual insurance rate or TAEA of 1.03% for the couple).

The cost of the Borrower Guarantee (under delegation of insurance) amounts to €9,440 over the term of the loan (TAEA of 0.42% for the couple). Savings of more than €10,000, or the equivalent of more than 0.50% of the credit rate.

Source: Securimut 01/01/2022

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