Home insurance as loan collateral

It is widely known that the collateral for a mortgage is the property. Are there other options? Yes, but only in certain circumstances. Find out how home insurance can act as loan collateral!

• Better safe than sorry
• Home insurance as loan collateral
• Regular payments are enough

Better safe than sorry

Banks are among the most cautious institutions we are likely to deal with. Granting a loan has to be worthwhile for the bank, so it will do everything it can to be able to recover its money in case of unforeseen circumstances.

The basic collateral for a mortgage is always a house, a flat or a building plot. The borrower puts their home on the line in order to obtain a lower instalment or a lower interest rate, and will do everything to repay the debt on time. Before the machinery gets moving, however, we face a great many formalities, which may take many weeks, if not months.

The problem is that the buyer would like to receive the money to buy a house or flat, and the bank to obtain proper collateral, which is a final entry in the land and mortgage register (księga wieczysta) – ideally at the same moment. In such a case an additional security is used, namely bridging insurance.

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Home insurance as loan collateral

Until the mortgage entry appears in the land and mortgage register, the borrower is obliged to pay for bridging insurance. Its cost is usually a small percentage of the total loan amount (typically between 0.06% and 0.09%), and it is paid only until the mortgage entry becomes final. After that, all that remains is to provide the bank with proof of the entry. From then on, the mortgage is secured by the buyer's property.

What does it look like in practice? A borrower who wants to buy a property and receive mortgage funds for it goes to the bank, where they complete the necessary formalities. Afterwards they visit an insurance company, where they take out the bridging insurance. In the meantime they must apply for the mortgage to be entered in the property's land and mortgage register.

For the next several months – which is roughly how long the formalities connected with the entry becoming final take – the bank's client is obliged to pay the bridging insurance premiums. It is worth checking the mortgage terms carefully, though. It may turn out that the bank requires payment for six months in advance or a quarterly instalment.

Regular payments are enough

As soon as proof of the mortgage entry is delivered to the bank, we can cancel the bridging insurance. This will take part of the burden off us and bring a little relief during the subsequent mortgage repayment period.

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