Check your mortgage blind spot
First published 26 February 2015 • Updated 25 July 2017
‘Hope for the best, prepare for the worst’ is sound advice. But many mortgage holders are only doing the first part. If you’re buying a home but don’t have a repayment protection plan, then you could be blinding yourself to one of the biggest risks of all.
Imagine if it became legal to drive without vehicle insurance. A lot of people might be glad at first. Young drivers especially would enjoy being rid of those punishing premiums, and we could all afford bigger, faster, more expensive cars. But when the accidents started to happen, we’d quickly regret our short-sightedness.
No-one thinks driving uninsured is a good idea. So it’s odd that such prudence isn’t always found among homebuyers. True, it’s a different kind of risk from crashing your car – but if you were to lose your job or become too ill to work, how long could you keep on repaying your mortgage? According to recent research from Royal London, around 50 per cent of mortgage holders could keep up repayments no longer than six months, while the other half simply did not know how long they could survive financially in that situation. Yet the study found that up to 5.2 million mortgage holders have no cover in place.
Millions of people are essentially trusting to luck. A mortgage will probably be the biggest financial commitment you make, and few things are more important than your home. You secure a mortgage on the basis that you can manage a certain level of repayments – but that assumes you will at least maintaining your present income. Which is a bit like assuming you will never crash your car, just because you never have. And then there’s the question of what might happen if the household’s main earner should die – the last thing a bereaved family needs is then to face possible eviction.
It’s not pleasant to think about these issues, which is probably why many don’t. As a result, they don’t think about protection against the consequences – and so the issue becomes a blind spot in the mortgage process. Also, buying a home is such a financial strain – people tend to stretch their limits to secure the best property they can – that it’s hard to face adding yet another expense on top. But this financial strain could also be an argument in favour of protection. If you are already pushed to the max, with your good health and dependable income, then how long could you last if either one were even briefly taken away?
Getting the right cover
When discussing mortgage options with your adviser or broker, it’s a good idea to ask for two quotes, one of which factors in appropriate MPPI cover when calculating monthly repayments and what you can afford to pay. This will allow you to compare the overall costs, and make an informed decision about whether MPPI makes economic sense in your case.
MPPI cover comes in many forms, so make sure yours is the most suitable for your circumstances. The first thing to bear in mind is that most policies will continue to pay your mortgage only for a year at most, so if you believe your savings could last this long, then MPPI may not provide value for money. Another point to consider is the unemployment element of your policy (if offered). If your employer is likely to offer a good-sized payment in the event of your redundancy, then you may choose not to include unemployment cover, and so reduce the cost of protection. However, if your employer does not offer a good package, or if you have worked there only a short time, such cover may be worth considering.
If you can no longer work as a result of sickness or injury, your MPPI will generally start to pay out either 31 or 60 days after the day you stopped work – although in most cases will then provide backdated cover so you are not out of pocket. By contrast, most policies relating to unemployment will not pay out until three to six months have passed, and are not backdated, so you would need to cover this period yourself. There are also maximum monthly payments (usually between £1,500 and £2,000, or a percentage of income) so if your repayments are larger than this you will need to make up any excess yourself.
A lot of people pay more for their MPPI than they need to, either by not shopping around or by not fully considering all the factors. Such factors may include the level of sick pay your employer provides, whether or not you may be entitled to help from the government (you can find out more at www.gov.uk/mortgage-interest-run-on), and what kind of cover you may already have from health insurance, for example. The simplest way to get the best deal is to ask your independent mortgage broker or adviser when they set the mortgage up for you.
The Royal London research found that only 15 per cent of mortgage holders would consult a financial adviser if they could not keep up their repayments. This is perhaps understandable – by then, it may be too late to do very much about it. Like taking out car insurance, the time to ask your adviser about MPPI is before the accident happens. So if you are about to move off into the housing market… make sure that you first check that blind spot.
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