Homeowners must protect their mortgage
SUNDAY MERCURY - 4TH JUNE 2002
Contrary to cliché, when it rains, it does not always pour.
Homeowners with variable mortgages know that interest rates have risen several times over the last year, but the increased have been small.
Money to pay for the additional interest charges has been dripping, not flooding, away.
And while further rises are probable, it is unlikely that we will see the kind of steep increases that proved disastrous for many homeowners a decade ago.
House repossessions still occur, but this is now a sporadic occurrence, not a nationwide epidemic.
Nevertheless, concerned that some homeowners may be overexposed, the Council of Mortgage Lenders (CML) has looked into the question of mortgage payment protection insurance and discovered that the total number of protected homeowners still leaves something to be desired.
The CML is gratified that court action to repossess homes are in a downward trend. Homeowners are holding their own despite higher interest cots and reduced state aid for homeowners.
And some homeowners who do find themselves with money troubles may be able to get themselves out of their financial hole by trading down, especially if they live in an area which has enjoyed better than average house-price increases.
This privilege was for the most part denied to financially-stretched homeowners a decade ago when with interest rates soaring and the economy in a nosedive, buyers were scarce and desperate homeowners couldn’t get out of the negative equity trap.
Also heartening for the CML is that a rising number of households are buying mortgage payment protection insurance to guard against unforeseen sickness, injury or job loss.
However, the CML finds that while around one-sixth of homes now have , half of all households actually need the extra protection it provides.
The CML cites three critical developments in property ownership:
• The changing socio-economic profile of people who own a home and pay a mortgage.
• Reduced stability and security of income that has historically underpinned home ownership.
• Diminished government support for home owners.
CML research indicates that mortgage payers “are more likely than they were to experience a period of unemployment, have a low-paid or temporary job or be involved in the breakdown of a relationship.”
As if the prospect of losing a job or a spouse weren’t worrisome enough, we are also statistically more likely to be paying out of our own pockets for our pensions or long-term care or to support elderly parents.
Accident, sickness and unemployment is the familiar acronym that describes the three main areas of mortgage payment protection insurance cover – accident, sickness and unemployment. Some homeowners have mortgage payment protection insurance cover which is partial.
In their Annual Housing Finance Survey, the CML found that just over one-third of respondents were only covering one or two of these eventualities.
If you are tempted by mortgage payment protection insurance, make sure that you know exactly what you are buying. Up to a few years ago many mortgage payment protection insurance policy holders were burned when they discovered that the ailment for which they were claiming was excluded, or some other term or condition stood between them and customer satisfaction.
“A few years ago mortgage payment protection insurance received justifiably bad publicity,” admits general insurance broker Simon Burgess, a director of Burgesses.
“It was under suspicion because of the predominance of the single premium. Both lenders and unscrupulous insurance brokers offered inflated premiums and took 80 per cent commission.
“In handsomely lining their own pockets, these lenders and brokers took so much money that there were insufficient funds to pay all genuine claims. Consequently, the industry smartened up its own act, and the CML with the Association of British Insurers introduced minimal, baseline standards.”
Mortgage payment protection insurance is now sold by independent financial advisers and general insurance brokers in addition to brokers and lenders, who effectively had had a cartel.
Commission still has to be paid, but not all brokers take identical cuts.
Policyholders should know, for example, which medical or physical conditions are included and excluded. Make sure you understand when the policy kicks in, for how long, and the restrictions or exclusions that might apply.
Policies tend to exclude pregnancy and pre-existing conditions, so if you have suffered from or been treated for a specific ailment, you may not be able to claim should it recur. In addition, other forms of insurance, such as simple income replacement, may be better suited to you and your circumstances.
Despite the introduction of minimal standards, Burgess says that interested consumers “should seek advice from and independent insurance broker.”
