When taking out a mortgage it is important to think about how you will keep up with payments if you find yourself not working owing to redundancy, accident or illness.
State help in these circumstances tends to be fairly limited, and government statistics show that 55 per cent of the working population have no savings to tide them through a period of unemployment. So it makes sense for borrowers to consider taking out Mortgage Payment Protection Insurance (MPPI).
MPPI policies are offered by mortgage lenders, banks and insurers and policyholders pay an insurance premium each month. If you become unemployed, or unable to work due to accident or sickness, the policy will pay out to cover your mortgage.
Buying MPPI
MPPI is reckoned to be a £1.1 billion-a-year market. Around 20 per cent of existing mortgages and 23 per cent of new mortgages have some form of MPPI attached.
MPPI is one of the best-value protection insurances you can buy and as it protects mortgages is for many people the most relevant, says Brian Brown of financial analyst Defaqto.
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However, industry critics have raised concerns about how MPPI is sold, saying that it is too expensive and often mis-sold at the point of sale, and that the market operates to the detriment of consumers. A recent study by the Office of Fair Trading resulted in the sale of all payment protection policies, including MPPI, being referred to the Competition Commission for further investigation.
When buying MPPI consumers can choose whether to buy accident, sickness and unemployment (ASU) cover, or accident and sickness together (without unemployment), or just unemployment cover. The cover you will need depends on your individual circumstances.
Simon Burgess of insurer British Insurance says : The self-employed and short-term contract workers should never buy unemployment cover, as it is impossible to be made redundant. People with pre-existing medical conditions and those in employment sponsored sick-pay schemes may not need accident and sickness cover.
MPPI policies have a ‘benefit period’ which is the length of time you can claim monthly payments for. This varies with different policies but is normally one or two years. The longer you want the cover for, the more expensive the monthly premium will be.
There is often an ‘initial exclusion’ period at the start of the contract, during which time no claim can be made. This is normally 30, 60 or 90 days although some policies offer ‘back to day one’ cover and so have no exclusion period. Burgess recommends this type of policy and says it is also best to avoid a policy with an excess. An “excess” or “waiting period is an amount of time during which no payments will be made; this is normally up to 60 days.
Exclusions
Claims that MPPI has been mis-sold often arise because a policy has been sold to someone who would never be able to claim – the self-employed are not covered by the employment part of many policies, for example, so an adviser selling MPPI to a self-employed person should point this out.
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Most policies do not cover pre-existing medical conditions and many do not cover common medical conditions such as stress, mental health issues and backache.
Self-inflicted injuries, illness due to drink or drug addiction, pregnancy and HIV are normally excluded.
Costs
The MPPI policy offered by your mortgage lender is unlikely to be the cheapest; better deals can be found by shopping around or going to a standalone provider such as Paymentcare, Ant Insurance or British Insurance.
The premium you pay is normally worked out as a price per £100 of benefit, so the bigger the mortgage repayments you want to protect, the more you will pay. According to financial analyst Defaqto, the average price per £100 is £4.76, although policies range from £2.40 to £6.50.
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Defaqto’s Brian Brown warns that cheap is not always best: Anyone taking out MPPI needs to think carefully about what sort of cover they want and what sort of risks they face. Many people are so happy they have been given the mortgage offer they want that they sign up to MPPI without thinking.
Costs and what is covered can vary quite dramatically. Halifax’s Repayment Cover costs £4.50 per £100 worth of benefit for a 25 to 55-year-old, for example, but does not offer full cover for stress and backache. Norwich & Peterborough Building Society’s Safeguard, on the other hand, costs £5.80 per £100 of cover and includes stress-related conditions as well as back trouble.
You need to think carefully about and weigh up the risks, says Brown: If you’ve decided you want MPPI, it might make sense to take cover only for accident and sickness and not for unemployment. If you are confident you won’t be out of work for long, feel secure in your job, or have enough savings to tide you over until you get another job, you could decide not to bother with unemployment cover.
MPPI vs income protection
In some cases MPPI might not be the best product for your circumstances – an income protection (IP) policy might be more suitable.
Pam Needham, director at Ant Insurance, says:”If you lose your income, MPPI will pay only the monthly mortgage, leaving consumers to fund their other monthly expenses, such as food, credit cards and council tax, personally – a fact that many people forget. Income protection bridges that gap by protecting any chosen amount up to 75 per cent of net income so that consumers can protect not just their mortgage, but their other monthly outgoings as well under just one policy.
MPPI is also tied to your mortgage, so if you change mortgage providers, to remortgage for example, then your premiums might increase, particularly if your MPPI policy is age-banded or if a previous illness is now classed as a ‘pre-existing condition’.
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Unlike MPPI, income protection policies are not tied to any particular mortgage or loan, so you don’t need to change your policy if you move your mortgage, says Needham.
