Within the framework of a mortgage loan, borrowers are obliged to take out insurance. This loan insurance is requested by the banks before releasing the funds needed to purchase a house or apartment. But how is mortgage loan insurance calculated?
What is the purpose of calculating the insurance rate of a mortgage loan?
First of all, it is necessary to know that the real estate loan insurance or borrower’s insurance is defined by the insurance code as the means for the borrowers to be covered in case of incident or impossibility to repay the loan to the bank. Thus, the purpose of calculating the rate of insurance of a mortgage loan is to define the real cost of credit. In addition to the interest on the original borrowing rate, various costs such as taxes, file fees and the borrower insurance premium must also be taken into account.
Criteria influencing the calculation of the insurance of a mortgage loan
The calculation of the mortgage insurance depends first of all on the contract that the borrower will take out. Indeed, it can be about a grouped insurance which most of the cases are proposed by the lending bank. He also has the possibility of taking out an individual loan insurance contract. For the first case, that of the group insurance, the calculation of the capital is fixed and does not change until the end of the repayment. In contrast to an individual insurance external to the bank, the contributions are not fixed and are reassessed annually. It is good to know, however, that individual insurance is cheaper than group insurance thanks in part to competition. Other criteria can also influence the calculation of the loan insurance rate, such as the waiting period during which the insurer pays contributions but is not yet insured. As for the waiting period, this is the period between the claim and the actual assumption of the insurance. Finally, the method of repayment, i.e. lump-sum or all-risk, is also one of the factors influencing the insurance rate for a mortgage loan.
The method of calculating the cost of insurance for a mortgage loan
For a grouped mortgage loan insurance contract, the rate is calculated on the basis of the amount of money borrowed. In this case, the rate is fixed and does not vary until the end of the contract. To calculate the monthly payments of the insurance, it is enough to multiply the rate defined by the bank at the time of the signature of the contract with the capital of the loan. To determine the cost of the insurance during the term of the loan, it is necessary to multiply the capital of the amount lent by the bank with the term of the loan minus the amount of the loan. As for individual insurance, the cost is calculated on the basis of the amount of the capital to be paid multiplied with the duration of the loan amortization. In conclusion, the insurance of a real estate loan is a way for banks to get paid because the real estate loan is often subject to several hazards.