Money News Feature

Four things your mortgage adviser will try to make you buy

Four things your mortgage adviser will try to sell you

Tuesday 4th October 2011

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Don’t feel indebted to your mortgage adviser just because they are giving you a mortgage. You could find yourself signing up for expensive products you don’t need.

Whether you adviser only advises on their company’s products, or a limited range of products from several companies, it’s likely they will try to persuade you that now you’re becoming a home owner there are products you simply must have.

But you’ll need to keep your wits about you and take your time. The golden rule is that you don’t have to buy any products from this adviser beyond your mortgage. And you could get a much better deal if you shop around the whole market. You can do this online or with the help of an independent financial adviser.

1. Mortgage life insurance

You need this if you’re buying a house, are the major breadwinner and have dependents, the mortgage lender will most likely know this and will therefore most likely try to sell you mortgage life insurance.

It will pay out a lump sum if you die before the mortgage is paid off, and the idea is that it can then be used to settle the outstanding mortgage and your dependents will have one less thing to worry about.

There are two types of mortgage life insurance: "level" and "decreasing". Level means the policy will pay out the same sum regardless of where in the 25-year mortgage term you are; “decreasing” is because the outstanding mortgage debt, and therefore the potential payout, decreases over time.

Lenders will try very hard to sell you their own ridiculously expensive policies, often without regard to your circumstances. For example, if you don’t have anyone to leave your property to, then there’s no need to take out any insurance.

If you feel compelled to take out this type of insurance, remember the market for this type of mortgage life insurance is very competitive and you’ll be able to keep your costs down if you shop around. Read our guide to mortgage life insurance.

2. Mortgage payment protection insurance

Mortgage payment protection insurance (MPPI) and accident sickness and unemployment (ASU) cover are often thought to be interchangeable terms for the same thing, but they have crucial differences.

Whereas ASU can be used for any monthly bills and can be taken out whether or not you have a mortgage, MPPI is generally used in conjunction with a mortgage and will cover your mortgage payments should you be unable to work due to accident, illness or redundancy.

This is, however, only a short-term solution and MPPI cover normally only comes with terms of 12-48 months. During this time you are expected to have recovered from your illness, accident or have found yourself another job.

Lenders currently charge around £5 per £100 of monthly mortgage payment for MPPI, but you can also find cheaper deals than this, so shop around.

3. Critical illness cover

Another type of cover worth contemplating is critical illness cover.

Critical illness cover will pay out a lump sum to you in the event you are diagnosed with a serious illness, disability or if you need to undergo certain types of surgery.

If you do not have much money saved away then critical illness cover could well be a good option for you.

If you were unfortunate enough to suddenly contract a nasty illness such as cancer for example, then you must have a way to pay your monthly mortgage payments.

However be warned that there is a very strict and defined list of what conditions critical illness policies actually cover. If your particular serious illness is not on the list, you will not receive any money.

That said many critical illness policies also contain a “total and permanent” disability clause.

This means that it will pay out if you become permanently disabled for whatever reason, regardless of whether the illness or injury is listed on the policy.

Again there are some companies particularly well-rated for this cover, so don’t just go for your adviser’s preferred choice.

4. Income Protection

Not to be confused with payment protection insurance (PPI). If you can’t work because of illness or disability, income protection provides you with a regular, tax-free income. The benefit paid is up to a maximum percentage of your earnings - often 50% or 60%.

Income protection is also known as permanent health insurance.

Unlike critical illness cover, which has a defined list of illnesses and is paid as a lump sum, income protection will pay out if you are unable to work due to whatever illness or injury, and is paid in the form of an income over the period that you are unable to work.

Income protection replaces part of your income and will continue to pay out until you can return to work or you reach retirement age, whichever is sooner.

There is a waiting period before it will start to pay out, but you should be covered by your employer for at least part of this time. This period can range from a month up to two years and is known as the “deferment period”.

Find out what income you can get from your employer (such as sickness benefit) and for how long, but the longer you agree to wait for payouts, the cheaper your premiums will be.

The maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost, less an adjustment for any State benefits you can claim.

vThis usually translates into a maximum of around 50% to 65% of your salary before tax.

Be warned though that income protection insurance will not cover redundancy, so for this you will need to take out MPPI or ASU.

Please read our guide on mortgage life insurance.