When signing a mortgage, it's common for the bank to offer (or practically push) several additional insurance policies, presenting them as part of a package. But legally, only one of them is actually mandatory, and telling it apart from the rest can save you a significant amount of money.
The only legally mandatory policy: home (damage) insurance
The law requires that every mortgaged property carry insurance covering, at a minimum, fire damage, since the home serves as collateral for the loan and the bank needs to make sure that collateral value doesn't disappear in the event of a loss. This is the only policy that mortgage regulations expressly require you to take out.
Policies the bank offers but that aren't legally mandatory
- Life insurance: covers the death (and sometimes disability) of the borrower, ensuring the outstanding debt is paid off with the payout if the borrower dies during the life of the loan.
- Payment protection insurance: covers the installments for a set period in the event of unemployment or temporary incapacity of the borrower.
- Other bundled policies (cards, health insurance, etc.) that some banks include as part of "packages" to improve the terms offered.
None of these is legally mandatory, although the bank may condition a better interest rate (so-called "discounted" or bundled products) on taking them out.
How "discounted" mortgages work
It's common practice for the bank to offer a lower spread if you take out certain bundled products (insurance, salary direct deposit, cards with a minimum spend). It's essential to run the full numbers: compare the real interest savings the discount provides against the annual cost of those bundled products, since in some cases the cost of the insurance far exceeds the savings achieved on the mortgage payment.
You can take out home insurance with any insurer
Even if the bank offers you its own home insurance, you have the right to take it out with the insurer of your choice, as long as the policy meets the minimum coverage required by the bank (related to the property's rebuilding value). Comparing prices between different insurers for this mandatory coverage can mean substantial savings compared to automatically accepting the bank's option.
Check the fine print before bundling insurance
Before accepting a package of discounted products, it's worth calculating the total cost over several years, not just the apparent savings on the first year's payment, since some of these policies increase their premium over time or with the policyholder's age, changing the value equation as the years go by.
Simulate your mortgage with and without the discount
Our mortgage calculator lets you compare the resulting payment at different interest rates, to assess whether the discounted spread actually offsets the cost of the required bundled products.