What is the minimum amount of Landlords Life Insurance we really ought to purchase?
I suspect the reason most property investors choose not to purchase Landlords Life Insurance is cost. For example, if you are 40+ years of age and your buy to let mortgages balances are £1 million plus the premiums can appear to be very scary if you ask for a quote for enough life insurance to repay all of your mortgages in the event of death.
For borrowers without family and/or business partners whose finances could be affected adversely by death during a mortgage term, the risk of having no Landlords Life Insurance is perhaps an acceptable one for them. However, for people who have borrowed jointly or would like to leave their properties to loved ones the risks are far higher.
In the event of the death of a borrower, even if it’s a joint mortgage, it is usually well within the rights of a mortgage lender to call in their loans. This is more likely to happen post credit crunch as several lenders have closed their doors to buy to let lending and want to recover as much money as possible. Lenders which are still actively in the market can now lend money at far higher profit margins so there is every incentive for them to call in their loans in the event of death too.
I am not a financial adviser and the following should not be construed as financial advice. It’s just my opinion as a landlord on what the minimum amount of Landlords Life Insurance should be purchased.
If I were to die tomorrow my wife would have two or three choices:-
1) Sell the property portfolio and pay off the loans
3) Do nothing and force the mortgage lender to call in the loans, eventually reposes the properties and sell them. This would cost a lot more than options 1) and 2) above. The reason is that substantial fees and penalties would be incurred and the mortgage lenders primary incentive would be to recover as much money as possible. Now I know that mortgage lenders have a duty to sell the properties for as much as possible, however, is that really what you think happens?
In my case, I want my wife to continue to receive rental income as I genuinely believe that property is the best form of investment. Therefore options 1) and 3) are out of the window for me.
On that basis, refinancing is her only viable option. However, to get a decent deal and retain the same level of cashflow she will need to be borrowing around 50% LTV. This is because it will cost her a lot of money to refinance and the interest rates she will be paying are far higher these days than when I arranged my tracker mortgages at bank base rate plus 1% to 2%.
I have concluded that the minimum amount of Landlords Life Insurance I should buy is the difference between my outstanding loans and the amount those loan balances would need to be to get 50% lending. As a simple example, if I were to own one property worth £100,000 with an £85,000 mortgage, I reckon I would need to purchase £35,000 of life insurance to enable my wife to be able to pay £35,000 off the mortgage and take a new mortgage for £50,000 (which is likely to have a higher interest rate) in order to maintain the status quo in cashflow terms. Now that’s very much a rough estimate as everybody’s circumstances are different but I hope you will find it a useful rule of thumb. The other reason I think the minimum amount of Landlords Life Insurance should be enough to reduce loans to 50% LTV is because at that level of lending, most mortgage lenders would be falling over themselves to offer decent interest rates, pretty much regardless of any market conditions I can realistically imagine.
To help you to work out the minimum amount of landlords life insurance you would need based on the strategy I have outlined above I have created a very simple calculator, see below …….