How to protect your mortgage

By: Simon Christopher

When you buy a home and take on a mortgage, you expect to be able to make the payments. Times are uncertain though, and many unexpected events can occur knock you off track.

If you fall ill or are unable to work because of an injury, you may be unable to make your mortgage payments. If you are made redundant at work, you could face losing your home because you can't keep up with your mortgage repayments. That's why many mortgage companies suggest that you buy mortgage payment protection insurance. It works like any other insurance - you pay an annual premium, and if you are unable to make your home loan payments for any covered reason, the insurance policy will meet payments (for you for up to 12 months with most policies).

PPI and MPPI - payment protection insurance and Mortgage Payment Protection Insurance - have come under increasing fire here in the UK. Last year, the FSA asked the Competition Commission to look into the market for PPI and make recommendations regarding the market for mortgage protection and other payment protection insurance. The issues have to do with the outrageously high costs and alleged dodgy sales practices around most payment protection insurance.

According to the recently released report on Emerging Thinking from the Competition Commission, the PPI industry rakes in nearly £4bn in premiums each year, just under 25% of it in MPPI - payment insurance for first charge and second charge mortgages. That's £1bn a year in mortgage insurance taken out - yet according to critics of the industry, only 10-20% of that is ever paid out in claims, making a tidy 80% profit for the insurers. Furthermore, the critics continue, the industry uses deceptive sales methods, and the policies include clauses that make it almost impossible for most people to collect.

In light of all the criticism leveled against the PPI industry, though, is mortgage payment insurance a wise use of your money? In some cases, you'll end up paying nearly as much or more for your payment protection cover than you do in interest payments on your mortgage. Despite that, it's important to find a way to protect your home and the loan secured against it. If not MPPI, what can you do to insure yourself against losing your home in case of accident, illness or unemployment?

- High interest savings account

One suggestion made by many financial experts is to self-insure by depositing the amount you'd pay for mortgage payment insurance in a high interest savings account to be held specifically in case you can't meet your monthly loan repayments for some reason. The added benefit - if you neer need to touch it, you'll have the additional savings toward your retirement or other goals once your mortgage is paid off.

- Disability Insurance

Another option for protecting your insurance payment is to insure yourself against loss of income. Disability insurance pays you a percentage of your income if you become disabled and unable to work. You can use that insurance payment to make your mortgage repayments and meet your other bills and accounts. In general, the insurance premiums for disability insurance are lower than for payment protection insurance, and it doesn't cover you in case of unemployment.

- Buy from an independent insurer

If you do decide that payment protection insurance is right for you, shop around to get the best deals. It may be tempting or make sense to buy your MPPI from your bank or mortgage lender, but you could end up paying twice as much for the same cover. By law, your mortgage company may offer MPPI, but they may not require you to carry their insurance as a condition of your loan. According to the latest figures, shopping around and buying your MPPI from an independent insurer can save you tens of thousands of pounds over the life of your mortgage.

Mortgages
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