Why is home insurance mandatory when taking out a mortgage?

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Is home insurance mandatory? Most people in Spain wonder about this when they analyse their mortgage requirements. When you take out a mortgage, the bank will probably try to sell you a home insurance policy from their product portfolios. What’s more, some banks, to exert pressure, will tell you that it is mandatory to take out home insurance with them. However, this is not true, and this article will address all your doubts in this regard

What is mortgage-linked home insurance?

It is a type of insurance that banks and mortgages lenders offer when we buy a home. Mortgage insurance has a specific purpose, which is to cover the mortgage lender’s risk if the borrower does not pay the mortgage instalments on time and the property is at risk of seizure.

When you take out a mortgage with a bank, they will more than likely suggest you also take out a mortgage insurance policy. The truth is that you are under no obligation to have a single insurance provider.

Is it mandatory to have home insurance with a mortgage?

According to the Royal Decree, you must take out a basic insurance coverage against fire when you take out a mortgage on a home. In short, you need property insurance that includes the most basic coverage.

Although not all insurance companies offer such basic home policies, one offering average coverage is sufficient to comply. The fact is that most people take out a multi-risk policy to protect their property.

However, banks are not allowed to demand that a customer take out a home insurance policy. In this regard, the European Parliament says that:

  • Banks are forbidden from exerting pressure on customers taking out mortgages to purchase life or home insurance policies.
  • Mortgage borrowers are entitled to select the policy that best suit their needs and their pockets.
  • Customers are free to take out any insurance policy they see fit. However, they must prove to the bank that they have a home insurance policy.

How to avoid paying mortgage-linked home insurance?

When taking out a mortgage with a bank, it is essential to check whether or not they offer mortgage-linked home insurance. If they do, then you should reject it before continuing with the formalities (if that is what you want).

Remember, you are entitled to take out the policy of your choice through an agent or broker. If you want to know how to get the best rate, you can compare several policies and the coverage they provide rather than just accepting the first option. This will allow you to analyse the type of protection each insurance company offers separately.

How to decouple your mortgage from your home insurance?

What happens if you did not get the right even and take out home insurance with the bank where you have your mortgage? Can you decouple the policy later on? Yes, you can and perhaps you should if you find an insurance provider that offers better coverage at a more affordable price.

You should not have a problem with your bank if you decide to do this. Just follow these steps:

1- Keep the date your policy expires in mind and give the bank at least one month’s notice of your intention to cancel. This is extremely important, because if you do not give the bank notice, the policy will probably be renewed automatically. Some banks will send you a renewal notice before the policy expired, but this is not always the case. It is best if you take the initiative.

2- Before decoupling, analyse the other insurance providers’ offers. Don’t wait until the last moment, because you may have to hurry and make the wrong decision.

3- The bank will ask you for all the documents required for the decoupling, so have everything ready. Although banks cannot force you to take out home insurance, as mentioned above, they can demand a document setting out the quality of the new policy. Remember that the new policy must cover the mortgaged property and the bank must be the main beneficiary in case of an incident.

Generally speaking, the latter requirement is more pressing when decoupling the mortgage from the home insurance policy, but the broker will not provide the contractual documentation until the coverage is paid, and the bank will not allow you to cancel the policy until you present the new policy.

Remember that when you cancel the home policy with the bank, you will also be renouncing any rebates or discounts you were given for taking out the insurance.

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