Bridging insurance is designed to safeguard the interests of financial institutions, mainly in the case of home loans, i.e. those that are ultimately secured by a mortgage on the financed property. Some changes regarding bridging insurance are being prepared in the near future, but it is worth describing exactly what bridging insurance is, how much it is and whether it is necessary when taking out a mortgage.
Housing loan and mortgage
A home loan, commonly known as a mortgage, is based on the fact that banks, when providing certain financing for the purchase of an apartment, house or land, require an entry in the mortgage book. This entry evidences the establishment of a mortgage in favor of the banks, and in the event of default on the housing loan, the institution can easily seize the property in question.
However, the entire loan process usually takes quite a long time, and it is not uncommon for many weeks to pass between the granting of financing (the provision of funds) and the execution of the security on the property, which is precisely the entry in the land register. During this time, apart from the loan agreement itself, the bank has no collateral, which is a certain “discomfort” for financial institutions.
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This is because this is a period in which the borrower has unlimited rights to dispose of the apartment or house, can sell it and take the money over. Naturally, the situation is quite extreme, but banks look at this as a kind of credit risk and require a certain action to be performed, more specifically, the purchase of bridge insurance.
What is bridge insurance?
Bridging insurance, commonly known as bridging insurance, is called a policy that is intended to protect the interests of the bank during the period from the granting of a home loan, until the bank is registered as a mortgage creditor in the mortgage book of the financed property.
Note that in theory this should not take too long, but bridging insurance makes profound sense mainly in the case of financing apartments that are still under construction, and often only in the plans of the developer. Thus, the bank is providing financing for a property that is yet to be built, and consequently, the mortgage book for that property does not yet exist.
In some situations, the period between the availability of a home loan and the entry in the land registry can take up to several years. During this time, a lot can really happen. Such extreme situations as the bankruptcy of the borrower or his death cannot be ruled out.
At this point it should be emphasized that when a mortgage is established in the land and mortgage register in favor of the bank, the bank, as a mortgage cred itor (creditor in rem), has priority in the event of enforcement against the debtor’s property, which is the property in question, over other creditors.
Is bridge insurance required?
Credit insurance, mainly for mortgages, is a river topic. On the one hand, the law does not mandate their purchase, on the other hand, the bank’s policy may “force” the borrower to take out various policies. These can include life insurance, homeowners insurance, low deposit insurance, bridge insurance, etc. There is even a whole spectrum of different “solutions” available to protect financial institutions.
It is no different in the case of bridging, which, after all, is also designed to protect the capital and ultimately the interests of the bank. In Poland, most institutions that finance consumers’ housing needs expect/require bridging insurance, and you have to reckon with it especially in the case of housing under construction. Of course, it is not necessary to buy bridging insurance, but in practice it deprives us of the chance to get a loan.
IMPORTANT: bridging insurance, if the bank plays fair, is not a particularly heavy burden for borrowers, because it is temporary. Once the mortgage entry already appears in the land registry, the bridge insurance expires. However, it is best to keep an eye on this yourself, as there are situations in which bridging premiums are paid despite the theoretical expiration of the policy.
How much does bridging insurance cost?
The price/cost of bridging insurance generally depends on the value of the property and the insurer itself and the bank’s policy. In practice, we can most often encounter bridging insurance, which will cost between 1 and 2 percent of the value of the financing. Thus, in the case of a mortgage worth half a million zlotys, the price of bridging insurance can be between 5 and 10 thousand zlotys. It is worth remembering that this cost will increase our credit commitment.
Finally, remember that bridging insurance is paid until the bank or other financial institution establishes a mortgage on the financed property. If premiums are still required after that, it is essential to contact the bank and explain the reason. When there is a possible overpayment of bridging insurance, the bank must return these funds to us.
