Protection need not be a racket
THE WALES ON SUNDAY - 4TH JULY 2004
With interest rates possibly on the rising gradient until late 2005, monthly mortgage repayments will become an increasing strain on household budgets. The danger of falling ill or losing a job is rising.
In these circumstances, big lenders will try to boost sales of mortgage payment protection insurance which keeps paying the mortgage when borrowers fall ill, have an accident or lose their job.
Although it was the last Tory Government, back in 1994, which cut benefit payments to cover mortgage repayments for homebuyers thrown out of work any hope of homeowners fixing private cover to fill the gap in their defences has scarcely been borne out.
With personal debt – including mortgages – topping the trillion pounds mark, households are more vulnerable than ever to sudden falls income.
Yet only about 16% of eight million homebuyers – some 2.2m households. Hold mortgage payment protection insurance. Others must hope a second income or accumulated savings will tide them over until they get another job – because it may be nine months before state benefits help to over part of the monthly mortgage repayments.
Sales of mortgage payment protection insurance policies are targeted on new buyers who tend to have a lower risk of unemployment than existing homeowners.
However, as this week’s (July 1) report from Which? Magazine makes clear, borrowers who buy mortgage payment protection insurance from major lenders could get it much cheaper elsewhere.
In 203, two thirds of mortgage payment protection insurance buyers arranged it through their lender – but only three lenders’ policies make the list of Which? Best buy.
“People are susceptible to high pressure sales techniques when they chase a mortgage,” says Simon Burgess of independent broker Burgesses. “Loan applications can be refused if lenders’ insurance policies are rejected, so buyers might not bother to look for cover elsewhere.”
The standard mortgage payment protection insurance policy pays out for a limited period – typically 12 months, but possibly 18 or 24. But this is usually after a waiting period (one month or two) in which policyholders must be ill or unemployed before a claim is accepted.
Some policies – called “back to day one” – pay out as earned income finishes, but other policyholders have to wait 30 or 60 days before they receive any money. On existing mortgages, new policy holders usually have to wait 90 days before they are eligible to a payout and unemployment must always be “beyond their control.” Voluntary redundancies don’t qualify.
The Which? Best buy tables exclude any policies with an initial period longer than 90 days when homeowners can’t claim for unemployment.
There are other headaches with mortgage payment protection insurance says Which? Some policies refuse to pay out if unemployment happens soon after they are sold, and all policies have exclusions on existing illnesses. Cover varies on back pain and stress related illnesses, two of the commonest causes for loss of income.
Curiously, more expensive mortgage payment protection insurance policies might be slower to pay out. Simon Burgess claims the policy from Cheltenham and Gloucester, at £7.70 per £100 of cover, invokes a 60day excess period before payment is made – while Burgesses’ policy costing barely half as much, £3.95 per £100 of cover, has an excess of only 30 days.
Says Burgess: “The C & G policy, underwritten by Lloyds TSB Insurance pays out less than 5% of premiums in claims. Our policy pays out over 50% of premiums in claims.”
Another worry for policyholders is that some mortgage payment protection insurance policies tie borrowers to the lender supplying mortgage payment protection insurance. This adds to complications if they switch to another lender.
For homeowners nervous about rising mortgage repayments, however it is good news that the stranglehold on mortgage payment protection insurance policies held by leading lenders like C&G, Abbey National and Barclays, is under attach.
Cheaper cover is available from brokers like Burgesses, with four policies in the Which? Best buy table and a new online operation QuickquoteUK. Both rebate commissions paid by insurers to customers.
Says QuickquoteUK boss John Williams: “Abbey quotes a premium of £80.46 per month for joint term cover to protect a £200,000 mortgage, based on a non-smoking make and female aged 28 and 26 respectively over a 25 year period.
W charge just £36.58 a month for identical cover – saving £43.88. Abbey is loading up charges that translate into pure profit.”
QuickquoteUK also intends to challenge providers like Tesco, Virgin and Direct Line. Simon Burgess at Burgesses says homeowners could save more than £7billion in premiums by switching mortgage payment protection insurance from traditional mortgage lenders to new-style providers like his mortgagesafetynet policy.
Hiss accident, sickness and unemployment cover starts at £3.95 per 3100 of monthly mortgage repayment. Average cost of mortgage payment protection insurance among banks and building societies is £5.78.
Which? Shares the view that worrying only about mortgage repayments when unemployment or illness loom is unrealistic. Urging homeowners to build stronger defences, it believes income protection is a safer option, providing cash to cover all household bills and not just the mortgage.
Mortgage payment protection insurance is a cheaper option. And more people will ask brokers for a quote in 2004/5 if rate rises trigger job losses.
