In the ever developing market of ‘buy to let’ mortgages, it is important that you understand your lender’s requirements when it comes to interest clauses. This article will help you decipher the lingo, to ensure you understand the agreement you are signing up to.
Why has my mortgage lender requested to be noted on my property owners insurance policy?
As mortgage companies have a significant financial stake holding in the property they have agreed to lend upon, it is understandable that they wish to ensure the property in question is fully protected against a range of contingencies.
Following an agreement between the Association of British Insurers and the British Bankers’ Association in the early 1990s, a large number of major UK insurers agreed to notify the mortgage lender in the event that a policy is either cancelled, or if the policy holder fails to renew. It also protects the lender’s interest in the event of a policyholder defaulting on the payment of their premium.
In practice, when a lender requests to be noted as an interested party, it offers quite limited benefits to the banks which has brought about a handful of new lender requirements. These requirements, whilst reducing the risk to the lender can prove arduous to the property owner, particularly in the event of a claim.
It is therefore important that as a property owner, landlord or investor, you have an understanding of the following terms:
“First loss payee”
If you note your lender on your policy as “first loss payee”, the lender has the ability to control money paid by the insurer in the event of a claim, or order that the payment is made in line with their authorisation. This can mean that claims payments are delayed whilst the authorisation is obtained.
As well as this, the lender may opt to use the settlement money to pay down the loan, rather than reinstate the property following the loss. This can leave the property owner in a position where they have insufficient funds to make the necessary repairs.
This gives the lender equal status to the main policy holder, giving them the power to instruct the insurer, even if it is not in the best interests of the property owner.
Composite Insured status gives the lender a say in how claims are settled, but also protects the lender in the event that the policy is voided by an act or omission of the policy holder. This significantly increases the risk to the insurer, and can result in additional premium being charged.
Generally, you should be able to expect that your lender will act in a fair and equitable way in the event of a loss, but it is important to understand that simple requests upon taking a loan can have a vast impact further down the line.
If you have questions or doubts around the requests of your lender, you should ensure that you seek their advice or discuss with your insurer.