Mortgage Insurance Explained

Most people are required to take out at least buildings insurance on their home if they have been granted a mortgage for its purchase. This reduces the risk to the lender by protecting their investment. However, other than safeguarding the physical structure, what other form of protection is there that offers you a safety measure? Mortgage insurance may be worth considering as this could be used to meet your monthly mortgage repayments and other associated expenses should you succumb to involuntary unemployment, long-term sickness or an accident.

While none of us like to be pessimistic, the truth is, none of us are infallible and at any moment in time, we could become unable to work. Early in 2008, economists predicted that more than 1,200 people a day will lose their jobs over the next 18 months and unemployment has been rising steadily with the Office for National Statistics stating that it hit 1.6 million in March, up 14,000 since January. That is why the insurance can be so valuable.

You might think that if you lost your job or suffered incapacity for any length of time that the State would help you financially. The State does pay social benefits but only if you qualify and the weekly amounts are minimal. It would probably be difficult to manage on benefits, without the additional burden of a mortgage. This inability to pay might result in lenders and other creditors taking you to court for non-payment. It may bring about a visit from the bailiffs or worse still, you could have your home repossessed. Even if you manage to negotiate so that you do not lose your property, you would probably incur arrears, which could affect your credit rating. This might cause problems in the future should you wish to enjoy further loans or credit facilities. To avoid this situation and for a relatively small increase in your monthly outgoings, you could enjoy the peace of mind mortgage insurance - or mortgage payment protection insurance to give it its full name - might give.

Mortgage Insurance from Burgesses

This type of insurance should not be confused with mortgage life insurance, which is a form of life insurance and pays out a lump sum upon your death.

The benefits of mortgage protection insurance might have already been explained when you secured your mortgage. The lenders are often quite keen to have you take out this form of insurance, preferably from them. Unfortunately, it is often very expensive compared to that offered by an independent standalone provider. Just because a lender offered you the most favourable mortgage deal, does not necessarily mean that they will do the same on insurance. It has been known for high street lenders to use pressurized tactics to sell expensive cover. They might even imply that you must take the cover out with only them. Which, if successful, could increase the profitability of their cheaper mortgages at your expense? This is not so, you are legally allowed to buy insurance from whichever bone fide provider you choose. If you do not wish to pay expensive premiums for your insurance, then it will probably be cheaper to go independently.

When looking for a cheaper deal on your mortgage insurance, it could be important to bear in mind that although the cost of the premiums might be paramount in your decision-making, comparing the contents should not be overlooked. It could be pointless opt for an inexpensive policy if you are unable to benefit from its protection. For example, the period from the start of the plan until you are allowed to make a claim can vary quite a lot. In a case where you are rather stretched financially, you might consider it prudent to take one with slightly more expensive premiums that offers a minimum exclusion period, than a cheaper one that does not.

Mortgage Insurance

The extent of the claim period can differ; normally it is up to 12 months, although some lenders will offer a longer period of 24 months. The length of the excess period should also be assessed. Some allow you to claim immediately should you experience involuntary unemployment or incapacity, whilst others require you to wait until the 90th for making a claim. Your age too could affect the price of the premiums. It generally accepted that the older you are, the higher the risk of ill health. In addition, older people often find it harder to secure re-employment.

Although these factors contribute to the terms offered, the monthly amount payable during a claim is calculated using your earned monthly wage before tax is deducted or up to the provider’s pre-defined claim limits. The criteria for each lender can differ but invariably no more than 75% of your monthly gross income is paid each month in a claim. This covers, but will not exceed, your monthly mortgage repayments and their connected costs. These might contain life and critical illness insurance, repayments plans and home insurance.

The inclusion of type of insurance in your monthly expenses could be deemed very advantageous. However, a review of your circumstances might reveal that this form of insurance is inappropriate. If you work part-time, that is 16 hours or less, or plan to take early retirement, even leaving the UK, these could all affect your ability to make a claim. Self-employed people may not be-able to enjoy this sort of protection. Therefore, checking thoroughly the terms and conditions of the mortgage insurance and how they apply to your situation before making a commitment is essential to help avoid a costly mistake and disappointment.

That aside, when taking mortgage protection insurance from either your mortgage lender or an independent standalone provider, it could be sensible to ensure that they are authorised and regulated by the FSA (Financial Services Authority). This authority governs most good financial suppliers, and their rules adhered. This could give you confidence in the service and products offered and the assurance that an official body polices this industry.