A case for mortgage insurance

Imagine the excitement of family of five at moving into their dream home with convenient shopping, schools, hospital, and recreational centres on their doorstep. It's all made possible because they received an approval for a 20-year mortgage loan commitment.

A mere two years after the family settled into their new home, the breadwinner is disabled in a car accident. As a result of the loss of income, the family is unable to afford the necessities in addition to their mortgage payments. The combination of the emotional trauma and the financial distress of the risk of losing their home due to foreclosure is devastating on the family. Furthermore, the mortgage lenders realise that they are at risk of losing their investments and returns, thereby discouraging them to participate in future homeowner lending programs. Hindsight is 20-20 but one wonders what could have become of the family fortunes had they anticipated this possible loss by purchasing mortgage Insurance.

In many developing countries, governments prioritize affordable, low and modest-income homes as a step towards national development. They generally sponsor programs to construct homes and provide financing by partnering with international financial institutions and banks. One of the key components to ensure alignment of interest is the request by these investors for the provision of a mortgage insurance facility in case of homeowner default due to death or disability.

In exchange for a nominal premium, mortgage insurance will reimburse the lender, the outstanding balance of the loan obligations upon the death or disability of the borrower.

Mortgage insurance may not always be at the top of homeowners' minds if they simply see it as an additional cost when purchasing a home. What they may suddenly realize however is that this insurance product can be extremely valuable when an unexpected event leads to financial distress.

The decision to purchase a mortgage insurance policy can be the difference between having financial freedom or facing financial crisis which can have lasting impact on the family.

Typically, if borrowers make a down payment of less than a specified percentage of the home's purchase price, the bank will require mortgage insurance. This represents a fractional increment on the total loan cost and is usually embedded into the total monthly payment to the lender.

Mortgage insurance protects the lender if the homeowner defaults on payments. It ensures that their funds are secure, and the entire mortgage lending ecosystem is preserved. It is typically required by banks and institutional investors for this reason.

Furthermore, mortgage insurance provides innovative options to increase homeownership. It enhances lenders' confidence and, as a result, they may offer greater flexibility and more competitive mortgage interest rates. Consequently, more home buyers' benefit, including some who may not have qualified for a mortgage – for example, those who are self-employed, entrepreneurs, and workers who rely on commission. With mortgage insurance, people who have good credit but do not meet some conventional lending criteria can also qualify for the financing they need.

At Swiss Re, we believe that insurance is a key pillar for any sustainable housing market. We therefore co-create mortgage insurance solutions with institutional investors, banks, local insurers, and government. These solutions will ensure that our family of five above are protected from loss of income and mortgagee funds are secured if unexpected financial difficulties arise. This promise is backed by our double-A rating and our deep subject matter expertise. Together with our clients and partners we power progress to close the housing gap.