It’s estimated that more than 750,000 households are at risk of defaulting on their mortgage within the next two years. These people could protect themselves by considering the different types of mortgage insurance. Our mortgage insurance explained guide will explain all you need to know.
Understanding Mortgage Insurance
What is mortgage insurance?
When you take out a mortgage, you’re likely to consider different types of insurance. One policy that you may consider is mortgage insurance, also known as mortgage payment protection insurance.
Mortgage payment protection insurance is a type of insurance policy that will help you meet your mortgage payments when changes in your circumstances mean you can no longer keep up (full) repayments. Failing to repay your mortgage as agreed can result in losing your home, so mortgage insurance is a way to protect yourself from this situation to a specified degree.
How much does mortgage payment insurance cost?
Your projected mortgage insurance cost will be determined by multiple factors, including your type of employment, income, mortgage repayments and even your age. As with most types of insurance policies, the cost of premiums can differ significantly based on individual factors. Nevertheless, some homeowners secure mortgage payment insurance for around £20-£30 per month.
Is mortgage protection insurance compulsory?
No, you don’t have to take out mortgage protection insurance when you take out a mortgage. However, you might want to consider mortgage payment protection insurance if you’re worried about keeping up repayments and having your home repossessed.
There are alternative insurance policies that you may wish to consider, which can also prevent you from missing mortgage repayments and losing your home. We will discuss some of these alternatives later in this guide.
Benefits and limitations of mortgage insurance
The benefits of mortgage insurance are that your mortgage will still be paid should you not be able to keep up repayments as agreed with the lender., which would then prevent you from defaulting on the secured loan. Mortgage defaults may occur for several reasons, including being unable to work due to sickness or injury.
However, some of the drawbacks of mortgage payment insurance are:
- This creates an added monthly expense
- There may be exclusions within the policy
- The policy may only cover you for a fixed period of repayments
- You may be better off using an alternative insurance policy
Cancelling or terminating mortgage insurance
You can usually cancel mortgage payment insurance at any time, similar to when you may cancel other insurance policies. If you’ve recently taken out mortgage insurance but changed your mind, you may still be within the cooling-off period and be eligible to receive a full refund on any premiums paid so far.
Types of insurance to consider when taking out a mortgage
Instead of taking out mortgage insurance, other types of insurance policies can ensure you retain an income to pay your mortgage. The common alternatives are income protection insurance, critical illness cover and life insurance. We have compared each of these policies in the sections below.
Income protection vs mortgage protection
Income protection insurance is a type of insurance policy that pays an employee a percentage of their usual salary if they cannot attend work due to illness or injury. The amount paid out may decline over time until no further payments are paid out. This money can be used as preferred by the worker, but it is often taken out to help pay essential living expenses in such a situation, including mortgage repayments.
The main difference between mortgage protection insurance and income protection insurance is that the former provides funds specifically for mortgage repayments, whereas income protection payouts can be used as preferred. You don’t even have to have a mortgage to benefit from income protection insurance.
Can l buy income protection if I’m self-employed?
Yes, some insurance providers are offering income protection insurance for self-employed workers. The applicant will need sufficient evidence to prove their regular income. Our team can help self-employed professionals find suitable income protection insurance options.
Critical illness cover vs mortgage protection
Critical illness cover is an insurance policy which pays out if the policyholder is diagnosed with a critical illness or suffers a serious injury. For example, if you were diagnosed with cancer and required an extended period off work, critical illness cover would provide funds to maintain essential living costs for all or some of this time. Note, this insurance policy only covers the individual for specific medical events and some medical issues are excluded.
Alike income protection insurance, critical illness cover isn’t specifically taken out to cover mortgage repayments, although many people do take it out to ensure they can meet mortgage repayments. This is the main difference between critical illness cover and mortgage payment protection insurance.
Life insurance vs mortgage protection
Life insurance is a type of protection policy which pays out a sum of money to beneficiaries if you pass away. Some policies last indefinitely and pay out a fixed sum. Other life insurance products pay out an increasing sum or decreasing sum to cover the individual against inflation or declining financial responsibilities, respectively.
Some people take out life insurance to help their family cover mortgage repayment obligations if they were to unexpectedly pass away, especially if both incomes are required to repay the mortgage and maintain essential living standards. However, any payout can be spent as the beneficiaries prefer, unlike mortgage protection which must be used to repay the mortgage.
How do I choose mortgage protection insurance?
You should consider your personal needs before choosing mortgage protection insurance, including the level of cover you require to cover your monthly mortgage repayments. A mortgage insurance broker can help you assess and consider options against personal circumstances. The best brokers will discuss the pros and cons of alternative insurance options from the outset.
What if I have a buy-to-let mortgage?
Landlords can opt for buy-to-let insurance instead of mortgage payment insurance. This is a type of insurance policy that protects landlords from financial loss, such as missed rent payments.
If your tenants miss their rent payments it can take a long time to have them evicted from the property. Buy-to-let mortgage insurance is one way of covering yourself in these situations and ensuring your BTL mortgage is still repaid.
If you need help with your mortgage, call us today: 0345 450 4660
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