When you take out a mortgage on your home, you and your lender gamble on the fact that you'll be healthy and working for the full term of the mortgage.
None of us know what the future holds, but there's a good chance that sometime in the next twenty to thirty years you'll find it difficult to meet your mortgage payments. The reason may be an illness or injury that keeps you out of work for an extended period of time or even being made redundant at work. Mortgage payment protection insurance (MPPI) is designed to carry you through those difficult times by paying out a monthly amount to cover your mortgage expenses when you are unable to work for certain reasons.
Mortgage payment protection insurance came under fire recently when the FSA revealed that in many cases, the MPPI offered by lenders alongside their mortgages was grossly overpriced. In many cases, borrowers were paying 5 to 6 times as much as they would had they bought cover through an independent insurer. In the most extreme cases, borrowers were paying nearly a third of the cost of their monthly mortgage payment in mortgage insurance. You can find more from the FSA MPPI review pages.
Tips for Buying MPPI
By understanding what cover you need, shopping around and comparing like with like, you can avoid paying more than you have to for mortgage payment protection insurance.
Be certain that you need MPPI. If you're already paying for short term disability cover or another type of insurance that pays you when you are out of work due to illness or accident, you may not need MPPI.
TIP: Check with your employer and cover provided by any other policies you hold to be sure that you're not duplicating coverage you already have.
You are not required to accept the payment protection insurance offered by your lender. While many lenders offer mortgage insurance, and some may require that you carry MPPI during the course of your loan, they cannot require that you purchase cover from them.
TIP: Shop around online for the best prices on payment protection insurance but remember to also compare cover.
It's nearly always more expensive to have your lender include the cost of payment protection insurance in your mortgage. It may sound convenient to only have to pay one monthly bill to cover your mortgage and the payment protection cover, but it can cost you considerably more.
TIP: Ask your lender to itemise the cost of your mortgage both with and without their payment protection cover so that you know exactly how much you're paying and how it compares to other providers.
Be sure that the payment protection insurance will cover you in the most likely eventualities. Many policies exclude seasonal workers and the most common illnesses and disabilities from payment. They may require that you be employed for 6 or 12 months continuously before they'll pay out on an unemployment claim.
TIP: Check the exclusions on any MPPI cover that you're considering to be sure that it will actually pay out in the circumstances that are most likely for you.
Make sure that any payouts will cover all of your mortgage related expenses. Often, the MMPI that mortgage lenders want to sell you only covers the cost of your mortgage ‚ but you'll not be covered for other expenses associated with your house and mortgage.
TIP: Be sure to get enough cover to pay all mortgage related expenses that would continue during a period of unemployment.
PLEASE NOTE: The guidance published in this article is for information only and does not constitute financial advice or a recommendation of any particular home insurance policy or company. If you are in any doubt please consult an independent insurance adviser. A database of advisers in your area is available at www.unbiased.co.uk
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