What is mortgage insurance, and do you need it?
When you buy a home – whether Barratt London or any other – it’s likely that your mortgage will become your biggest monthly expense. It may also be the one with the most serious consequences if you find yourself unable to make the monthly repayments (for example due to unemployment or ill health). To help reduce the risk that you could lose your home, you have the option of buying mortgage insurance.
The purpose of mortgage insurance, also known as Mortgage Payment Protection Insurance (or ‘MPPI’), is to provide both ongoing peace of mind and to step in and cover your payments if the worst were to happen. The question of whether you need mortgage insurance will depend upon your particular situation, other insurance policies you may (or may not) have in place, and your own personality and attitude to risk.
In this article we’ll take you through everything you need to know.
How does mortgage insurance work?
At its simplest, mortgage insurance will pay out a set amount each month to cover your mortgage if you’re unable to work. While it will usually be the precise amount to cover your mortgage payment, this can vary depending on your policy.
Here are three options it’s likely you’ll be offered when you first take out your policy.
- Have payments calculated on your salary – you’d typically receive up to 50% of your salary
- Have payments calculated on your mortgage – the amount of your mortgage only
- Have payments calculated on your mortgage plus bills – around 125% of the value of your mortgage
What mortgage insurance isn’t
Mortgage insurance is not the same as more general policies such as Life Insurance or Critical Illness Cover, though these types of policies may also help cover mortgage payments.
It is also not the same as Home insurance or Homeowner’s Insurance, which are designed to provide cover for issues arising to the home itself, such as flooding or theft.
Are there different types of mortgage insurance?
Yes, there are lots of policies available with different features and priorities. However, most mortgage insurance cover will fall into one of these three tiers.
This type of cover pays out only if you’re made unemployed.
Accident & sickness only
This type of cover pays out only if you have a long-term illness or accident which prevents you from working.
Unemployment, accident and sickness
The most comprehensive type pays out if you become unemployed, ill or have an accident. This is the most expensive kind of policy.
You will need to decide for yourself which is the best type for you. As well as how much you’re willing to spend on insurance, it will also depend upon factors such as your type of profession (and how difficult it could be to find another job), the risks you encounter in your work and life, and your overall attitude to risk.
How long will my mortgage insurance actually pay out for?
This will depend on your individual policy. Mortgage insurance is designed to cover windows where you’re ill or not working – not to be a permanent replacement for earnings – so as standard most policies will pay out for 12 or 24 months.
How much does mortgage insurance cost?
This varies from policy to policy. Every mortgage involves a different sum of money, and that’s before you even begin considering risk factors such as age, salary, riskiness of your job and medical history. There are lots of competitive policies available, so it’s a good idea to get quotes from different providers.
Is there anything else I need to know about mortgage insurance?
Most mortgage insurance policies will feature exclusion periods and waiting periods, so it’s important you’re aware of these.
Exclusion periods mean that you won’t be covered the moment you take out the policy – you’ll likely have to wait a few months before you can claim. In the case of unemployment cover this is in place to stop someone who knows they’re going to be made redundant taking out a policy and claiming immediately.
Waiting periods mean you must be off work for a specified number of days (often between 30 – 180) before you can make a claim on your policy. In general, the longer the waiting period, the lower the premium.
How long a waiting period you’re happy with depends on several factors, including any savings you have, or redundancy packages you’re receiving (or have received) from your old employer.
Do lenders require me to have mortgage insurance?
Lenders don’t require you to have this insurance as a condition of your mortgage, but it is important you’re able to pay your monthly mortgage in the event you’re unable to work as a result of an accident, sickness or unemployment
Should I take out mortgage protection insurance?
There’s no straightforward answer. But with your home at risk – and none of us really knowing what the future holds – having some back-up in place to cover your mortgage repayments may well be a good idea.
How do I find the best deal for mortgage protection insurance?
You may be sold a mortgage protection insurance policy with your mortgage, though it’s often possible to find a better and cheaper deal elsewhere.