Safety net or false security?
THE FINANCIAL TIMES - 24TH JANUARY 2004
Lenders are keen to sell insurance, but it is costly and full of exclusions.
Homebuyers are being forced to stretch themselves ever further as house prices continue their upwards march. Latest Royal Institution of Chartered Surveyors figures show December increases at a 13 month high and no sign of a let-up
This is in a still queasy climate for white collar workers, especially in the media, information technology and finance sectors. Many would appreciate some sort of safety net if about to buy a premium priced pad.
Mortgage lenders and brokers are not slow to spot the need, and are eager to foist mortgage payment protection insurance on buyers. The product is a bundle of accident, sickness and unemployment cover. It should make your repayments for you, normally for up to a year, if you are unable to work. Someone with a £100,000 25 year mortgage at 5.75% interest would pay £25 to £38 a month for the product.
Commissions are fat – more than 50% with some lenders. Credit card and personal loan providers also try to push cover.
But borrowers are warned that policies may not be worth the paper they are written on. Mortgage payment protection insurance is riddled with exclusions, hidden in the small print, and individuals should only consider buying after going through terms and conditions line by line.
Alan Mudd, a director of Savills Private Finance, vows he will never sell another policy; a client was caught out and his claim rejected because of a clause in the literature. He says salesmen lack the training to sell mortgage payment protection insurance and can end up mis-selling an inappropriate product. “My advice is read the key features document very carefully,” he says. “The chances are that the person selling the policy doesn’t”
Even if the employment protection is suitable the accident and sickness part may well be unnecessary, as many employees, particularly of blue chip companies, have generous sickness schemes in their contracts. Indeed, if you ask, many providers offer unemployment only cover. This could save you 30-40%.
If you do want the accident and sickness element be aware of exclusions for pre-exiting conditions, and check back problems and stress are included.
The unemployment section is particularly fraught with exclusions. Anyone selling a self-employed individual mortgage payment protection insurance is effectively miss-selling, as the customer would have to go bust to be able to claim. As Ray Boulger, senior technical manager at Charcol, explains, most unemployed people experience a fall-off in work load rather than go bust. An income replacement policy known as permanent health insurance would be a better alternative to protect earnings in case of ill heath.
Company directors with significant amounts of equity in their company should also steer clear, as they may only have a claim if the company goes under.
The mortgage payment protection insurance provider will refuse to pay out if you are, ineligible for Jobseekers’ Allowance, or if you have not worked continuously for six months before you first lose the job, if you are a contract worker (with less than 24 months in one job), if you accept voluntary unemployment or where you resign, retire or accept early retirement.
Individuals, who know they will lose their jobs when they buy, will also have claims rejected. This is a fuzzy area, of course, and the providers vary as to how they express the awareness in their contracts.
Further, they may not explain this at point of sale, but if your claim is successful and the employer gives you a cheque in lieu of notice, the policy pays only when the notice period has finished. So individuals on 12 months’ gardening leave could easily find they have fixed up another job before mortgage payment protection insurance kicks in.
With most policies sold through lenders, payments start only after 30 or 60 days. With some – Burgesses, Paymentshield and Pinnacle, for example – there is a Back to Day One policy, where after a month you receive money backdated to the first day of unemployment.
With C & G your policy is not portable if you switch mortgage providers.
Boulger suggests clients self-insure instead. One less pricey route is flexible mortgages, where borrowers can overpay in times of plenty, and borrow back subsequently.
But for the non-excluded, who lack capital, mortgage payment protection insurance is worth considering. David Hollingworth, mortgage specialist at L &C, says, products not linked to lenders are cheaper. These are available through brokers and company websites.
People are normally sold mortgage payment protection insurance when they take out a mortgage. But you can buy unemployment cover at other times, though there are only a handful providers. The initial exclusion period is 120 days and the policy is more expensive.
