Mortgage indemnity guarantee
Many mortgage lenders have a normal lending limit of 70–80 per cent of the property’s value. If someone wants to borrow a higher proportion (eg, 95–100 per cent), the lender may ask the borrower to buy an insurance policy to protect themselves against a mortgage shortfall. This is the mortgage indemnity guarantee (MIG) (or indemnity insurance or building society indemnity). The insurance premium is usually paid as a lump sum at the time of purchase, or it may also be included in the monthly payments. Remember to check if there is a MIG in place.
Note: this insurance is intended to protect the lender, not the borrower. The only value to the borrower is that, without agreeing to pay the insurance premium, they may be refused the amount of mortgage.
The mortgage indemnity guarantee does not pay the full shortfall. The amount paid is a proportion of the shortfall relative to the lending risk. Therefore, there may still be a shortfall owing to the lender.
However, the insurance company can pursue the client for the money paid towards the mortgage shortfall. In some cases, the client may receive a demand for money from the insurer, even though the lender has agreed not to pursue the shortfall. Alternatively, some insurers appoint the lender to collect a client’s liability on their behalf. In this case, the lender contacts the client to ask for payment of the entire shortfall. Commonly, the client can expect to receive a demand from the insurer and the lender for their respective proportions of the shortfall. These cannot be ignored and must be dealt with.