Buying your home is an important decision. As opposed to renting, you’ll need to maintain your property and ensure it is sufficiently insured. All this costs money, and could be a significant monthly expense. So, what if you were to lose your job and couldn’t make your repayments?
In this guide we explain how this can be mitigated with mortgage protection insurance.
Mortgage protection insurance is a policy which will cover the cost of your mortgage repayments over a certain time. You'll typically receive a pay out if you lose access to your monthly income, such as a redundancy or an illness which puts you out of work for an extended period.
If you need to claim, some mortgage protection insurance policies can pay out 125% of your monthly mortgage repayments. The extra money is aimed to help pay your monthly bills, such as energy and water.
This differs from mortgage protection life insurance, which pays off your mortgage or long-term loan if you die while the loan is still outstanding. In addition, mortgage protection insurance is unlikely to pay off your entire mortgage debt. Monthly payments will occur over a set period, like a year, with the intention that you can return to work within this time.
Most mortgage protection policies refer to two events, sickness and unemployment.
If you fall ill and therefore can’t work, your policy should cover the cost of your mortgage each month. This also includes injuries you might suffer outside of work, for example through a car accident. Your pay-out will also then run over a certain period or until you’re healthy enough to return to work, whatever is sooner.
Otherwise, some mortgage protection policies pay out if you lose your job through redundancy. It is worth noting that most policies won’t pay out if you were fired from your place of work.
Some insurance companies include cover for just sickness or unemployment, so it is worth checking your policy documents before agreeing to your plan to make sure both events are covered.
This depends on a variety of factors which include whether you’re on a fixed or variable mortgage, the length of your policy, your salary type of employment you have and the type of cover included.
Like with other insurance policies you can cancel your mortgage protection policy. If you’ve just taken out your policy, it’s worth looking for the cooling-off period in your documents. This will let you know if you can cancel your policy without incurring any charges or fees.
If you’re self-employed you may be worried about how you can pay off your mortgage if you were to fall ill. After all, if your business is small, there might not be enough cashflow to live and keep your business afloat. Speak to LifeSearch today to explore your options.
Defaulting on your mortgage can come with serious consequences. If you can’t keep up with your monthly repayments then ultimately your home could be repossessed.
This is one of the main benefits of mortgage protection insurance. It can give you peace of mind that if you were to lose access to your monthly income for a reason that is covered by the policy you’d still be able to make your mortgage repayments and work towards homeownership.
It is ideally for those who wish to have this peace of mind. However, this can be found through other insurance types too.
Mortgage protection insurance can be easily confused with other policies. Below we’ve listed some similar types of insurance and how they differ from mortgage protection insurance.
Life insurance is a type of cover which pays out a lump sum to your beneficiaries upon your death. It is therefore designed for people with dependants.
Unless critical illness cover is added to your policy, it won’t pay out if you become seriously ill and does not cover redundancy. So, those living alone or without a beneficiary after death might be more inclined to take out mortgage protection cover.
Income protection policies pay out if you’re unable to work due to sickness or injury, but is not linked directly with your mortgage. It’s like a mortgage protection plan, but your pay-out will come in the form of cash and won’t cover your mortgage repayments directly, and redundancy is not covered
This might be suitable for those who are looking to use their cash flexibly.
Critical illness cover can pay out if you’re diagnosed with certain illnesses. These illnesses are listed in your policy documents and can include certain types of cancers, heart attacks and kidney failure. If you have a life insurance policy it is worth checking your documents to see if you’re already covered for critical illness.
Like income protection, this pay-out has a certain degree of flexibility, and won’t just cover the cost of your mortgage repayments.
Before you take out a mortgage protection plan, have you considered building a savings account?
One strategy is to take out an easy access account and tuck away a portion of your income into this fund each month. Over time your balance will earn interest and at some stage you may have a sufficient sum to make your monthly mortgage repayments.
If you ever lose access to your monthly income then this account can be something to use instead, and it avoids the need for monthly premiums.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.