What Happens Mortgage Protection When You Pay Off Your Mortgage?

Don’ talk to me about Aunty Muriel.

She’s an auld wagon, I’m sorry but she is.

Always grumpy, never stops giving out, no wonder she never got married.

And talk about tight, she could peel an orange in her pocket wearing boxing gloves.

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She’s passed away you say, and left everything to me?

Ah you see, I always told you she had a heart of gold.

Poor auld divil, may she RIP.

If you suddenly find yourself in the incredibly fortunate position of being able to pay off some of your mortgage due to careful planning, an unexpected windfall or Aunty Muriel’s sudden demise, what happens to your mortgage protection?

Does the cost of mortgage protection reduce if I pay off a LUMP SUM?

Eh, no, unfortunately not.

The price of your mortgage protection policy is fixed regardless of how much remains on the mortgage.

If you think about it, your mortgage balance reduces every time you make a montly payment but your mortgage protection payment remains the same.

I know this seems unfair because the bank is on the hook for a lower payout so you’d expect the premiums to reduce.

However, from the insurer’s point of view, you’re getting older so the risk of a claim is greater. Give them half a chance and they would increase your premiums!

What happens mortgage protection if I CLEAR my mortgage?

You have options, two in fact.

Let it lapse ~ Cancel it and stop paying

You can let it lapse i.e.stop throwing money at it completely since you no longer need it

Perhaps you may even choose to funnel those newly freed-up funds into a brand spanking new savings account.

The interest on savings accounts is at an all-time low. Unless you are throwing in a hell of a lot of dough, this option could be relatively futile.

I’m not saying saving is a complete waste of time, but that extra twenty bucks isn’t going to be the difference between cocktails on the beach in Mauritius when you’re 70 and spending your retirement years in destitution.

Keep on paying  ~ Your cover continues

Keep paying those insurance premiums and that mortgage protection policy will transform itself into a beautiful personal life insurance policy where the cover continues to reduce over time.

It’s a bit like a caterpillar changing to a butterfly, but without the cocoon.

And some say life insurance is boring – pah.

Even better, it’s likely you were a spring chicken when you took out your mortgage protection insurance so it’s bound to be pretty decent value now you’re a more mature hen or cock.

Thusly, I recommend this option. I mean, you’ve already budgeted for the monthly premium so why not keep it working for you in a new way, after you have paid off your mortgage?

And if any claim is made against the policy, it will go to your family or estate so it’s an extra layer of protection for your loved ones.

‘But I can’t pay it ALL off, what happens if I just pay a hefty chunk off of my mortgage?’

I hear you.

This is cool, not all of us have the funds to clear our mortgage super early.

That is unless we can score a win on the Lotto or poison an Aunt.

And we have all seen how long that nineteen million euro carrot has been dangling in our faces.

Imagine winning 19m, you’d be meeting Muriel fairly soon.

What options do you have if your outstanding mortgage is LESS than the balance on your mortgage protection?

You have three options.

Yep, insurance heads love giving you options.

Keep paying the same premium that you paid before.

If there’s a claim in the future, it will pay off your mortgage in its entirety and any leftovers go to your fam bam.

e.g €50k outstanding mortgage, €250k left on mortgage protection. If there is a claim, the policy will clear the mortgage and give the balance of €200k to your nearest and dearest.

Take out a new policy covering the outstanding balance over the remaining term

– if this saves you a few quid.

However, as you are now older than when you took out your policy, your age may negate any savings you make. And if you have had any new health issues since you took out your mortgage, you’re better off sticking with your current policy.

Exercise the Conversion Option

As for the second option, more ominously named the ‘conversion option’.

No, this isn’t some underhanded American-style therapy.

If you have a conversion option on your policy, you can use it to reduce the amount of cover on your policy and lock in a lower premium, without having to answer medical questions.

By the way, if you’ve stumbled upon this blog before taking out mortgage protection, you should always add the conversion option to your policy – it only costs a couple of quid extra per month but gives you loads of flexibility in the future.

Though it won’t guarantee you’ll be able to touch your toes when you’re 60 – in fairness, if you can see your toes by the time you’re 60, you’ve won at life. Am I right?

Anyway, either option is decent, but again if you already have your initial premium budgeted and you can still comfortably pay it, maybe keep paying it.

Lastly, the benefits of clearing your mortgage early are awesome but always check with your mortgage lender. Those sneaky little devils have ways of making you pay through the nose, or at the very least trying to strongly dissuade you from overpaying.

Like, if you’re on a fixed-rate mortgage, you may face an Early Repayment Charge if you overpay or clear the mortgage in full before the end of the fixed-rate period.

Don’t let this stop you now, you’re having such a good time, you’re having a ball.

Think like Freddie Mercury – but perhaps minus the pleather skirt and vintage hoover – if you want to be mortgage-free.

Sometimes the mortgage overpayment fees are worth it taking into account the savings you are going to make on interest.

More importantly, you’ll be mortgage-free, that’s a big W.

What next?

Invite me to the Mortgage Burning Party.

Now, the mortgage is paid off, and you have more disposable income, is it time for income protection?

We can discuss this at the party or you can complete this questionnaire 

Thanks for reading and hearty congrats on being able to pay off your mortgage.

I mean it  👏👏

Nick

05793 20836 | nick @  lion dot ie