Lenders found lacking
EVENING STANDARD - 25TH MAY 2005
Most mortgage companies over-charge their customers for income payment protection insurance. shop around for the best deals.
Only one in five homebuyers take out mortgage payment protection insurance to guard against a drop in income due to unemployment or sickness. Figures from the Council of Mortgage Lenders reveal that 2.5 million borrowers out of 11.5 million homebuyers have mortgage payment protection insurance cover. Of those who do, 73 per cent purchase it through their mortgage lender and most are over-charged. They could save money – and get better cover – if they used an independent broker, or shopped around on the internet.
Research from specialist broker Burgesses reveals that lenders pay out less than 10 per cent of premiums in claims. The rest is profit for the insurer, minus a small administration charge.
Accident, sickness and unemployment cover
A good accident, sickness and unemployment policy, available through the British Insurance Brokers Association, works out at £3.95 a month for each £100 of mortgage repayments covered – and the first three months are often free. But, if you buy cover through the lenders, it is often nearly double the price.
The same cover from Lloyds TSB works out at £7.70 for £100 a month of repayments covered, £6.95 at Woolwich, £6.04 at Abbey, £6.06 at Halifax, £5.95 at Barclays, and £5.25 at NatWest. Even at mutual Nationwide, which is offering free cover for the first three months for new and existing borrowers, you will pay £4.99.
“There are other problems, too,” says broker David Hollingworth of Town & Country Mortgages. “Most of the mortgage payment protection insurance policies sold by the lenders do not allow you to take sickness and accident as separate cover from unemployment and redundancy.” Also, such cover often only kicks in for the self-employed if they cease trading, go into liquidation, or declare themselves bankrupt, which they may not wish to do.
Going without cover can be risky. Do not expect government benefits to cover your outgoings if you are made redundant. If you took out a mortgage, or remortgaged, after 2nd October 1995, you get nothing towards your mortgage for the first 39 weeks. After that, the State will meet mortgage interest payments on the first £100,000 of your loan –but only for those with savings of less than £8,000. it pays nothing for any borrowings above £100,000.
Income protection cover
If your employer pays you when you are sick, all well-and-good. But what happens if you are permanently disabled?
“We look at the overall insurance needs for the client,” says Ray Boulger, of mortgage broker Charcol. He point out that for most homebuyers, income protection or permanent health insurance maybe more suitable. He adds that if your employer pays sickness benefit for up to six months many employees need only redundancy and unemployment cover.
The advantage of income protection is that you can cover overheads such as household bills as well as mortgage repayments. And the benefit period usually lasts up to two years instead of one year offered by most mortgage payment protection insurances.
Another disadvantage of mortgage payment protection insurance is that benefits are usually paid direct to the mortgage lender, not to the homebuyer. With income protection benefits are paid to the policyholder – and you don’t even need a mortgage to qualify. Maximum cover is 65 per cent of gross earnings, including bonuses or commission, with an overall maximum of £2,500 benefit a month.
Borrower, beware
Specialist broker Simon Burgess is scathing about lenders’ mortgage payment protection insurance policies. “It is not only the extortionate, rip-off prices that lenders are guilty of, but the quality of cover they are peddling to their customers is often grossly inferior.
“For example, lenders’ payment protection insurance tends not to pay out until after a 60-day waiting period, whereas those sold through specialist brokers usually offer back-to-day-one cover,” he says.
He points out that lenders’ mortgage payment protection insurance policies normally prevent people with pre-existing medical condition from switching to another policy when they change lenders, without further medical underwriting, and you may get turned down. Borrowers who buy through brokers can avoid this problem with fully portable policies.
The regulator, the Financial Services Authority (FSA), recently described mortgage payment protection insurance policies as posing a risk to consumers’ financial health and has raised concerns about aggressive sales techniques, lack of suitability and complex policy terms and conditions. “We are looking into payment protection insurance as an urgent matter because we are conscious that it is a high-risk area,” says the authority’s Anna Bradley.
‘I wouldn’t have been able to claim for unemployment’
Andrew Areoff, a freelance photographer living in Shoeburyness, has just set up his own photography business on the web. If he fell ill, it would be disastrous.
“I remortgaged with Alliance & Leicester and they tired to sell me payment protection insurance cover. But they didn’t tell me that I wouldn’t be able to claim for unemployment,” he says. “They wanted to charge me around £6 a month for every £100 of cover.”
The heavy sales pitch prompted Andrew to search the internet, and at www.insureyourmoney.co.uk – a Burgesses affiliate site – he found an accident and sickness quote for only £2.45 a month for each £100 of mortgage payment. “I rang them and they talked me through what I really needed. I then bought the cover on the internet.” He says.
Andrew’s mortgage repayments are £850 a month; he now pays £20.82 a month for cover, instead of the £51 a month he would have paid at Alliance & Leicester – and the first three months of cover are free.
