Shop around for loan protection
BRADFORD TELEGRAPH & ARGUS - 3RD JULY 2004
With interest rates possibly on a rising gradient until late 2005, monthly mortgage repayments will become an increasing strain on household budgets. The dangers of falling ill or losing a job are 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, the hope that homeowners would fix private cover to fill the gap in their defences has scarcely been borne out.
With personal debt – including mortgages- topping the trillion pound mark, households are move vulnerable than ever to sudden falls in income.
Yet only about 16% of eight million homebuyers – some 2.2 million households – hold mortgage payment protection insurance. The rest must hope that 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 cover part of the monthly mortgage repayment.
Sales of such insurance policies are targeted at new buyers who tend to have a lower risk of unemployment than existing homeowners.
However, as this week’s report from Which? Magazine makes clear, borrowers who buy insurance from major lenders could get it much cheaper elsewhere.
In 2003, two-thirds of insurance buyers arranged it through their lender – but only three lenders’ policies make the list of Which? Best buys.
“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 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/unemployed before a claim is accepted.
Some policies – call 2back to day one2 – 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”. Those who take voluntary redundancy 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 such insurance, says Which? Some policies refuse to pay out if unemployment happens soon after they are sold, and all policies have exclusions on pre-existing illnesses. Cover is variable on back pain and stress related illnesses, two of the commonest causes of loss of regular income.
