Why do I need to take mortgage insurance?

Mortgage insurance acts as a safety net. PHOTO | SHUTTERSTOCK

Why do I need mortgage insurance? How many Kenyans have insured their mortgages and what are the pros and cons of paying mortgage insurance? Is it a one-off payment? Do I also need to take insurance if I’m taking a construction loan?

These are excellent questions that merit careful consideration, especially in the Kenyan real estate market.

Understanding the nuances of mortgage insurance is crucial for anyone considering the path to homeownership.

Imagine this scenario; you have finally found your dream home in Nairobi, and you are looking forward to securing a mortgage to make it yours. However, life can be unpredictable.

What if an unforeseen event, like a serious illness or loss of income, makes it challenging to meet your monthly mortgage payments? This is where mortgage insurance comes in as a safeguard for both you and the lender.

Mortgage insurance works two-fold in that it protects lenders by ensuring that they are guaranteed of their payments in the following circumstances; if the Loanee dies, gets critically ill, or becomes permanently and totally disabled and cannot take up any income-generating activity.

The cover also provides payment upon retrenchment or redundancy of the loanee of up to a maximum period (Monthly instalments) as agreed by the service provider.

Additionally, it offers peace of mind to a borrower, as one gets the comfort their loved ones won't inherit the burden of mortgage debt should they face such unfortunate events.

Uptake for mortgage is still low in the country with the 2021 bank supervision annual report published by Central Bank of Kenya putting the total number of mortgage accounts at 26,000.

Nevertheless, the increased awareness of the importance of mortgage insurance is encouraging more Kenyan homeowners to consider it as an integral part of one’s financial planning.

Mortgage insurance acts as a safety net, ensuring that your loved ones won't be burdened with your mortgage debt if something unexpected happens to you.

Also, its options are flexible, with choices like single premium or monthly premium payments. This allows borrowers to tailor the insurance to their financial circumstances.

On the other hand, some of the drawbacks include the fact that it normally comes as an additional cost as it adds to the buyer’s monthly expenses thereby increasing the overall cost of homeownership.

Do you also need to take insurance if you're taking a construction loan?

If you need a construction loan, it is important to note that when embarking on a construction project, whether it is building a new home or renovating an existing one or even in some cases estate development, considering insurance is equally important.

In some instances, construction loans can be converted into permanent loans once the construction is fully completed thereby giving a borrower the benefit of time to pay back the loan.

These types of loans also reduce much hustle in terms of looking for guarantors as some of them do not require any personal collateral as the property itself can serve as security for the loan.

You can enjoy further protection as some come with embedded insurance covers that can go a long way in offering protection against property damage due to construction accidents, liability protection or loan protection.

While it comes with costs and limitations, the peace of mind that insurance offers in uncertain times is invaluable.

However, it's essential to carefully evaluate your financial situation and risk tolerance before deciding if mortgage insurance is right for you.

In the end, making informed financial decisions is the key to a secure and prosperous future. Whether you're a seasoned homeowner or a first-time buyer, remember that knowledge is your most potent asset when it comes to personal finance.

Mr Oduor is a financial communication specialist at Zamara. | [email protected]