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What is mortgage protection insurance & do I need it?

4 mins read
by Nick Green
Last updated Thursday, July 4, 2024

How mortgage payment protection works and how it compares to life insurance, income protection and critical illness cover.

Mortgage protection insurance acts as a safety net to cover your monthly mortgage repayments if you can no longer afford them due to various circumstances.

It can prevent you from having to default on your mortgage, and so avoid repossession of your home.

But is this type of protection right for you, or are there better options available?

We reveal how mortgage protection insurance works and what to consider. 

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What is mortgage protection insurance?

Mortgage protection insurance is a type of policy that helps to pay your monthly mortgage repayments if you can’t work due to illness, a serious injury or redundancy. Sometimes it’s called mortgage payment protection insurance (MPPI).

After you’ve been out of work for a specified period, which is generally at least 30 days but can be up to 180 days, your insurance will pay you a set amount each month.

You may be able to get cover for your bills, too, which usually means the provider will pay 125% of your mortgage.

However, there is usually an exclusion period, again between 30 to 180 days, that you need to have the policy in place before you can claim.

Furthermore, you’ll only receive payments for up to 12 months or until you return to work, depending on the policy.

Mortgage protection insurance isn’t the same as payment protection insurance (PPI) as it covers mortgage repayments, and if you need to claim, the payments come directly to you rather than the lender.

How much does mortgage payment insurance cost each month?

Monthly premiums are normally around £20-£25, but you could find a deal for around £10 a month or up to £40 a month on mortgage payment insurance.

Your premiums are calculated based on your circumstances, including your age, salary, mortgage repayments and your job.

For example, if you’re in a desk-based job, you're at a lower risk of serious injury than if you do manual labour, which will help bring your payments down.

As with all types of insurance, the higher your level of coverage, the more the premiums will cost.

You’ll also pay more for a shorter waiting period or a wider range of scenarios that could stop you from being able to work.

Also more expensive are ‘back-to-day-one’ policies, as these backdate payments cover you from the date you stopped working rather than from the date of your claim.

What are the different types of mortgage protection insurance?

There are three main types of mortgage protection insurance, which cover different circumstances:

  • Unemployment policies only pay out if you can’t work due to redundancy.

  • Accident and sickness policies will cover you if you can’t work because you’ve become seriously ill or had an injury.

  • Combined policies also exist that cover both unemployment and accident/sickness.

Some providers will cover self-employed people, but you may need a mortgage broker to find these more specialist policies.

Do I need mortgage protection insurance?

Mortgage protection insurance isn’t compulsory, but you should think very carefully about how you will keep up mortgage repayments if you find yourself out of work for a while.

You might choose to do this using mortgage protection insurance, or with some other method.

Several alternatives exist that cover more than your mortgage and may provide better overall protection and value for you, depending on your circumstances.

These are:

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Income protection vs mortgage protection

Income protection is far more comprehensive than mortgage protection.

It covers a portion of your salary, rather than just your monthly mortgage payments, and it usually pays you for longer than the MPPI limit.

Your policy may even cover you until you go back to work or retire.

The trade-off, of course, is the higher cost of the premiums. But it can be invaluable, especially for people in high-risk jobs, as this example shows.

Critical illness cover vs mortgage protection

Critical illness cover pays you a lump sum if you get a serious illness that stops you from working. It is usually offered alongside life insurance.

Only certain illnesses are covered, though, and it won’t cover you for an injury or redundancy.

Life insurance vs mortgage protection

If you have a joint mortgage, your lender may require you to take out life insurance.

It pays out a lump sum or instalments if you die, so the person sharing the mortgage with you and other dependents can cope financially.

This type of life insurance is usually known as ‘decreasing’ as your cover and premiums go down as your outstanding loan shrinks.

Do I need life insurance for a mortgage?

Life insurance isn’t designed to replace mortgage protection insurance as it won’t cover you for unemployment or redundancy.

You might like to take out both life insurance and either mortgage protection or income protection to cover each scenario.

How do I choose mortgage protection insurance?

The best way to find the right kind of protection for your mortgage repayments is to ask a mortgage broker.

This mortgage adviser can also help you access more providers, so you can find cheaper policies or more comprehensive, tailored insurance.

Like other income protection policies, your mortgage protection policy may not cover you for pre-existing conditions, especially if you have been unwell in the past year.

You may need a medical assessment if you’ve had any health problems.

Did you find this article helpful? Then you may find our articles on improving your chances of getting a mortgage and what to do after a mortgage application is declined useful.

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Author
Nick Green
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.