Will you lose your home if you get ill?
CUMBERLAND NEWS - 9TH JULY 2004
Interest rates may continue rising until late 2005, putting an increasing strain on household budgets. What will happen if you fall ill or lose your job?
Big lenders offer mortgage payment protection insurance which keeps paying the mortgage when borrowers fall ill, have an accident or lose their job.
It was back in 1994 that the Tory government cut benefit payments to cover mortgage repayments for homebuyers thrown out of work, but the hope that homeowners would fix private cover to fill the gap in their f=defences has scarcely been borne out.
Only about 16% of eight million homebuyers hold mortgage payment protection insurance. The rest must hope that a second income or 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 mortgage repayments.
Sales of mortgage payment protection insurance policies are aimed at new buyers who tend to have a lower risk of unemployment than existing homeowners.
However, as a report from Which? Magazine makes clear, borrowers who buy mortgage payment protection insurance from major lenders could get it much cheaper elsewhere.
In 2003, two thirds of mortgage payment protection insurance buyers arranged the insurance through their lender – but only three lenders’ policies make the list of Which? Best buy.
“People are susceptible to high-pressure sales techniques” says Simon Burgess of independent broker Burgesses.
“Loans 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/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 for 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 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 pre-existing illnesses.
Cover is variable on back pain and stress-related illnesses, two of the most common causes of loss of regular income.
Curiously, more expensive mortgage payment protection insurance policies might be slower to pay up. Simon Burgess claims that the policy from Cheltenham and Gloucester, costing £7.70 per £100 of cover, invokes a 60 day excess period before payment is made – while Burgesses policy, costing just £3.95 per £100 of cover has an excess of only 30 days.
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 interest rates, however, it is good news that the stranglehold on mortgage payment protection insurance policies held by lenders is under attack.
Cheaper cover is available from brokers such as Burgesses – with four policies in the Which? Best buy table and a new online operation QuickquoteUK. Both rebate commissions paid by insurers to customers.
QuickquoteUK boss John Williams said “Abbey quotes a premium of £80.46 a month for joint cover to protect a £200,000 mortgage, based on a non-smoking male and female aged 28 and 26 respectively over a 25 year period. We charge just £36.58 a month for identical cover.”
QuickquoteUK also intends to challenge providers such as Tesco, Virgin and Direct Line, which moved into the sector by undercutting the High Street players.
Simon Burgess at Burgesses estimates homeowners could save more than £7 billion in premiums by switching mortgage payment protection insurance from traditional mortgage lenders to new style providers.
His accident, sickness and unemployment cover starts at £3.95 per £100 of monthly benefit – so it cost £39.50 per month to guarantee a £1,000 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 looms is unrealistic? Urging homeowners to build stronger defences, it believes income protection is a safer option, because it provides cash to cover all household bills and not just the mortgage,
