Mortgage & House insurance

Bitstring , from the wonderful person hg said

You seem to understand just fine. No-one can require you to insure against a loss which is just going to affect you. If the loss affects someone else (i.e. the mortgage company which 'owns your house' until you pay off the debt) then they can reasonably require you to have cover

- unless you persuade them you have other assets to cover the payment in the event the house burns down (in which case why did you need a mortgage in the first place).

Although arguably if the mortgage loan is smaller than the difference between the market value and the rebuild cost then they shouldn't really be able to insist.

Why not?

Because even if the house falls down they can sell the land for enough to clear the loan.

Nonsense.

Market value 150k. Rebuilding cost 100k. Loan 45k. Place burns down uninsured. What fool would buy the land for 45k and still have to spend 100k to rebuild ahouse they could expect to sell for at most 150k?

A fool who owns a building company that can build a house which would cost an insurance company 100k for 60k

Neb

With only 5k margin you might still say that it's too tight, but with current prices it's not uncommon for the rebuild cost to be less than half the market value - for my house I think it's now less than a third if I believe the latest asking prices. There will be plenty of people with mortgages well under that level, so in practice the lender could be pretty certain to get their money back.

There are still places, though, where the rebuilding cost exceeds market value, and it's also necessary to bear in mind that in the case of flats you can't sell the land (since the owners of the other flats co-own it). I'm thinking particularly about the situation in Scotland where, like houses, flats are (in effect) freehold and there is not generally an arrangement whereby the whole building is insured under a single policy to which all the flat owners contribute, but each flat is insured separately by its owner, generally with different companies.

Also, the lender doesn't really want to get involved in selling the property except as a last resort. Their aim is to make money while having an easy life of it, and insisting on insurance is a reasonable way of ensuring that aim is achieved, no matter how small the loan is.

Depends why/how it falls down - if there turns out to be a bottomless mine shaft underneath, or 1000 gallons of heating oil leaks into the land during the fire, or whatever, the building plot could turn out to be worthless, or even a liability.

And how is the mortgage going to be less than the difference between the market value and the rebuild cost in that case?

and it's also necessary to bear in mind that in the

It also doesn't make much sense to insure only one flat for the rebuilding cost! Presumably in that case lenders do insist that the whole block is insured in some way? Indeed, there are presumably covenants between the occupiers regardless of loans.

That's related to the ability of the borrower to pay the interest, it has nothing to do with insurance. If the borrower does keep making the payments the lender is not going to care if the house is rebuilt or not!

The same argument is made for life insurance, but I have a mortgage without it.

Easily, because the phrase "the difference between X and Y" is ambiguous and tends to mean either X-Y or Y-X depending on which gives a positive result.

One would have thought so, but remarkably it doesn't appear to be the case as far as I can tell.

Presumably, but in practice there doesn't seem to be any mechanism to enforce it. Any of the owners can end up uninsured by just not paying their premiums any more, and could well be bankrupted by any judgement against them for their contribution.

Yeah, but if your house is wrecked by some little disaster, and is uninsured, keeping the loan payments going is probably going to be low on your list of priority demands on your pocket.

I guess the argument against life insurance is perceived as a little more convincing than that against buildings insurance.

In that case, why do they only require you to insure for the rebuild cost and not against such eventualities? Could it be because it never happens? ;)

Rubbish, you know exactly what I meant.

Which is why they have the backstop of being able to sell the property. Lenders try to have their security three ways, with salary multiple limits, mortages and insurance, but there is no real reason to let them get away with it!

I think it's just that most people would want to have buildings insurance anyway. Also the big gaps between market value and rebuild cost are recent. At some point it may even start to look attractive to knock things down and rebuild deliberately, if you could get planning permission you could improve the property quite a lot in many cases and it might work out cheaper than buying a better house to start with (or than building extensions piecemeal).

"Stephen Burke" wrote

How would you quantify the *largest* possible liability for a particular plot??

In message , Stephen Burke writes

No. A lender can insist on anything it wants, you dont have to borrow from them if you dont like it. If it is a condition that you buy a mars bar every third tuesday, then so be it.

Th circumstances you describe would be impossible to police in a world of current account mortgages and varying house prices.

In message , Stephen Burke writes

That will depend on the lenders assessment of the residual value and the marketability of the burned shell.

No, that argument isnt used for life insurance. Only two lenders that I know of insist on it.

In message , Stephen Burke writes

There speaks a man who has never lent a pound in is his life and who, therefore, has never suffered a bad debt. Experiencve is a woinderful thing and experience shows that the housing market isnt always as it is at the moment.. Only two of the factors you refer to are actually 'security' because income only determines the ability to repay. The mortgage deed merely pledges the house if you default and the insurance ensures that the house value is protected in the event of disaster.

In message , Stephen Burke writes

The 'rebuild' cost is only part of the cover and many lenders dont even specify a rebuild cost these days.

"Stephen Burke" wrote

In that case, even though (of course) I would continue to keep making the payments, why is my lender *not happy* for me to sell my house, pocket *all* the money and keep the mortgage loan in force?? :-(