What is a Mortgage Indemnity Guarantee?
Mortgage Indemnity Guarantee (‘MIG’) is a policy of insurance which a mortgage lender will take out to protect their interests should the borrower default on their mortgage and the lender has to repossess the property. When a lender has to repossess a property they may have to sell it at a price which is less than the mortgage secured against it. In the event that the mortgage lender has to foreclose on a mortgage, they rely on the Insurance Company which issued the mortgage guarantee to compensate them for their losses.
The MIG is paid for by the borrower but it does not protect the borrower. In cases where the lender has to claim on the mortgage indemnity insurance, the insurer will pay out to the lender and then pursue the borrower for the shortfall.
When Do Lenders Require a Mortgage Indemnity Guarantee (‘MIG’)?
When offering to give a mortgage on a property the lender will not usually provide a mortgage for 100% of the value of the Property. The maximum percentage (‘loan to value’) that a lender will lend will vary from lender to lender from around 75% to 90%. A mortgage which is more than 75% loan to value is known as a ‘high loan to value’ advance and it is these mortgages that will require a MIG. Where a MIG is required the borrower will be required to pay a fee which is variously called a ‘high percentage loan fee’, ‘a high lending fee’, or an ‘additional security fee’ on their mortgage and it is this fee that pays for the MIG.
What Happens When A Lender Makes A Claim on the MIG?
The mortgage lender can only make a claim under the MIG after they have sold the repossessed property and then only if they make a loss when selling it (i.e. they have not been able to recoup the full amount of the debt outstanding on the mortgage).
As mentioned earlier, the fact that the lender is able to recoup their losses through the MIG does not protect the borrower, the shortfall still remains as a debt owed by the borrower only now, it is not owed to the mortgage lender, it is owed to the insurer. The insurer gains the right of ‘subrogation’.
The right of subrogation means that the insurer can reclaim from you any money it has had to pay to the lender under the MIG. Insurers always have the right to recover money they have to pay out on a claim from the third party who causes the claim. This is how the insurer automatically acquires the right of subrogation, as it is the default of the borrower that has caused the claim. Further, the insurer may not cover all of the mortgage lender’s loss and the borrower may find that they have both the mortgage lender and the insurer pursuing them for unpaid debt.
If the borrower does not repay the debt voluntarily, both the insurer and the mortgage lender may take legal action against them. It is usual for such action to be taken in the name of the lender. Once the mortgage lender has recouped the debt, the shortfall is passed to the insurer. Legally, the mortgage lender has 12 years in which to take action to recoup the debt although most of the mainstream lenders will begin proceedings within 6 years of the property being sold.
The important fact to remember is that the MIG does not cover the borrower. Even if the borrower voluntarily surrenders the property to the lender – the borrower is still liable for the debt.
For further information on Mortgages see our other articles in this series available on our website:
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