Mortgage Insurance - Pros and Cons
Mortgage Payment Protection Insurance and Stopping Repossession
Dec 5, 2008
It is important to appreciate the difference between payment protection insurance and mortgage payment protection insurance. Payment protection insurance was sold in conjunction with personal loans and credit cards. It came under criticism because it was part of a mis-selling scandal.
Mortgage payment protection insurance or MPPI shouldn't be perceived in the same way. It helps ensure that mortgage payments are made each month and can stop repossession from taking place when a policy holder is made involuntarily unemployed or becomes ill.
Shane Craigof money charity Payment Trust stated that "Mortgage borrowing accounts for 83 per cent of consumer borrowing, yet mortgage protection policy insurance is only taken out by 17 per cent of mortgage holders.”
Advantages of Mortgage Insurance
- Immediate payment upon being made involuntarily redundant. Mortgage protection comes into effect straight away which is particularly important should the company worked for have gone into receivership. State assistance isn't normally available for 37 weeks.
- 12 months cover is provided. This period of time is normally more than adequate to find a new job or overcome an illness. In any event, it provides cover until state assistance is available.
- Minimal state assistance for those with savings. If someone has savings, it is expected that these are used before any state assistance is received with regard mortgage payments. Mortgage insurance isn't related to savings and can help protect family finances from erosion.
- Helps prevent mortgage arrears and can stop repossession. Provides a regular source of payments without creating debt problems and exacerbating any existing health complaint.
- It is possible to shop around for the right mortgage insurance policy. The right mortgage insurance policy isn't always the cheapest, it should be the one that offers the best coverage. A number of companies offer MPPI so it is possible to get the right policy.
Disadvantages of Mortgage Insurance
- There is no payout until 6 months of premiums have been paid. This means that if someone loses their job before the qualification period, they won't receive anything.
- Certain illnesses aren't covered. Policies often seek to exclude stress-related and back injuries so it is necessary to check the small print before signing up.
- Pre-existing medical conditions. Any previous illnesses will be specifically excluded for MPPI and cannot be claimed for if they were to arise.
- Those in vulnerable employment situations can't get cover. Excludes those on short term contracts and people who haven't been in the same job for a minimum of 6 months. Some mortgage protection policies also exclude the self employed.
- Age restrictions. If over the age of 64, cover isn't available.
- High premiums. The majority of people buy mortgage insurance directly from their bank. This isn't usually a good idea. Money Week Editor-in-chief Merryn Somerset Webb stated that "The High Street banks charge up to five times as much in premiums as the few independent providers."
- Most policies only provide cover for 12 months. Mortgage insurance cover is usually for a year meaning that problems can arise if the policy holder hasn't returned to good health or found suitable employment.
Provided the multiple pre-existing health issues aren't a problem, taking out mortgage insurance is a smart move. Mortgage payment protection insurance buys a policy holder time should the unexpected happen. It is important to check the small print of any policy and always use an independent advisor to find the best priced policy.
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