Mortgage Protection – how to make sure you're fully covered

by Michael Challiner

So your mortgage has been finalised and you've finally moved into your new home. The mortgage is expensive but worth it – but of course it is essential that you consider what would happen if, for some reason, you are not able to meet the repayment schedule. There are a number of things that could go wrong, and you need to consider them all to see if is worth insuring yourself against each possibility. If you have a family to protect, then it is particularly important you consider the following five main areas of concern. Each one relates to your ability to keep up the mortgage repayments: If you have a variable rate mortgage and interest rates increase, you could find yourself unable to afford the monthly repayments What if you lost your job What if you suffer an illness or accident that keeps you off work What if you become permanently unable to work due to accident or a critical illness What if you die before you've finished paying off the mortgage Never an industry to miss a trick, the insurance industry has all these angles covered, and there are a huge range of products available to cover these risks. In all honesty, any risk relating to interest rates rising should have been dealt with before you signed up for your mortgage. Your mortgage adviser will have told you all about “fixed” and “capped interest rate” mortgages. The fixed rate mortgage ensures that whatever happens to the Bank of England interest rates, your payments remain the same. A capped mortgage sets a pre-agreed level that the interest rate cannot rise above. After an agreed time - usually between 3 and 5 years - both types of mortgage revert to the standard variable rate. The majority of people like the security of the fixed rate mortgage and now they account for 55 of all new mortgages. The capped rate mortgage is less popular, but still a very valid choice. At the outset, you will probably pay more than with a fixed mortgage, but the rate you pay is generally less than the fixed interest rates. It's a good way of controlling the amount of interest you pay, and at the end of the protected period you are free to shop around for another protected deal. There's no way of knowing if there will be better deals available then but the mortgage market is so competitive, there are always good deals to be found. When it's time to re-mortgage, it would be worth asking a mortgage broker to find the best deals for you, as they always have access to the latest information and the cheapest special offers. If you're concerned about how you would pay your mortgage if you lost your job - then Mortgage Payment Protection Insurance is the answer. However, you should remember that its most basic form is only really applicable to redundancy. If you resign or are ‘sacked' then you probably won't have a legitimate claim. Online quotes come in at around £2.45 per £100 of monthly mortgage payment, the payments would start after 30 days and continue for up to one year. Your mortgage company will probably offer you this type of insurance but we highly recommend buying it separately – banks and building societies often charge up to three times more than their online rivals. You can extend your mortgage payment protection policy to include No3 – being off work due to accident or illness. But check with your employer first to see what protection they have in place for you – for example, if you get six months at full pay then you'll only need to be insured for the period after that. At that point, you would get statutory sickness pay, but that's not enough to comfortably live on and you'll still need to pay the mortgage. To insure yourself against accident or sickness it will cost around £2.45 per £100 of monthly mortgage payment. If you choose to combine it with unemployment then it is around £3.95 per month. It is essential to remember that this type of insurance will only pay out for a maximum of one year – which leads neatly onto No4. What if you suffered a serious accident or illness and are permanently unable to work? You may think that this is a rare occurrence, but the insurance industry estimates that 20 of men and 16.6 suffer a serious illness before their normal retirement age. A stroke at the age of 40 would make a huge impact on your family finances, so it really is an essential form of insurance. Critical illness insurance is the best in the above case, as it will pay the outstanding mortgage in full if you can't work again. You need to make sure that “total and permanent disability” cover is included in your policy as it's this that ensures that your mortgage will be repaid if you are unable to work again because of an accident. You can buy Critical Illness Insurance where the level of cover, and correspondingly the size of the payout, decreases in line with your mortgage. This is called “decreasing cover”. If you have a repayment mortgage then this is ideal, and it is also the cheapest form of critical illness insurance. With an interest only mortgage, the sum you owe your lender remains the same so you need Critical Illness Insurance with “level cover”. All these insurance have a catch – their exclusions list. For example, to make a claim on Critical illness Insurance you need to survive for an agreed period following an accident or diagnosis of a life-threatening illness. If you don't, the insurance will be useless. Most insurance companies require you to survive for 28 days but some have reduced this to 14 days. That means that you need another type of insurance to cover the possibility of you dying before your mortgage is paid off. Mortgage Life Insurance is often a pre-requisite so if you die, the mortgage is paid off in full. If you're single and have no family living with you, then you probably don't need it, in that case the property would be sold and the outstanding mortgage would be covered by the sale. Most homeowners get Mortgage Life insurance and it is the most popular form of mortgage protection. It also comes in “decreasing cover” and “level cover” formats, just the same as with critical illness insurance. Covering yourself against all the eventualities won't come cheap however there is a lot you can do to keep costs down. For example, choose a Mortgage Payment Protection Policy that covers unemployment, accident and illness – that will save you about 20. This is sometimes known as “unemployment and disability” cover. You can also combine Critical Illness and Mortgage Life Insurance, and although it is difficult to be exact about what savings you will make, they are likely to be around 20-25. The other great way to make a saving is by shopping around. Your bank or building society is the last person you want to buy your insurance from, they charge a lot more than the independent companies on the internet. Probably the best way to find the cheapest deal is to use a specialist broker – you will find these by searching for “life insurance”, “cheap life insurance”, “life insurance quotes” or “Mortgage Protection Insurance”, and you will make big savings by doing it. The Internet is a highly competitive marketplace and brokers make a habit of cutting their commission and passing the savings back to you through lower premiums, because it means they win your business. Insurance can be quite complicated, for example you'll need to decide if you want a policy with a “Guaranteed Premium” or a “Reviewable Premium”, so it pays to get professional advice anyway. A life insurance adviser will not only get you the best deal, but the right deal – so it's worth making that phone call to make sure you don't make a mistake. Hopefully you won't ever need to make a claim on any of these essential insurances!

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