Mortgage payment protection insurance
A guide to mortgage payment protection insurance
There is certainly no social stigma attached to having a mortgage, like there can be with having to resort to other forms of borrowing. But ultimately there is no escaping the fact that a mortgage constitutes a debt – and normally a very large one.
Like most other debtors, therefore, those with mortgages rarely have too much spare cash lying around to help them make their monthly repayments if they lose their income.
There is so much corporate restructuring going on that even those with the most formidable qualifications and experience can find themselves being made redundant within months of being told they were indispensable to their employer’s plans.
Don’t forget also the possibility of becoming the victim of a serious accident or illness. No-one can guarantee that they will always be fit enough to work, however healthy a lifestyle they lead.
A single stroke of misfortune could therefore easily result in you having your home repossessed if you fail to put in place a suitable insurance mechanism to safeguard against the possibility of finding yourself unable to go out and earn a living.
Consequently many homeowners take out a product known as mortgage payment protection insurance (MPPI), which can cover their mortgage outgoings for up to 12 months if they become unable to work on health grounds or as a result of involuntary unemployment.
But, although mortgage payment protection insurance can provide valuable peace of mind, the costs involved have often proved a problem for financially stretched homeowners who have sunk every last penny into their new property purchase.
Even the most competitive specialist mortgage payment protection insurance providers have tended to charge around £4 a month per £100 of monthly mortgage outgoings covered, and the major banks and building societies have often charged 50% to 100% more than this.
Now, however, those requiring mortgage payment protection insurance are able to take out an age-related format, which is much more affordable for younger people. Indeed, in some cases premiums can cost under half what they would do with the best value standard mortgage payment protection insurance, and this is especially good news for young first-time buyers who are still living off only modest incomes.
How Does Age Related Mortgage Payment Protection Insurance Work?
Like standard mortgage payment protection insurance, the age-related version is able to cover the costs of mortgage outgoings for up to 12 months if you become unable to work as a result of illness, injury or involuntary unemployment.
You select the exact amount of cover you require at outset, subject to a stated maximum. You can protect both mortgage interest and capital repayments and also related premiums for life assurance or household insurance.
As with standard mortgage payment protection insurance, your occupation, gender and smoking habits will have no bearing on the premium that you are required to pay. But the big difference with this new approach is that your premiums are affected by your age.
The only factor determining the cost of premiums of standard mortgage payment protection insurance – other than the competitiveness of the flat rate offered by the provider – is the amount of cover you choose. Pricing with the new age-related approach, on the other hand, depends on both your age and cover level.
A key point to understand is that mortgage payment protection insurance premiums are determined by your age at the outset of the mortgage payment protection insurance policy and will not automatically increase just because you get older.
Nevertheless this should not be construed as a cast-iron guarantee that prices will remain unchanged throughout the mortgage term. As with standard mortgage payment protection insurance, the provider reserves the right to increase – or, indeed, decrease – its premium prices as a whole if it finds that its overall claims experience is proving significantly different from that originally anticipated.
The age-related approach is fairer on younger policyholders, because they are less likely to suffer from long-term health problems and, if they lose their job, are likely to find a new one more quickly than their older counterparts.
Why should those least likely to claim have to cross-subsidise those most likely to, as happens when policyholders of all ages pay the same flat rate with standard mortgage payment protection insurance?
High Quality Mortgage Payment Protection Insurance Cover
As well as offering highly attractive premium prices to young and middle-aged policyholders, age-related mortgage payment protection insurance typically also provides a higher quality of cover than standard mortgage payment protection insurance policies sold by major mortgage lenders.
For example, many mortgage payment protection insurance policies offered by banks and building societies do not pay out at the claims stage until after an initial 60 day exclusion period has elapsed, but the age-related cover pays out after only 30 days and backdates payments to day one.
Many mortgage lenders will only permit you to take out mortgage payment protection insurance cover at the beginning of the mortgage term, but the specialist mortgage payment protection insurance providers that offer the age-related cover are more flexible and will allow you to start their policies mid-term. This means that those who buy poorer value standard mortgage payment protection insurance policies at outset can subsequently switch.
Beware Of The Exclusions
But just because age-related cover can prove the best value mortgage payment protection insurance on the market, it does not meant that it is necessarily suitable for everyone. As with standard mortgage payment protection insurance, it contains some very significant exclusion clauses that you should give careful consideration to.
Medical conditions that you have had before you take out your mortgage payment protection insurance policy (so-called ‘pre-existing conditions’) are excluded, although this exclusion is waived if you haven’t suffered from the condition concerned for two years before the first date on which you became unable to work.
Such pre-existing conditions are easily picked up by the underwriters at the claims stage when they will write to your GP, so there is no point in kidding yourself that any illnesses you have been suffering from will go undetected.
The fact that the self-employed are only covered for involuntary unemployment if they permanently cease trading, as opposed to merely experience a sticky patch, means that the cover is likely to represent poorer value to self-employed than employed people. Furthermore, even employed people may have a major issue with the fact that voluntary redundancy is excluded, because this has become a common way of exiting employment in certain industries.
Other important exclusions to be aware of include:
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Any claims you knew you were going to make at the time you took out your mortgage payment protection insurance policy.
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Self-inflicted injuries, including alcohol and drug abuse.
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Involuntary unemployment claims if you were not in continuous employment for six months immediately before your employment ended.
- Involuntary unemployment claims if misconduct contributed to your dismissal.
Other Reasons For Not Requiring Mortgage Payment Protection Insurance Cover
Even those not potentially affected by the major exclusions may feel that their particular individual circumstances mean that they don’t need mortgage payment protection insurance cover. They may, for example, know that their partner’s income is substantial enough to temporarily cover their mortgage payments or that their parents are sufficiently well-off and willing to bail them out.
Alternatively, someone may already have longer-term health cover known as ‘income protection insurance’ protecting their overall lifestyle. Although this does not cover involuntary unemployment, it is capable of paying out for illness and injury right up until the time you recover or, if you fail to do so, until the end of the policy term – which is typically your intended retirement date. It may be able to pay a benefit level that can take care of your mortgage payments as well as all your other basic costs of living.
It is also important for anyone in employment to check with their HR department the terms of their short-term sick pay scheme. If they are entitled to unusually generous terms, such as six months’ full pay, they may decide that mortgage payment protection insurance is unnecessary.
Additionally, they should enquire whether they have longer-term cover by virtue of being a member of a group income protection scheme. But, as with individual income protection insurance, the benefit payments from this will not normally begin until after an initial exclusion period known as a ‘deferred period’ has elapsed, and it is worth enquiring about the length of this.
If you are entitled to only modest short-term sick pay benefits and are a member of a group income protection scheme with a six or 12 month deferred period, you may still decide that MPPI is necessary to plug the gap.
Limited State Help
Those who enjoy only very limited sickness cover via the workplace are, on the other hand, likely to have to rely on the state for help if they haven’t made any suitable insurance provision, and unfortunately the state safety net isn’t nearly as secure as generally imagined. In fact many will not enjoy any help at all with their mortgage repayments as a result of having either a full-time working partner or savings worth over £8,000.
Even those who do qualify for state help will not receive any assistance with capital repayments, only with interest repayments on mortgages up to £100,000 – and this will not be available for the first nine months for mortgages that have been taken out since October 1995.
Many people are therefore likely to conclude that they can’t afford to be without age-related mortgage payment protection insurance. Even younger homeowners affected by its exclusions are likely to feel that it is so inexpensive that it is worth having regardless.
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