Insurance is a financial tool that needs no introduction. As the name suggests, Mortgage Insurance provides financial security to the mortgage lender or the homeowner in the case of any mishappenings. If the mortgage borrower goes default on loan instalments or if anything happens to the borrower like temporary loss of income, etc. then the Mortgage Insurance will be a financial saviour.
Mortgage Insurance is not the same as Home Insurance. The Home Insurance protects the home in the case of any mishappenings that happen to the house like fire, natural calamities, repairs, etc. Whereas mortgage insurance is supposed to protect the lender if the borrower defaults on the mortgage payments.
Check: How to afford first home in the UAE?
Working of Mortgage Insurance in the UAE
When you get a mortgage loan from the bank, there are some additional expenses added to the final monthly instalment amount. Usually, banks are tied up with an insurance company to provide Mortgage Insurance. Mortgage Insurance is an additional expense added to the monthly mortgage instalment. The lender includes the mortgage insurance cost in the monthly payments.
The Mortgage Insurance premium payments are made monthly along with the loan instalment. At some banks, the insurance can range between 0.3% to 1% and can be more than that as well depending on the applicant’s profile. Going towards the end of the tenure, the Mortgage Insurance premium value keeps decreasing as the loan amount keeps reducing. When the mortgage borrower can’t pay the loan, the insurance will cover the loan payments.
Calculation of Mortgage Insurance
The calculation of Mortgage Insurance includes certain factors like down payment, loan amount taken and definitely the credit score.
When the down payment for the home mortgage is less, the loan amount required will be more. The mortgage insurance is calculated according to the loan amount. For example, if the loan amount taken is AED 1,00,000 and consider 0.5% of Mortgage Insurance, then the Insurance would be AED 500. This value increases with the increase in the loan amount.
Related: Calculate your mortgage instalment using Mortgage Calculator UAE
How is Mortgage Insurance and Credit Score related?
Mortgage Insurance is a protection for the lender if the borrower defaults on the payments. Hence along with other factors like down payment and loan amount, the credit score plays an important role to determine the insurance value.
The credit score of an individual determines their financial ability and reliability. Banks and financial institutions take credit scores into consideration while lending money. If the credit score is bad, the more the lender needs to be cautious about the loan. Therefore if the credit score is good, the lender will charge less Mortgage Insurance.
Read: How Banks use Credit Score Reports?
Usually, banks and financial institutions will have partnered with an insurance company to provide such insurances on the loans. Some banks provide the borrower with the privilege of opting for third party insurance for Mortgage Insurance while at some it can be mandatory to get insured as per the bank’s choice.
Irrespective of any insurance provider, the borrower shouldn’t overlook the details of the mortgage insurance. They must check the terms and conditions of the insurance cover and pick the one that gives good benefits on less premium value.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
