Don't run for cover

Mortgage protection may seem like a good idea, but make sure you're not sold a pup.
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The Independent Online
There used to be a time when borrowing from a building society was almost as straightforward as shopping at the supermarket. You decided what loan you wanted - repayment or endowment - and signed on the dotted line. Then you got yourself a bit of insurance from a local broker, and you were set.

But it doesn't happen like that any more. Building societies have become operations bent on maximising profit, and that means getting you to buy things on which they will receive a commission. Their advisers have become slick salesmen who will offer you all manner of financial products (usually insurance) at all manner of fancy prices.

The unwary borrower is not only in danger of ending up with products he does not really need; he or she may find that they add significantly to the overall monthly repayment costs. In one recent deal with a top- name building society a housebuyer found that he had been repeatedly misled over certain aspects of the loan. This despite asking all the right questions.

It is increasingly common for societies to offer packages in which a cash discount on the first year or two of loan repayments is available as long as the borrower also buys certain types of insurance from the society. Unfortunately, the insurance may be so expensive as to cancel out the discount on the mortgage.

In some cases, the expense of paying for these extras may even exceed the basic monthly mortgage repayment.

The most straightforward policy you are likely to be offered is "mortgage protection" or "term assurance". Both kinds of policy will repay the whole loan (on repayment or pension mortgages) if you die prematurely. It is wise to have some cover of this sort and the cost is relatively low.

The same cannot be said for any of the other kinds of insurance cover. Mortgage repayment cover simply promises to cover your monthly repayments if you are the victim of sickness, accident or redundancy. It may be a sensible policy to have if you think you are seriously at risk, but beware. The premium is not negligible - about pounds 7 per per pounds 100 of repayment, which means protection cover for a mortgage with pounds 300 a month repayments would cost about pounds 21 per month.

You also need to check what you are getting. Most policies cover only repayments for a year, while others, such as Nationwide's, cover two years. It may also be worth trying to check out the insurer's reputation for paying out on claims. Horror stories are not uncommon of people claiming on a policy they have kept up for years only to be told that something in the small print means they do not qualify.

Unfortunately, the reduction in income support from October means that some kind of repayment cover may be more important than in the past.

Critical illness insurance is a more specialised kind of cover, which pays out a lump sum - the entire amount of the mortgage if you choose - if you fall seriously ill. It tends to be extremely expensive and of very doubtful value for most people. On a large mortgage, you could easily find yourself paying more than a pounds 100 a month in premiums for this policy alone. The commission the society receives for selling policies of this size could exceed pounds 1,000 - a huge incentive to sell them whenever possible.

Special redundancy cover may also be an expensive luxury. A premium of about pounds 230 a year for pounds 300 monthly repayment cover is not unusual. You may feel this is a totally unnecessary expense, but some mortgage packages will have it built in, so the only way of avoiding it is to find another lender.

Virtually every mortgage lender insists that borrowers have house and contents insurance. This too is often sold as part of an obligatory package, in which case the premium rates may be high. Where there is no obligation to buy from the lender, societies will still offer to sell you a policy themselves and many have the gall to charge around pounds 25 if you do not buy it.

Before accepting the lender's policy, it is worth shopping around. Premium rates on a mid-priced property can vary by pounds 100 or more between insurance companies and your building society may be offering one of the most expensive without telling you. Even if you turn it down, the society may then suggest you should use its independent insurance broker to find you a cheaper policy.

People borrowing a high proportion of the property's value may find the building society urging them to buy a mortgage indemnity policy. The policy covers the lender's loss if he has to repossess the property and sell it for less than the value of the loan. If you borrow 95 per cent of the value of a house, you are likely to find an indemnity policy is a condition of the loan. In most other circumstances, however, it is completely unnecessary.

It does not insure you, but the building society - so you are in effect paying to insure the society's risk. It is also very pricey. To cover a pounds 50,000 loan, for example, you might have to pay a one-off premium of between pounds 500 and pounds 1,000. This is an expense that no one ought to take on unless circumstances absolutely demand it.

Mortgage protection: repays the whole loan if you die prematurely. Worthwhile since the cost is relatively low at about pounds 10.00 a month on a pounds 50,000 loan.

Mortgage repayment cover: insures monthly repayments for a limited period if you get ill or are made redundant. Expensive at pounds 7 for each pounds 100 of monthy repayment, and often made useless by the smallprint.

Critical illness cover: pays out a lump sum if you fall ill. It earns the lender huge commission and is of doubtful value. Can cost more than a pounds 100 a month.

Redundancy cover:- an expensive luxury. Usually costs around pounds 230 a year for a pounds 300 monthly repayment. Beware.

House and contents insurance: you do not have to buy it from your lender so shop around. Premiums vary enormously.

Mortgage indemnity policy: covers the lender's loss if he has to repossess the property. If you are borrowing a high proportion of the property's value it may be a condition of the loan. A typical one-off payment is about pounds 750

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