Haris Ashley
Indemnity insurance is a type of policy that compensates professionals and business owners for unexpected losses or damages, typically covering legal costs and settlements when they are found at fault for a specific event. When buying or selling a property, a conveyancing solicitor may suggest taking out indemnity insurance to help get the sale moving. This is because indemnity insurance covers legal costs and potential damages in lawsuits, protecting professionals from financial loss due to negligence, errors, or omissions in their work. In the context of mortgages, indemnity insurance can refer to a Mortgage Indemnity Guarantee (MIG), which is an insurance policy that protects lenders if mortgage repayments cease for some reason, such as death or redundancy. The cost of MIG is typically calculated as a percentage of the loan amount over 75% loan-to-value (LTV), and it is usually the borrower who bears this cost.
| Characteristics | Values |
|---|---|
| What is Mortgage Indemnity Insurance? | An insurance policy that protects lenders if the mortgage repayments cease. |
| Who does it benefit? | Mortgage lenders and whoever owns the property. |
| Who pays for it? | The buyer or borrower. |
| When is it paid? | It is a one-off payment. |
| How much does it cost? | Between £20 and £300, depending on the type of cover, circumstances, risks, and provider chosen. |
| How is the cost calculated? | Based on the value of the property, the level of protection needed, and the loan amount. |
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What You'll Learn
Mortgage Indemnity Guarantee (MIG)
A Mortgage Indemnity Guarantee (MIG) is an insurance policy that protects lenders in the event of a borrower defaulting on their mortgage payments. It is typically required when the borrower is taking out a mortgage with a high loan-to-value (LTV) ratio, usually above 75%. In such cases, lenders seek additional security, as they are at a higher risk of losing money if the borrower defaults.
The MIG policy is not an insurance policy for the borrower but is specifically designed to protect the lender's interests. While it benefits the lender, it is the borrower who bears the cost of the MIG. This can be calculated as a percentage of the loan amount over 75% LTV, typically ranging from 6% to 8%. For example, if a borrower secures an 85% LTV mortgage with an MIG to purchase a £200,000 property, their deposit would be £30,000 (15% of the purchase price), and the MIG cost would be between £6,000 and £8,000 (6-8% of the £100,000 loan amount above 75% LTV).
The mechanics of an MIG are straightforward. If a borrower defaults on their mortgage payments, the lender can repossess the property and sell it to recover the outstanding loan amount. If the sale proceeds are insufficient to cover the full amount, the lender can make a claim on the MIG policy to recover the shortfall. For instance, if a borrower defaults on a mortgage with an outstanding balance of £200,000, and the lender sells the repossessed property for £180,000, resulting in a loss of £20,000, the lender can claim this amount from the insurer under the MIG policy.
From a borrower's perspective, MIGs have both advantages and disadvantages. On the positive side, they can provide access to homeownership for those with limited deposits who would not otherwise qualify for high LTV mortgages. By allowing borrowers to secure larger mortgages with smaller deposits, MIGs can make the property market more accessible. However, MIGs also represent an additional cost for borrowers, increasing the overall expense of obtaining a mortgage. Additionally, while MIGs protect lenders, they do not offer any protection to borrowers. In fact, if the MIG policy pays out a loan shortfall to the lender, the insurer can still seek to reclaim that amount from the borrower.
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Cost of indemnity insurance
The cost of indemnity insurance varies depending on the type of policy you need. Indemnity insurance is a broad term that covers various types of insurance, including public liability insurance, professional indemnity insurance, and mortgage indemnity insurance.
Public indemnity insurance is commonly purchased by sports organisations and small businesses to protect themselves from third-party claims. The cost of public indemnity insurance depends on factors such as industry risk level, coverage limits, and claims history. In the US, small businesses typically pay between $42 and $68 per month for public indemnity insurance.
Professional indemnity insurance, on the other hand, is designed to protect professionals and business owners from financial losses due to negligence, errors, or omissions in their work. This type of insurance is particularly relevant for professionals in financial and legal services, such as financial advisors, insurance agents, and attorneys. The cost of professional indemnity insurance averages $61 per month, with 32% of small business policyholders paying less than $50 per month.
Mortgage indemnity insurance, also known as a Mortgage Indemnity Guarantee (MIG), is a type of insurance policy that protects lenders in the event that mortgage repayments cease. The cost of an MIG is typically calculated as a percentage of the loan amount, usually between 6% and 8% of the loan amount over 75% loan-to-value (LTV). However, lenders may increase the interest rate instead of charging a lump sum for the MIG.
When buying or selling a property, your solicitor may also suggest taking out indemnity insurance to cover any legal defects with the property that cannot be resolved or would be costly and time-consuming to fix. This type of indemnity insurance typically costs between £20 and £300.
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When to take out indemnity insurance
Indemnity insurance is a type of policy that compensates professionals and business owners for unexpected losses or damages, typically covering legal costs and settlements when they are found at fault for a specific event. It is also relevant when buying or selling a house, as it covers legal defects in the property that are challenging to resolve or costly and time-consuming.
When buying a property, you can consider indemnity insurance in the following scenarios:
- Issues with planning permission, such as a lack of documentation showing the right kind of permission was obtained before building work started.
- Building regulations not being met during the work, or the relevant paperwork is lost.
