Co-Habitation and Mortgage Protection

it’s fine to not get hitched…

Weddings are extremely expensive. You and your partner made the right choice not to do it. You’re building a life that isn’t just about one day, and you’re very committed. You even have a house together! Co-habitation is fine!

With all this in mind, let’s have a quick check and make sure that your financial arrangements are as sensible as you are! Because you’ve got a house and a mortgage, you’ve got mortgage protection, right?

What is Mortgage Protection?

Why do you have mortgage protection? It’s fine to say ‘because the bank told me we had to’, most people start the same way.

But if you’re unsure what it covers, like a lot of people:

  • Mortgage Protection is an insurance policy against the loan you took out to buy your house.
  • It DOES pay off the loan in the event of your death.
  • It DOESN’T keep up payments on your mortgage if you’re unable to due to illness.

Ultimately it protects the bank against loss, and your dependents against debt and loss of their home if you die.

What effect does co-habitation have on Mortgage Protection?

And now we’re back to the marriage question. In co-habitation situations, an off-the-shelf joint mortgage protection policy could be a drastically wrong choice for you, and here is why:

As you have a jointly held mortgage, you probably assume that you each own half your house. With a joint mortgage protection policy, if one of you die, the bank will receive the money to pay their loan, so the property will be paid off.

However, if you aren’t married, and particularly if you have no children together, you’re strangers in the eyes of the law. If you both have wills, and are each other’s beneficiaries, you can leave each other your half of the property. Now is the time to join the 30% of the population who have wills. There’s never a better day than today.

I don’t have a Will!

If you don’t have children, your parents will receive your share of your home. It WON’T automatically go to your partner, no matter how sensible that might seem.

If you have no will, but DO have children, they could get your share, rather than your partner.

Death and Taxes

What will make this potentially worse is the inheritance tax. For taxation purposes, a co-habiting couple are treated as strangers, and the threshold for these inheritances is €16,250.

This means that any inheritance you receive from your partner, including their half of the home you own together, is taxed at 33% above €16,250. And it’s been a very long time since anyone purchased a house in Ireland costing €32,500.

This could put you in the very unenviable position of owing a large tax bill on a property that should, theoretically, be paid off outright at a time of need for you or your family.

To prevent a Revenue-related mess, you need to fix this situation now, by doing a few things: Write a will. Immediately. It’s never too early, and you can find a link to tell you more here.

Fix your Mortgage Protection

The second thing is to look at your mortgage protection policy, and do two things:

Increase the amount to cover each of your tax liabilities, eg, if your mortgage is worth €300,000, and you each own 50%, then you would leave each other €150,000. After your €16,250 threshold, you would each still owe 33%, or €44,138 on the remaining €133,750.

So the answer in the example above is to increase the amount you’re insured for, to cover this tax liability. It’s easier to so this on a policy you own individually, rather than the group policy your bank offers you when you apply for your mortgage. If you both have individual means, and separate bank accounts, you can arrange single life ‘life of another’ policies, where you each pay for a policy insuring each other.

The third thing you’ll both need to do, depending on how many assets you have, is to effect a Section 72 policy, on a single life basis, nominating each other as the beneficiary. Section 72 policies are specifically for the purposes of
paying off tax liabilities.

Or you could already be planning on getting married, just to avoid these potential pitfalls. No matter which course of action you choose, the only unacceptable one is doing nothing at all. You can run quotes for Life Insurance and Mortgage Protection below. If you have any questions at all, please contact us.

Debbie Cheevers

Debbie Cheevers

Qualified Financial Advisor

Debbie was born in Dublin and graduated from NCAD with a degree in Visual Communication. She brings a strong customer services background to Greenway.

Debbie qualified as APA in 2017 and a fully qualified financial advisor (QFA) in 2018.

She believes that product knowledge is key to helping customers make the right choices.

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