Mortgage payment protection insurance: A complete guide
When you have a mortgage taking a substantial chunk of your salary each month, the idea of losing that salary and not being able to make your monthly payments can be a significant worry.
Mortgage payment protection insurance is designed to take that worry away and provide financial cover to make sure that you never get to the point where missed mortgage payments mean repossession is on the horizon.
What happens to your mortgage payments if you stop working? Assuming you have no form of mortgage insurance at all, what does happen if you suddenly lose your salary though accident, illness or unemployment?
Rejigging your monthly outgoings
It might fall on your partner to make up the shortfall, while you cut back on any unnecessary outgoings, but how long can your family cope without your income?
It could be that you have sensibly built up a solid amount of savings that can be used to pay your monthly mortgage bill, but was that really what you were saving for? With mortgages typically taking up a large percentage of your monthly pay packet, how long will your savings last? One month? Four? Six?
Savings are an excellent idea and provide a strong security blanket for the short term, but could run short and leave you struggling a lot faster than you think.
If you have become unemployed due to redundancy, then you may be entitled to a redundancy package. This might hold the wolves at bay for three-to-six months – even longer if you were employed for a long while – but should not be seen as a long term alternative to your monthly salary packet.
Redundancy packages are good for giving you the time it takes to get suitable replacement employment, but are only available in very specific circumstances.
Being off work because you have fallen ill or had an accident does entitle you to sick pay, but unless you have a very comprehensive sick pay scheme with your employer, this is unlikely to help with a mortgage. Statutory sick pay (SSP - the legal minimum amount) is £94.25 per week – does this cover your mortgage?
Read our guide on Statutory Sick Pay vs Income Protection here.
Housing benefit does exist for those struggling with their rent, and in some cases, you can apply for state help for your mortgage, but it will only cover the interest on your mortgage and not provide a full plan to cover your repayments. There will be a shortfall (often of 100% as your application may be rejected) and that has to come from somewhere.
With universal credit replacing the older housing benefit system across the country, this help will be more difficult to obtain and may result in smaller payments. However, it is likely that if you are on a low income, you will be able to apply for an exemption for your council tax payments.
Renegotiating your mortgage payments
There’s always the option of calling your mortgage lender and hoping they’ll help out. Some will allow you a short break in your payments, while others will simply seem heartless and unhelpful. It’s sensible to contact them though, as communication when you are financially struggling is very important.
Suing for compensation
If you are off work due to an accident that is not your fault, you can look at personal injury compensation. While this will not help you pay your mortgage immediately, once a successful claim has gone through the process, you could find yourself reimbursed sufficiently to clear any arrears and replace any lost savings.
Equally, if you believe you were unfairly dismissed, suing your ex-employer for wrongful dismissal could result in a similar level of financial compensation.
Defaulting on your mortgage
Ultimately, when the savings run dry, your partner’s salary is too stretched and your application for benefit is rejected, you will end up defaulting on your mortgage. When this happens, you are in serious risk of having your home repossessed as well as doing extreme damage to your credit history.
Mortgage payment protection insurance (MPPI) is an affordable type of mortgage insurance cover designed to pay your monthly mortgage if you find yourself out of work.
There are different types of mortgage payment protection insurance, one for looking after you if you are away from work due to being sick or having had an accident leading to an injury, and a second type that covers you for unemployment.
It’s possible to get combined cover, but it could be that you only need one.
Get MPPI for accident and sickness only if you:
- Have worked at your company for long enough that any redundancy will come with a significant package
- Are self-employed or own your company
Look to unemployment MPPI cover only if:
- Your employer sick-pay scheme is comprehensive
- You have alternative income protection insurance to cover illness and accidents
Combined cover is appropriate if none of the above situations apply.
Mortgage payment protection insurance is typically capped at £1,500 to £2,000 per month. If your mortgage is more significant that this, then you may need to look at an alternative or combine MPPI with another type of cover. For amounts up to £1,500, you can expect your mortgage payments to be made in full on your behalf.
There is always a waiting period with MPPI, meaning you will not receive a payment during the first few weeks you are off work. With accident and injury insurance, it is usual to wait between 31 and 60 days from your first day off sick before the mortgage protection plan kicks in. Many policies, however, include a ‘back to day one’ clause, which means that if you do make a claim on your MPPI, it will be backdated to cover all your mortgage expenses so far, replacing the savings you have had to dig into.
For an employment mortgage protection policy, the waiting period may be as much as three-months, so you will need to make sure you have savings or another alternative in place to cover those first difficult months. Employment MPPI is unlikely to have the ‘back to day one’ condition.
Life insurance, including the mortgage-centric decreasing term life insurance type, only pays out in the event of your death. It is there to support your family once you are gone, and never covers you during your lifetime. In this way, it is separate from MPPI and should be seen as an important alternative cover.
Some other products, often tagged on to your life insurance policy, including critical illness cover and income protection, can provide a similar type of cover but are typically more expensive than dedicated MPPI.
On average, MPPI costs £5.60 for every £100 of monthly payment needed to be covered. Thus, if your mortgage is £700 per month, your MPPI would be approximately £39.20.
It is much cheaper than most income protection alternatives due to its dedicated nature, but if you are looking for cover that encompasses other aspects of your finances outside of merely the mortgage, income protection or critical illness cover may be more appropriate.
Remember to shop around when looking for any form of insurance, and any home buyer’s protection insurance product.
Whether it is a basic MPPI policy or joint mortgage protection, your quote will be cheaper if you put in the time to find the right deal.
Bobatoo works with some of the best insurance brokers in the UK, meaning that we can comb through all the best deals to help find the perfect insurance policy suited to your needs. For a no-obligation quote, get in touch with us now by tapping the green button below!