Nearly one in twenty of all homeowners are in negative equity – the situation that is reached when the value of the home is less than the outstanding mortgage on which it is being bought. Unless the borrower has mortgage insurance, therefore, if he or she should suffer a temporary loss of income – through an accident, illness or unemployment, for example – this means that it will take a supreme effort to maintain the mortgage repayments and the property may have to be sold. Where negative equity exists, however, the proceeds from that sale will not cover the outstanding mortgage debt, and the former homeowner will still have a mortgage to clear. In sum, it makes sense to avoid having to sell the property and instead keep up the mortgage repayments. That is why mortgage insurance is important.
The Council of Mortgage Lenders has calculated that some 903,000 mortgage borrowers – or 4.8% of all homeowners in Britain – suffer level of negative equity, according to a report in the Guardian newspaper on the 17th of April 2009. The proportion in negative equity varies, of course, from one part of the country to another and in some parts it is as high as one in ten, whereas in others it is only one in one hundred. Whatever the proportion where you live, however, you are unlikely to want to sell your home and still be left with a hefty mortgage debt and nothing to show for it.
Mortgage insurance is a way of avoiding such a predicament in the first place. It is a simple and straight forward mechanism that, in return for a remarkably modest monthly premium, guarantees the pay out of benefits that will cover the whole, or a substantial proportion, of the mortgage in the event of the policy holder needing to take unpaid time off work to recover from an accident or illness or if he or she should be made compulsorily redundant.
The level of insurance cover is decided by the prospective policy holder at the outset and will, of course, depend on the size of the mortgage itself, the individual’s particular needs and circumstances, and the cost of the appropriate monthly premiums. These are helpfully quoted in terms of the price per £100 of mortgage cover provided, so it is a simple calculation of the number of multiples required. Cover can generally be arranged for up to a typical maximum of £1,500 a month, or the equivalent of 50% of the policy holder’s gross pay from work, whichever is the lesser amount – in other words, the whole, or a substantial proportion, of the vast majority of mortgage repayments.
In the event of a claim, mortgage insurance policies generally require an initial waiting or “qualifying” period – of anything between 30 and 90 days, depending on the insurer – but the insured payments start to be made in full immediately thereafter. These payments then continue to be made on the same date every month that the policy holder is off work recovering from the accident or illness, or searching for alternative employment, or for up to a typical maximum of 12 months, whichever is the shorter period.
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