How can mortgage payment protection be equated to equity protection? If you are buying your home with the help of a mortgage, you might actually own the property, but the fact that it is used to secure an outstanding debt (the mortgage) means that at least part of its value needs to be offset against that debt, whilst the remainder is what is termed your equity in the property – your equity represents that part of the capital value of the home which is not subject to any borrowing.
So far so good: a simpler way of looking at it might be that the building society or bank “owns” that part of your home still subject to a mortgage, whilst you “own” the remainder. The problem is that, thanks to the plummeting value of property prices in recent months, very many homeowners actually owe more to the bank or building society on the mortgage than the home would fetch if it were put on the market and sold. This is called negative equity and is a trap into which an estimated 903,000 mortgage borrowers – nearly 5% of all homeowners – have fallen, according to the authoritative Council of Mortgage Lenders, as reported by the Guardian newspaper on the 17th of April 2009.
Any homeowner in that negative equity trap will be in a double bind if an unexpected loss of income results in difficulties in paying the mortgage – on the one hand, the home risks being repossessed if the payments are not made; yet if the property is sold, the former homeowner is still left with the balance of the mortgage debt that could not be covered from the proceeds of the sale.
So, how can mortgage payment protection insurance (MPPI) help protect the homeowner’s equity in his or her home? This can be explained simply by considering just what mortgage payment protection does: it pays the mortgage when you cannot. If an accident or an illness keeps you off work and, therefore, unpaid (unless you are one of the few with an employer’s especially generous sick-pay scheme), or are made compulsorily redundant (and therefore certainly unpaid), mortgage payment protection ensures that the mortgage repayments nevertheless continue to be made. It does this through a simple contract of insurance – a very modest monthly premium is paid and in return for which the response to any of the insured risks occurring is the payment of a regular, monthly benefit, from which to make the mortgage repayments.
In this way, mortgage payment protection can be used to cover mortgage repayments of up to a typical maximum of £1,500 a month, or the equivalent of 50% of the policy holder’s normal gross salary, whichever is the smaller amount. In the event of a claim, the insured benefits then continue to be paid out every month that the policy holder remains incapacitated (by accident or illness) or unemployed (as a result of redundancy), or for up to a typical maximum of 12 months, whichever is the shorter period.
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