Updated 07 May 2020
Mortgage protection insurance acts a safety net to cover your monthly mortgage repayments if you can no longer afford them due to a range of 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? Here’s mortgage protection insurance explained in detail.
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 waiting period (generally between 30 to 60 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 per cent of your mortgage. However, there is usually an exclusion period, again between 30 to 60 days, that you need to have the policy in place for before you can claim. Furthermore, you’ll only receive payments for up 12 months or two years, depending on the policy.
Mortgage protection insurance isn’t the same as PPI, because it covers mortgage repayments, and if you need to claim, the payments come directly to you rather than the lender.
Monthly premiums are normally around the £20-£25 mark, but you could find a deal for less than £10 or as much as £40 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 will be at lower risk of serious injury than if you do manual labour, which will help to bring your payments down.
As with all types of insurance, the higher your level of cover, 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 to cover you from the date you stopped working, rather than from the date of your claim.
There are three main types of mortgage protection insurance, which cover different circumstances:
Some providers will cover self-employed people, but you may need a mortgage broker to find these more specialist policies.
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 that cover more than just your mortgage, and may provide better overall protection and value for you, depending on your circumstances. These are:
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 of two years. 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 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.
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’, because your cover and premiums go down as your outstanding loan shrinks.
Life insurance isn’t designed to replace mortgage protection insurance because 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.
The best way to find the right kind of protection for your mortgage repayments is to ask your mortgage broker. This mortgage adviser can also help you access more providers, so as to 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.
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