Mortgage insurance is designed to protect your mortgage payments if you lose your income. The thought of getting into mortgage arrears is a nightmare for many people – it can be the first step to losing your home. So taking out a policy to prevent this happening seems like a good idea. But there are a couple of things to bear in mind.
In the first place, mortgage insurance only protects you against losing your income under very specific circumstances, such as redundancy, accident or serious illness. It wouldn’t cover you if you were dismissed from your job for misconduct, or if you left voluntarily. And it certainly wouldn’t protect you if you got into arrears through mismanaging your finances, even though this is very easy to do when money’s tight.
Secondly, mortgage insurance isn’t suitable for everyone – for instance it wouldn’t be suitable for you if you were retired. Before taking out any policy you must check carefully that it would actually benefit you.
If you do decide to take out a mortgage insurance policy, remember that all policies are not the same. You need to compare policies to find one that best meets your particular needs.
Some of the things to look out for are:
• How big is your mortgage? The bigger your mortgage, the bigger your monthly payment will be. Mortgage insurance policies have different monthly payout levels – most are pegged at around £1,500 or £2,000 per month. If you are going to need a bigger payment than this, check the policy carefully and make sure you find one that provides the pay level you need. A broker can help you.
• When will you need the payout to start? Most mortgage insurance policies don’t start paying out till 30 or 60 days after the claim arises – with some you have to wait 90 days. There are some that will backdate to day 1, so if this is important to you, check when the policy starts paying out.
• How long is the payout period? Many mortgage insurance policies pay out for a maximum of 12 months, after which it’s assumed that either you will have found alternative employment, or state benefits will have kicked in. There are some that pay out for two years, so make sure you find the period that best suits you.
• What exclusions does the policy have? Most policies have some exclusions, so examine these very carefully as the provider probably won’t point them out to you. For instance some exclude certain pre-existing medical conditions, some are invalidated if you were off sick from work when you took out the policy, others exclude you if there was already a possibility of redundancy at the time, and so on. It’s easy to get caught out here, as the small print is extremely small. So be on the alert.
Don’t forget that you don’t have to take your mortgage insurance policy from your mortgage lender. It can be tempting to do so, in order to simplify your monthly payments, but you won’t get the chance to compare policies. Your best plan is to look for a specialist broker who can help you find the policy that fits your requirements.