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  • 6 of 10 UK mortgage holders have life cover
  • secure your loved ones’ well-being
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What is mortgage life assurance?

Interest-only mortgages allow homebuyers to purchase a home by getting an interest only loan. For the period of the mortgage, the borrower only pays interest on the loan amount. When the mortgage term ends, the principal becomes due. This type of mortgage is very popular to those who otherwise cannot afford the monthly mortgage payments involved in a repayment mortgage such as first-time homebuyers and buy-to-let investors.

Why “Assurance” and not “Insurance”

With an endowment policy, whether you die within the coverage period or survive up to the policy term, you are assured that you will get something from the policy. This is in contrast with a term life cover, where, if you survive the coverage period, there will be no payments after the end of the policy.

An interest-only mortgage can be funded by an endowment life insurance policy. The payment plan for covering the principal when it becomes due is the endowment that will be received from the policy.

Since the life insurance policy involves cash values and an expected endowment by the end of the policy term, this is called a mortgage life assurance.

Features of a mortgage life assurance policy

The mortgage life assurance has its own drawbacks:

Is mortgage life assurance worth it?

Mortgage life assurance is actually just one of the three options you have to fund an interest-only mortgage. You can also make use of an individual savings account or personal pension plan.

Know more: What insurance to buy for your type of mortgage

Interest-only mortgages are becoming a niche product

Interest only vs. repayment mortgages

Interest-only mortgages only require one to pay monthly interest on the principal and then pay off the principal at the end of the period.

Meanwhile, repayment mortgages require one to make monthly payments that decrease the principal. By the time that the mortgage contract ends, the loaned amount should have been fully paid.

With the economic slump, interest-only mortgages are in danger of having a shortfall. Meaning, some holders of interest-only mortgages may not have enough to pay the principal when the mortgage becomes due. That makes it 50% of the 2.6M homebuyers who hold interest-only mortgages due for repayment for the next 25 or so years. The shortfall that borrowers might face is expected to be at least £50,000, perhaps even higher.

The number of interest-only homebuyers has ballooned due to the housing boom sometime in the late 1990s and early 2000s.

The Financial Conduct Authority (FCA) has since drawn more stringent requirements on the rules governing the issuance of interest-only mortgages. The FCA has also required lenders to contact their interest-only borrowers to discuss repayment plans to ensure that any shortfall is addressed before the principal becomes due.

With this in place, interest-only loans have decreased from 330,000 in 2007 to only 38,000 in 2012.

Latest update: 18.06.2013

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