Simmons Gainsford Financial Services Mortgage Protection

Mortgage payment protection insurance: What is it and do I need it?

Mortgage payment protection insurance (MPPI) is a type of policy that homeowners take out to ensure they are able to keep up with their mortgage repayments in the event they lose their job or have to stop working due to severe illness.

MPPI is not compulsory; though it is estimated around one in five homeowners have this type of cover.
Even if you do decide to invest in insurance, it is advisable that you still try and bolster your savings to give you a little extra breathing space should you find yourself out of work.

Above all, having a fully protected mortgage gives you extra peace of mind in uncertain times. As a general guideline, you should expect to pay £5 a month for every £100 you wish to cover. Be aware that most insurers place a delay of anything up to six months from the moment you claim on a policy to the time they start paying out, and most mortgage lenders will offer borrowers the opportunity to purchase a MPPI policy from them. Though this may be the quickest way, it may not necessarily be the cheapest.

Mortgage insurance policy options

When you take out an MPPI policy, you choose how much you would want it to pay out each month. Some policies let you also cover other monthly bills as well as your mortgage. Most MPPI providers let you have a maximum benefit of between £1,500 and £3,000.You may only be able to get up to, say, 75% of your gross monthly salary though, or up to 150% of your monthly mortgage payment. In addition, some mortgage protection policies don’t let you take the policy with you if you switch mortgage.

Problems with mortgage payment protection insurance

The biggest problem with MPPI is the way it is underwritten. Income protection is fully medically underwritten when you take out the policy, meaning you’ll know from the outset what you are and aren’t covered for. In contrast, MPPI usually does the full medical checks at the point you put in a claim – this means, for example, that you can’t be certain any pre-existing illness will be covered until the moment you put in a claim.

What does the ‘waiting period’ refer to?

The waiting period is how long you have to wait once you’ve put in a claim before the policy benefit starts to be paid out. Some providers call this the ‘excess period’ or ‘deferral period’. It can range from 30 days to 180 days. For example, if you stopped work on 1 February and the waiting period was 30 days, the policy would start paying out from 3 March. Some policies, known as ‘back-to-day-one’ policies, don’t have a waiting period.

In general, the longer the waiting period you choose, the cheaper the policy will be. If your employer pays you sick pay you may want to take out a policy with a waiting period that ends when these benefits end.

Need mortgage advice?

We believe you should always seek independent mortgage advice before taking out a mortgage. Please contact our mortgage manager Pauline Aldridge for more information.

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