No Risk No Fun? 

 

Sometimes taking risks can be a good idea. When it comes to financing, however, it is better to play it safe. Of course, unexpected events can come up in this area. 

 

The good news is: You can insure yourself against most of these risks, and good solutions can be found even for the uninsurable ones. 

 

 

Insurable Personal Risks: Illness, Accidents & Demise 

 

Things can go wrong, and an unfortunate event can lead to less or no income for a short or a longer period. In such a case, borrowers might struggle to meet their mortgage payments. Some of these events are insurable, for example: occupational disability, disability caused by an accident or demise.  

 

The only insurance a bank can demand of you to have, is a term life insurance. In most cases, it is just recommended and does not have to be pledged as collateral. If the insurance were to be pledged as collateral to the bank, this would have the following three consequences: 

 

1. Changes in your insurance agreement may only be implemented with the bank’s consent. 
2. The incontestability clause is demanded by the bank. By this, suicide and simple breaches of obligations are covered by insurance from the beginning. It is only possible to include this clause if the insurance is pledged as collateral to the bank. 
3. In the event of death, the bank has first claim to the lump sum paid out, irrespective of relatives’ entitlement. This claim, however, is limited to the amount necessary for the complete repayment of the debt. 

 

 

 

Insurable: Building Insurance 

 

Some risks that may occur during the construction or renovation process are also insurable. The following points mainly relate to houses, but a public liability insurance for builders (dt. Bauherrenhaftpflicht) and a builder’s risk insurance (dt. Bauwesenversicherung) are also useful when renovating an apartment.  

 

1. Building insurance for structural work (dt. Rohbauversicherung)
   
   
2. Property owner’s liability insurance (dt. Grundstückshaftpflicht)
   This insurance covers the owner of a building or land for their legal liability for injury to third parties on their property.
   
   
3. Insurance for building works (dt. Bauherrenhaftpflicht)
   This insurance covers property owner’s liability during the construction process.  
   
   
4. Builder’s risk insurance (dt. Bauwesenversicherung)
   This insurance is also called course of construction insurance and serves as a kind of “comprehensive insurance” during the construction process
    
5. Buildings insurance (dt. Gebäudeversicherung)
   You should take out this insurance after the building insurance for structural work (dt. Rohbauversicherung), at the latest when the windows are installed. Often, people are aware of the “usual risks”, namely possible loss and damage caused by fire, storms or leaking pipes, but other risks are looked over.
   
   For example: 
   1. Natural disasters (floods, flood debris, avalanches etc)
   2. Damage by sewer overflows and rainwater 
   3. Electrical installation (heat pumps, solar panels etc) 
   4. Damage caused by overvoltage 
      Entails all kinds of overvoltage and not just high voltage peaks triggered by indirect lightening. This is especially useful when living in the countryside.  
   5. Glazing for buildings (not just windows, but also conservatories or glass roofs etc) 

 

 

Uninsurable Risks: Long Loan Terms as Security for Mortgages 

 

Uninsurable risks are, for example, unpredictable familial or personal incidents or job loss. A good solution in such a case is to fully make use of the mortgage’s loan term.  

 

If you agree on a loan with a longer loan term, you can voluntarily pay back more than your monthly repayment amount. You can do this either by setting up an additional standing order or by sporadic overpayments. 

 

This will automatically shorten your loan term since you will pay off your mortgage faster. Alternatively, you can also choose to adjust your monthly repayments for the remaining loan term. The outstanding loan amount was reduced by overpaying on your mortgage, which means that your new monthly instalment, if you make use of your agreed loan term, will be lower. This way, mortgage payments will still be affordable despite lower income.  

 

 

If you had originally agreed on a shorter loan term with your bank and you could not afford your monthly instalments anymore, you would have to apply for increasing your loan term, which is equivalent to a new credit application. In this case, future terms and conditions, which we don’t know and can’t predict yet, would apply. If you urgently need your loan to be extended, it is very likely that your new terms and conditions will be worse or more expensive than your current ones.  

 

 

Risk of Fluctuating Interest Rates 

 

You can avoid the risks of fluctuations in interest rates by choosing a fixed interest rate for your loan agreement. Besides its advantages, a fixed interest rate also has its drawbacks in comparison to variable interest rates. Find out more about this topic here. 

 

 

Risk of Bank Bankruptcy 

 

Since the financial crisis of 2008, the bankruptcy of Lehman Brothers, most banks were rescued before they went bankrupt. However, nobody can guarantee that this will also be the case in the future. There is not enough empirical evidence to determine what would happen if a bank was not rescued by the state.  

 

In such a case it is very likely that the loan will be accelerated by the bank, and you will have to remortgage. Either the new bank will offer you the same terms and conditions, or you as the borrower must accept new ones.