A Beginner�s Guide to Mortgage Protection

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What is mortgage protection?

Mortgage payment protection insurance, or MPPI, is a form of insurance which can be taken out to protect your home from repossession in case of redundancy, accident or illness which results in being unable to work, and therefore meet your mortgage payments. Mortgage protection insurance is therefore sometimes also known as accident, sickness and unemployment cover.

You pay into the policy each month, and in the event that you are made redundant or signed off on sick leave, you apply to claim on your policy. Normally the payments will begin one month after your employer confirms you are unemployed and are made directly to the mortgage provider, but this does vary from policy to policy. Payments are usually made for up to 12 months, by which point it is assumed you will have recovered or found a new job, though some policies will pay out for up to two years.

Mortgage payment protection insurance is not compulsory, however some mortgage lenders may include it as a condition of their loan.

When won't I be covered?

When taking out mortgage protection, it's important to remember that you will not be covered if you have a pre-existing medical condition, or if you are aware that you job is in jeopardy when you take out the policy.

If you are claiming because of unemployment, it's worth noting that your claim will not be valid if your unemployment is due to resignation, voluntary redundancy or dismissal for unacceptable conduct. With most policies you will also need to be in receipt of job seekers allowance in order to make a claim.

If you're claiming because of illness or an accident which has left you unable to work, make sure to check the small print. Many policies will not cover sick leave caused by back injuries, stress, pregnancy (unless there are medical complications) or injuries caused by extreme sports.

If you are self employed you should take particular care to find a policy which will cater to your needs, as not all will. It's also worth checking the insurer's policy on sick pay and household income; if your sick pay is particularly generous or your partner earns enough to cover the mortgage with just their salary, the insurer may not pay out.

Finally, as with most insurance policies, it will not be active immediately. There is normally a period of around 60 days before you would be able to make a claim.

How much will mortgage protection cost?

The cost of mortgage protection insurance will vary on depending factors such as the insurance company you intend to use, how long they will pay your mortgage for, how long you have to wait until their payments kick in, and most importantly, how much your monthly mortgage payments are.

As a general rule, monthly mortgage protection costs somewhere between 3-7 for every 100 that you pay on your mortgage. Therefore, if your mortgage was 800 per month you would pay between 24-56.

You may see mortgage protection plans for as low at 10 per month, but remember that you get what you pay for. A low cost plan is likely to have cons, such as a longer excess period before the provider will pay out on a claim, in some cases this can be up to six months.

What else should I consider?

Before taking out mortgage protection insurance, it's worth considering the following points to see whether it is the right option for you:
  • How much cover will I require?

  • What type of protection will I need?

  • Which insurer offers the best policy for me?

  • Would I be better off saving privately? (this is particularly relevant if your sick pay/partner's income would cover the mortgage)

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