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Protecting your mortgage payments

Protecting your mortgage payments

Since 1997, the CML, the Association of British Insurers (ABI) and the Government have been working together under the Sustainable Homeownership (SUSHO) initiative to help borrowers remain in their homes when financial difficulties arise. The Government's guidance to homeowners is clear.

"If you have a mortgage, or are about to take one out, you should think seriously about how you would meet your mortgage repayments if you lost your income, say through unemployment or ill health"

Protecting Your Mortgage Planning for a Rainy Day (Department of Work and Pensions - April 2004)

The labour market is more flexible nowadays with fewer people in conventional, 'full-time' employment. There is less security of employment than in the past, and few people now have what used to be called ‘a job for life’. More people work for themselves or are on short-term contracts. Meanwhile, state support to meet mortgage repayments has been reduced. It has therefore now become even more important for everyone to think about how they would pay their mortgage if they became too ill to work, suffered an accident or lost their job unexpectedly.

Mortgage Payments Protection Insurance (MPPI)

The monthly payments for a large mortgage loan may stretch your budget in the early years. But you should look not just at what you’ll have to pay now. Will you be able to afford the payments in future - for example, when a low discounted period comes to and end or if interest rates rise?

Some things are even harder to predict. If you became ill and couldn’t work, or if you were made redundant, you might not be able to keep up with the mortgage payments.

You can guard against this by taking out ‘mortgage payment protection insurance’ (MPPI), which would pay your monthly mortgage payments for a specified period if you suffer accident, sickness or unemployment. This type of insurance is sometimes also called Accident, Sickness and Unemployment insurance or ‘ASU’.

It is a good idea to take out MPPI, or some other form of income protection insurance, because state benefits do not normally cover mortgage interest during the first nine months you are out of work. However, you do need to be sure the insurance cover is suitable for you and your circumstances - especially if you are self-employed, on a fixed term contract, or have a pre-existing medical condition.

Around 25% of existing mortgages and over 35% of new mortgages have MPPI to protect the mortgage repayments. However, other insurance products can also provide protection to homeowners including income protection policies, permanent health insurance, critical illness insurance and unemployment-only insurance. You should consider which type of insurance, if any, would be most suitable for you based on your individual circumstances. You should also check to see if you are already covered in other ways - perhaps through another type of income protection insurance or by your employer.

Further information
The CML and ABI have published a leaflet Take Cover for a Rainy Day. The leaflet sets out:

Consumers without Internet access can obtain a free copy of this leaflet by contacting the CML's Consumer Line on 020 7440 2255.

The FSA’s mortgage ‘Insurance Checklist’ is also a useful summary guide of all types of insurance policies that may be linked to your mortgage, and whether these might be suitable for your circumstances. The guide is available from the FSA’s website or by calling the FSA leaflet line on 0845 456 1555.

The material featured on this page has been provided by The Council of Mortgage Lenders CML.
Published November 2005

 

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