Expert opinion by Prof. dr. Steffen Sebastian
Prof. Dr. Steffen Sebastian is the author of this column
“Buying an owner-occupied property is a risky investment that will put a family’s budget on hold for decades, and once the decision is made, there is little way to reduce the running costs of financing.” “Unplanned events such as unemployment Parents, for example, can then quickly lead to existential difficulties: for example, in the event of a permanent loss of salary due to death or disability, the family is often forced to sell the home.
In such situations, so-called residual debt insurance should intervene. The insurance payments should continue to pay off in the event of unemployment, disability or death. In principle, this makes sense.
But for one thing, this is not enough to really secure the family financially. On the other hand, the implementation of the residual debt insurance in detail is fraught with many pitfalls.
Safeguarding existential risks
Very forward-looking parents have already secured themselves against such risks at the time the family was founded. In particular, this is important if one of the two parents earns the substantial part of the common income. Because if the main earner fails, not only the rates for the home to pay, but the rest of the living must be covered. It is of little use if the financing of the property is secured, but the property still has to be sold to cover the current expenses. Instead of taking out a residual debt insurance, families are well advised to comprehensively check and hedge their existential risks.
Nevertheless, a residual debt insurance is offered at the completion of mortgage financing. From the point of view of the bank or the financial advisor, this always makes sense, as an additional commission can be earned. In addition, the risk still diminishes for the bank without the interest having to be lowered at the same time.
Often, however, the insurance policies offered have crucial gaps. For example, unemployment will only pay for a short period of about one year. As a rule, occupational disability is only comprehensively covered if the policyholders are in good health at the time the contract is concluded. Sometimes even death payments are limited.
The insurance conditions must therefore be checked very carefully. The “advice” by the insurance broker should not be relied on.
Check cost-performance ratio
A major reason against many residual debt insurance, however, is simply the price. In many cases, the amount of the premium is disproportionate to the benefit. If you actually decide to take out a residual debt insurance, you should always compare the premiums and conditions of different providers.
However, residual debt insurance can only ever be a small part of financial planning. In most cases it makes more sense to use the purchase of owner-occupied property as an opportunity to comprehensively check the financial security in case of unemployment, death or disability. Here, the pension should also be included. Because it does not make much sense to be well insured in the event of death, but not to have taken precautions for the event of survival.
Unfortunately, however, one will often find that securing the current standard of living against all possible risks is very expensive and that one can not afford this in addition to the costs of real estate financing. However, this alone should not deter anyone from buying an owner-occupied property. Then, on the one hand, the standard of living should be secured at a lower level. On the other hand, it makes sense to be clear about the consequences of this, if – by whatever event – a large part of the income falls away. Then you are not fully protected against all risk cases of life. But at least you are well prepared. “
Prof. Dr. Steffen Sebastian holds the Chair of Real Estate Finance at IRE | BS International Real Estate Business School and Director at the Center of Finance at the University of Regensburg. In addition, Professor Sebastian is co-editor of the European Journal of Real Estate Research and the German Journal of Property Research.