- Issues relating to a 'restrictive covenant' that limits the property owner's ability to build extensions.
- Absence of easement, where you have to cross someone else's land to reach your property, and the 'right of easement' hasn't been granted.
- Chancel repairs, where a property is near a church, and the owner could be liable for repair costs.
- Insolvency, where someone has given you money for your deposit, and you want protection in case they go bankrupt and their creditors make a claim on your property.
- Absent freeholder, where the seller might offer to take out absentee landlord indemnity insurance to cover you against claims for unpaid obligations like ground rent.
When selling a property, you can consider indemnity insurance in the following scenarios:
- Issues with planning permission, such as a lack of documentation.
- Building regulation issues, such as missing certificates for boilers or windows and doors installations.
- Issues relating to restrictive covenants that limit the property's use, such as keeping livestock or giving neighbours access.
The cost of indemnity insurance varies depending on the type of policy and can range from £20 to £300. Obtaining indemnity insurance typically takes between 24 to 48 hours, but the duration can vary based on the complexity of the application and the insurer's processing time.
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Who does indemnity insurance benefit?
Indemnity insurance is an agreement between two parties, wherein one party guarantees compensation for losses or damages incurred by the other. Indemnity insurance policies typically cover legal costs and settlements when the insured is found at fault for a specific event. The insurance covers court costs, fees, and settlements in addition to an indemnity claim.
Mortgage indemnity insurance, also known as a Mortgage Indemnity Guarantee (MIG), is an insurance policy that protects lenders in the event that the borrower cannot make their mortgage repayments. This could be due to a number of reasons, such as the death of the homeowner or the homeowner being made redundant. The cost of an MIG is typically borne by the borrower, and it is calculated as a percentage of the loan amount, usually between 6-8% of the loan amount over 75% LTV. While the MIG is an additional cost for the borrower, it benefits them by allowing them to obtain a larger mortgage with a smaller deposit requirement.
When buying or selling a property, a conveyancing solicitor may suggest taking out indemnity insurance to cover any legal defects with the property that would be costly or time-consuming to resolve. This type of insurance covers the buyer against potential costs in the future if any legal issues arise with the property. For example, if the seller cannot provide a building regulation certificate, the buyer can take out an indemnity policy to protect themselves from potential claims. The cost of indemnity insurance for property purchases can vary depending on the policy but typically ranges from £20 to £300.
In the case of an absent freeholder when purchasing a property, the seller may offer to take out Absentee Landlord Indemnity Insurance. This type of insurance covers the buyer if the landlord or their successor reappears and makes a claim against them for unpaid obligations from the lease, such as ground rent. Mortgage lenders often require this type of insurance to consider lending to the buyer.
Indemnity insurance is also relevant for certain professionals, particularly those in financial and legal services, such as financial advisors, insurance agents, accountants, mortgage brokers, and attorneys. These professionals are advised to carry indemnity insurance as they may be liable for negligence or inadequate performance despite their best intentions. Indemnity insurance protects them from financial loss in such cases.
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Indemnity insurance and mortgage lenders
Indemnity insurance is an agreement where one party guarantees compensation for losses or damages incurred by another. It covers legal costs and potential damages in lawsuits, primarily protecting professionals from financial loss due to negligence, errors, or omissions in their work. Certain professionals are strongly advised to carry indemnity insurance, including those involved in financial and legal services, such as mortgage brokers.
When buying or selling a property, your conveyancing solicitor may suggest taking out indemnity insurance to help get your sale moving. This is especially relevant when there is a legal defect with the property that cannot be easily or affordably resolved. For example, if the seller cannot provide a building regulation certificate, indemnity insurance can cover potential future costs if your local authority pursues a claim.
Indemnity insurance is also important when buying a house with an absent freeholder. In this case, the seller may offer to take out Absentee Landlord Indemnity Insurance, which covers the buyer if the landlord reappears and makes a claim for unpaid obligations from the lease, such as ground rent. Many mortgage lenders will require this type of policy before lending to you.
The cost of indemnity insurance varies depending on the type of policy but generally falls between £20 and £300. It's important to note that indemnity insurance should ideally be used as a last resort, as it does not remedy the defect but provides financial compensation if a claim arises.
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Frequently asked questions
Mortgage indemnity insurance, also known as Mortgage Indemnity Guarantee (MIG), is an insurance policy that protects lenders in the case that the mortgage repayments cease. This could be due to death or the homeowner being made redundant.
The cost of mortgage indemnity insurance varies depending on the type of cover, the circumstances, the risks involved, and the provider. It can be as low as £50 for covering church repairs, while protection against a lack of planning permission could cost hundreds of pounds. Typically, the charge for an MIG is calculated at between 6-8% of the loan amount over 75% LTV.
Mortgage indemnity insurance benefits the property owner, so it is usually bought by the buyer. However, the insurance resides with the property, not the owner, so it can be passed on to subsequent owners.
A conveyancing solicitor may suggest taking out mortgage indemnity insurance when buying or selling a property. It is often required by mortgage lenders to secure funding for the purchase of the property.
Mortgage indemnity insurance covers legal costs and potential damages in lawsuits. It also covers court costs, fees, and settlements in addition to an indemnity claim.
