It's the one monthly payment you cannot afford to miss. Keeping up to date with your mortgage is essential and so it comes as no surprise that many of us opt to take out some sort of insurance.
New research from the Council of Mortgage Lenders shows that 60% of home-buyers have some form of insurance to provide help if they were unable to keep paying their mortgage.
One of the most common types of cover is mortgage payment protection insurance (MPPI).
What is MPPI and how does it work?
Mortgage Payment Protection Insurance pays your monthly mortgage payments for a specified period - typically two years - if you suffer accident, sickness, or unemployment. You pay a premium each month while the mortgage is running. If you become unemployed, or unable to work due to accident or sickness, the policy starts to pay out (usually direct to your lender) to cover your mortgage.
To keep the cost of the insurance down, there are some periods where you will not be covered (you should check the individual policy for exact details). The main ones are an exclusion period of up to 60 days when you first take out your policy, during which any claim for unemployment would not be met (although claims for accident or sickness would usually be paid). In addition, there is an 'excess' or 'waiting; period of up to 60 days for each claim, during which no payments will be made. So it makes sense to try to keep enough money in savings to cover at least two months' worth of mortgage payments, even if you have MPPI. There are some circumstances when MPPI will not cover you - for example, unemployment caused by misconduct, or that you knew was impending at the time you took out the insurance, or sickness claims caused by certain pre-existing medical conditions.
Do I need it?
Well it's certainly popular. CML figures show that almost one million MPPI policies were sold or provided free in 2003. This means that just over a quarter of the UK's 11.5 million mortgages were covered by MPPI at the end of last year. The figures do not impress John Prescott though. A recent report from the Office of the Deputy Prime Minister suggests the government should consider introducing a compulsory 'savings bond' for each home loan. It also recommends research on the merits of introducing incentives to encourage people to make mortgage overpayments or take up insurance.
But this doesn't mean you should sign up fro MPPI at the first opportunity. It is important not to be over-optimistic about your ability to meet your mortgage and other commitments but chances are you already have cover -such as accident or sickness protection from your employer, Income Protection or Critical Illness insurance, or substantial levels of savings - and you may decide that you do not need MPPI insurance.
How much will it cost me?
If you are taking out a new mortgage, you will probably be offered MPPI by your lender or the intermediary arranging your mortgage. Unless the MPPI is offered free as part of a mortgage 'package', it is up to you whether buy protection. MPPI is usually cheaper (and the terms may be more generous) if you take it out at the time you start your mortgage, rather than leaving it until you have had your mortgage running for a while.
The CML research reveals that the average cost of MPPI continues to fall. At £4.95 per £100 of mortgage payments, MPPI is now almost 12% cheaper than it was six years ago. But it may be cheaper to take out an alternative form of protection such as critical illness cover, permanent health insurance or unemployment insurance. Buying from an independent broker instead of signing up with your mortgage lender is likely to save you money.
What else to I need to watch out for?
Gaps in the cover. It may be a bore but reading the small print is the only way to know for sure what you are covered for. Thanks to an agreement from insurers, MPPI policies should all have the same basic level of protection. But you will still need to make sure that your specific circumstances are addressed. Although policies can be arranged for a joint mortgage, some risks, like the breakdown of relationships, are not adequately covered. Your age may also be a factor; certain policies will automatically expire when you reach 60 or 65 regardless of how many years they have left to run.
Policies may be getting simpler, cheaper and more popular but look before you leap. Think carefully about your own circumstances and seek independent advice if you have any questions.
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