Mortgage Guides

Mortgage protection - Do I need it? Why?

By Seamour Rathore seamour@consumerchoices.co.uk

There’s no avoiding it – we should all examine our need for mortgage protection cover (MPPI) as it seems no-one will escape the chill of the recession.

Unemployment has hit 2.2 million in the UK, and 65,000 homes could be repossessed in 2009, according a Council of Mortgage Lenders’ estimate. The last thing anyone wants to do is fall into mortgage arrears just now.

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If you fall into financial difficulty and can’t pay your mortgage, many lenders will only give you three months grace before commencing repossession proceedings. Although lenders are under pressure to ease off this timetable a little, there are no guarantees.

In this guide we’ll look at whether you should consider a mortgage protection policy and how much it will cost.

What is mortgage protection cover?

Mortgage payment protection is a policy which pays out a monthly sum to cover your mortgage if you can’t work due to illness, injury or redundancy. It is also known as accident, sickness and unemployment cover (ASU).

It’s different from many other types of cover, such as income protection, as it will only pay out for a period of 12 months (24 months in some cases) so should only be seen as a financial stop-gap until you get a new job or recover from ill-health.

The government recently proposed a scheme to allow families to defer part of their mortgage payments for two years if the main breadwinner has lost their job. However, even if you get help from the Homeowner Mortgage Support Scheme you will still have to find the money to cover all your other bills and living costs. Once you are back in employment, the interest will have compounded and added to the overall mortgage debt.

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Who needs mortgage protection cover?

In January 2009 the government introduced a temporary measure which cut the time you’ll have to wait for state benefits to cover your monthly mortgage interest.

In the past this was nine months, but it has been slashed to 13 weeks. Nevertheless, there rules for eligibility and you will be means-tested. So if you have a partner who earns enough to cover the mortgage interest or you have savings, you will not be entitled to state help. This help will not be available if you have a mortgage protection policy in place which would do a similar job.

Don’t confuse mortgage protection with life insurance as mortgage protection does not provide a payout in the event of death. If you have dependents you should make sure you have adequate life insurance outside of any mortgage protection policy.

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Mortgage protection cover – key features

You are under no obligation to take out mortgage payment protection from your mortgage provider at any point, including when you are taking out a new mortgage. Shop around independent product providers to find the best deal

The cost of cover is not governed by issues like health, age and whether you are a smoker
The cost of cover depends on the size of the mortgage. It will cost £3-7 per £100 of monthly cover – so you can pay as much as £50-60 per month. As an example if your mortgage payments are around £800 a month you could pay anywhere between £24 and £56 a month.
Mortgage payment protection usually pays out for 12 months, but policies which pay out for 24 months are available
Mortgage payment insurance is different from mortgage life insurance which insures your mortgage in the event of your death
You can add extra cover for regular bills as well, with some policies.

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What are the downsides of mortgage protection cover?

Mortgage protection is not designed to pay your mortgage during its entire term – just 12-24 months (depending on the individual policy) if you are unable to work.

You won’t be covered if you take out a policy after you have been told there is a risk you could lose your job or if your employer has said it’s planning redundancies
There is usually a period of around three months from taking out the policy before you can make a claim on it – this is the “qualifying period”
There is usually a period between making a claim and getting your first payment – this is the “deferred period”
An income protection policy may offer better cover for you, depending on your circumstances
In the event of illness, many employers will give you sick pay beyond the statutory requirement – this means that you may not need the MPPI to kick in before you have recovered, ie you may find yourself over-insured
The devil is in the detail – you must read the small print so you know what is and isn’t covered, ie dangerous sports, existing medical conditions, if you are self-employed etc.

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Getting the right policy for your needs

There is a multitude of life and protection products available of which mortgage protection is just one. It’s important to get the right policy, or mix of policies, for you.

This will differ according to whether you have dependents and whether your family has other sources of income. You also need to identify the areas where you are more likely to need protection in the future. The cost of each type of cover can vary enormously and some forms of life insurance depend on your health and lifestyle. Consider consulting a financial adviser to review your protection needs and get the right policy/policies for the best cost.

You should ask yourself the following questions:

How much cover should I have?
Which protection policies should I have?
Which provider is the most appropriate for me?
Perhaps you would rather save up yourself (self-insure) to have a financial cushion if you are made redundant rather than regularly pay into a policy. This may suit those with a partner who earns a good salary (so could carry the cost of the mortgage) or if your employer has a generous sickness benefit policy in place.

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A more open market for mortgage protection cover

The way that mortgage protection cover has been traditionally sold has been under scrutiny in the last few years. The Competition Commission ruled in November 2008, mortgage payment protection could no longer be sold at the same time as a mortgage.

Mortgage providers now have to give you 14 days after you have agreed to a mortgage before contacting you about mortgage protection. This gives you time to shop around and find the best deal for you, rather than being rushed into a purchase.

Banks have long made substantial sums from selling various types of protection policy – as much as one-fifth of their profits have been coming from these types of policies, according to one study by Morgan Stanley.

So, while you may need this type of cover, do your homework carefully and shop around for the best deal for your circumstances and finances.

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Mortgage protection cover: What it isn’t

It’s easy to get confused by all the different types of life cover and protection policies, but remember mortgage protection cover is not any of the following:

Life assurance: Pays out a sum to your dependents on your death

Critical illness cover: Pays out a lump sum if you contract a serious illness, a list of which will be outlined in the policy documents. This can be used for any purpose ie paying off all/part of a mortgage, paying other bills, paying for non-NHS treatment. Critical illness cover can be expensive.

Income protection or permanent health insurance: Based on a medical questionnaire, occupation, age and other risk factors this is a policy which pays around 50%-65% of your income if you can’t work due to illness or accident.

It does not cover you for redundancy, but you can bolt this on as an extra, at extra cost. Income protection can be expensive, particularly if you are considered a high risk. But unlike the fixed term of a mortgage protection pay-out, it will pay out until you can return to work.

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