Insurance when applying for a loan is a very painful issue for Russians. Despite the fact that this process inherently accompanies the registration of a mortgage, it causes very conflicting opinions. Some believe that the presence of insurance is a sign of the civilization of the Russian banking system, and its registration confirms the responsibility, wisdom and foresight of the borrower. Others, on the other hand, do not see any benefit in insurance, considering this service only an additional cost item.
Voluntary compulsory mortgage loan insurance
The main normative act governing mortgage relations is Federal Law No. 102 of 1998 “On Mortgage”. The insurance issue is spelled out in Article 31 of the law. This article states that the borrower is obliged to insure the collateral against possible damage at his own expense. As a rule, residential real estate purchased on credit acts as a collateral for a mortgage loan.
Thus, it turns out that the borrower is obliged to insure only the property acquired at the expense of borrowed funds, and everything else (title insurance, life and health insurance) is carried out on a voluntary basis. However, bankers do not miss the opportunity to earn more, and insurers willingly support such an initiative from banks. So, in a mortgage lending agreement you can often find such a clause as "comprehensive insurance of a mortgage loan", and if the borrower refuses to comply with the requirements of this program, the bank simply refuses to issue a loan. True, this trend has changed dramatically after the crisis times, when borrowers were unable to pay for expensive insurance and many banks were forced to abandon "comprehensive insurance".
But credit organizations, even in such a situation, found a way out by developing several mortgage programs at once. For programs that do not provide for compulsory "comprehensive insurance", the mortgage rate will be higher by about 2-3%. Moreover, the difference of a couple of percent is far from the final figure. For example, some bankers set this interest rate range at 8-10 points. Of course, even after rough calculations, borrowers make a choice in favor of obtaining a mortgage with all types of insurance.
What do we insure and how much does it cost?
Mortgage insurance assumes the presence of several articles at once, each with its own cost. It would seem that if the law obliges to insure the pledge, then this type of insurance can be made the most expensive, but insurers prefer to make money on the ability to work, life and health of borrowers. The cost of this service is on average 1-2% of the size of the mortgage loan. Moreover, the more risky the borrower's life, the more expensive this service will cost him. So, insurance will take into account the age of the borrower (the more years, the more expensive the insurance), gender (it is cheaper for women, since according to statistics they live longer), health status (recognized by insurers from the words of the client, but some insurance companies are forced to provide a certificate of full medical examination).
Another type of insurance services accompanying a mortgage is title insurance. The cost of this service will depend on the "history" of the property being purchased. If it belongs to the primary market, then the risks are minimal and the cost is appropriate. If housing is purchased on the secondary market, then the risk of depriving the current owner of the property rights significantly increases, which in turn will affect the cost of insurance.
Collateral insurance is at the very end of the list and is considered the cheapest insurance service (from 0.05 to 0.1%). It is also worth noting that the borrower can only get insured in an insurance company accredited by the bank, which, accordingly, deprives him of the choice. Although, according to the law, the borrower has the right to choose an insurer himself and offer it to a credit institution, but whether he will be accredited there is a very controversial issue.
