Bridging insurance is designed to protect the interests of the bank before it secures the loan by establishing a mortgage on the financed property. As a rule, it can be found in the case of housing loans, and its cost depends, among other things, on the amount of the loan. This insurance can be a significant cost, so many people ask themselves whether bridging insurance is necessary.
How does bridge insurance work?
Bridging insurance, as we mentioned at the outset, is designed to protect the bank’s capital, prior to the establishment of a mortgage on the financed property. Admittedly, bridging insurance can also be used for other banking products when a mortgage is involved, but in practice it applies to situations in which the property does not yet have a land registry, and the bank has no way to make a security interest in the property.
As an example, let’s take a housing loan aimed at buying an apartment from a developer who has either not yet completed the project in question or is just planning to do so. Banks, while providing financing, do not have any collateral, since the land registry will be established only after the construction work is completed. It should be mentioned that the establishment of a mortgage is possible just “in the land register”, and this fact is reported to the relevant department of the court.
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The funds from the loan, on the other hand, are made available as soon as the loan agreement is signed, and the borrower, in practice, can sell the apartment at that time (, even when it is not yet ready) and use the money for a completely different purpose. He can also lose his job, die or declare bankruptcy. The financial institution will thus lose the contributed capital and will not be able to enforce the debtor.
Is bridge insurance necessary?
In Poland, there is practically no single bank that would decide to grant a home loan without taking out bridging insurance. It does not matter whether it is a secondary or primary market apartment. The difference appears only in its cost, about which in a moment.
Bridging insurance is used by virtually every financial institution that provides mortgages, and it is in vain to look for offers from banks without the need to take out this policy. Recall that it is intended to protect the bank’s interest for a certain period only, but it is a solid security for the loan.
The length of the bridging insurance, on the other hand, depends on how quickly the mortgage is established on the property, and this depends entirely on ourselves and the property we are interested in. If it’s an apartment that will only be handed over by the developer in a year or two, the bridging insurance will be in effect for the entire period, until the bank’s entry in the mortgage book.
How much does bridging insurance cost?
The cost of bridging insurance depends entirely on the bank, the value of the property and the duration of the policy. As we mentioned above, the more time the bank waits to establish a mortgage, the higher the overall cost of the insurance will be.
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The value of the apartment or house that the bank is financing is also not insignificant. This is because the bridge insurance is based primarily on the amount of the loan. The more we borrow from the bank, the higher the cost of the policy will be.
In most cases, bridging insurance takes the form of an increased margin, which is usually between 1 and 2 percent of the loan amount. The sum insured naturally increases the cost of the loan and is fully charged to the borrower, who pays the bridging insurance until the mortgage is established.
When does bridge insurance end?
We have largely answered this question before, but it is worth emphasizing that bridging insurance only applies to the period from the date of the loan disbursement until the date when the bank makes a security interest in the financed property, i.e. establishes a mortgage in the land registry.
If, after this time, the bank is still charging bridging insurance costs, you should immediately file a cease and desist request for a refund of the overpayment. Financial institutions do not have the right to demand insurance after the date of the bank’s entry in the mortgage book.
Other types of insurance with a mortgage loan
In addition to bridging insurance and the mortgage itself, banks quite often expect the purchase of other policies that are designed to safeguard the interests of the institution. Some of the most common ones that can be encountered when applying for a home loan include property insurance (for example, in case of fire or flooding), low down payment insurance, life insurance, among others.
What is a reverse mortgage and is it worth opting for?
In most cases, the former, so home insurance is mandatory. Low deposit insurance will only be required if the borrower pays less than 20 percent of the value of the property. Life insurance is not required, but quite a few banks make, for example, the amount of commission dependent on its purchase.
