Debt Trap
DAILY MAIL - 25TH MAY 2005
Brits are more than a trillion pounds in debt. The amount we owe has doubled in the last eight years to an average of £50,000 for every family.
But even more worrying is the result of a recent survey which reveals that an alarming number of people would have no way of paying back their debts if they were to lose their jobs.
The research carried out by credit reference agency Equifax – shows that two in five borrowers under 40 (which are those most heavily in debt) couldn’t survive for a month if they were too sick to work.
And social security offers no help with your mortgage interest until you have been off work for at least nine months.
So how do you avoid a visit from the bailiffs if you fall on hard times? The best protection is not to get too deep in debt in the first place by building up a savings nest egg of at least three months income to tide you over.
But where that’s not possible for example, if you’re a first time home-buyer or have a young family to support you should get some payment protection.
Most lenders now offer this to borrowers alongside their mortgage, loan or credit card.
But a recent survey revealed that many of the policies pushed by lenders are overpriced because they pocked a huge slice of the premium in commission.
The 10 biggest mortgage lenders charge more than £35 a month on average for a policy to cover a £600 a month home loan – but some charge as much as £46. Comparable cover from an insurance broker, however, can be less than £15.
On personal loans the profiteering is even worse – the 10 top lenders charge £32.27 a month on an average for a policy to cover a £7,500 loan. Graeme Trudgill of the British Insurance Brokers’ Association explained why they’re so dear: “It’s not uncommon for lenders to take in excess of 80% of a client’s premium in commission. It makes the product more expensive and does not represent value for money. It’s all down to pure greed.”
And, according investment bankers Morgan Stanley, peddling payment protection insurance policies generates a sixth of Lloyds TSB’s profits.
What’s worse is that many of these over-priced policies won’t pay out if you make a claim because they’re peppered with exclusion clauses which catch out the unwary.
For example, you’re often not covered if you were self-employed. Off work, sick or injured for two months? Hard luck. Many exclude the first couple of months. Been ill before? Tough. Recurrences of past medical conditions can scupper claims too.
And don’t be fooled into taking out separate policies to cover mortgage, loans and credit cards. One policy can cover the lot – at much less cost.
David Lomas, a 40 year old website designer, learned the hard way that you much always look at the small print.
He spent a week in hospital and three months off work in a plaster when he broke his ankle playing football. The £70,000 mortgage on the Berkhamsted, Herts home he shares with wife Sue and 15 month old daughter Madeleine, costs £530 a month. He thought it would be taken care of because they had a payment protection insurance policy with Lloyds TSB but to his astonishment they reject the claim when they discovered he forgot to mention that he’d sprained his ankle 16 years ago on his application. “I’d forgotten about it until they discovered it in my medical records.” He explains. “And even if I had remembered I don’t think I would have thought it was worth mentioning.”
One reader more fortunate than David was Kelly Johnson from Braintree, Essex. She slipped up on the ski slope last winter but she was fully covered.
The 28 year old sales support manager – who sprained her ankle while skiing in the French Alps – says: “I was unable to drive to work for six weeks.”
Fortunately, she had a policy with brokers Burgesses. It met her £500-a-month mortgage for the entire time she was off work.
“I’d been offered a policy by my mortgage lender but it was a lot more expensive and only paid out if you were off work for more than two months. But this policy costs me just £19.50 a month and it really helped me out when I needed it.”
Simon Burgess – from burgesses insurance brokers – told us that banks are legally within their rights to reject claims if they feel the client has left vital details off their application. But he says that this can lead to policies being mis-sold. “The banks have a duty to explain to customers what they need to disclose.” He explains.
