Brits break with cover and hope for the best

Borrowers exposed if they can't work. Laura Brady reports

But inflated house prices have made affordability a big issue - especially for first-time buyers - and borrowers aren't covering themselves for a crisis.

The most recent figures reveal that mortgage payment protection insurance (MPPI) - which protects your income, usually for a year, should you be unable to earn due to an accident, illness or job loss - is falling off the agenda among hard-pressed people who have other financial priorities.

Only 23 per cent of outstanding mortgages carried MPPI last year - down one percentage point from 2003, and way off a government target of 50 per cent. "If it comes down to being able to afford a mortgage or not, this insurance is often the one that [borrowers] tend to skip," says Rob Clifford, managing director of broker Mortgageforce.

But buyers who ignore it, and have neither a separate income protection policy nor substantial savings to fall back on, are running a risk.

Since 1995, government help for people unable to repay their home loan has been stripped to the bare bones. "The state only steps in after nine months and only pays interest on the first £100,000 of your mortgage," says Mr Clifford.

And if you have more than £8,000 in savings or your partner works, you won't qualify.

MPPI premiums are calculated per £100 worth of monthly cover. Policies range in price from around £3 to £8 for each £100, usually depending on how comprehensive they are. At the average MPPI premium of £4.98 per £100, it would cost you £49.80 a month to protect a £1,000 home-loan payment.

Most policies are sold through mortgage lenders but intermediaries and insurers sell them too.

If you do choose the cover, scrutinise its limitations and exclusions. The most common pitfall is the "excess" period - the time between claiming and receiving your first payment - which can be as long as 60 days.

"You'll need enough savings or income from another source to tide you over until the policy pays out," warns Melanie Bien of broker Savills Private Finance.

With sickness payouts, many policies exclude the most common problems: backache, stress and depression.

And while redundancy will trigger a payout, policies differ on what constitutes "dismissal". If you were forced to leave a job because of poor performance, a mistake or a personality clash, you might not qualify.

Many policies also refuse to pay if you're self-employed and lose your business.

Given the cost and limitations of MPPI, Ms Bien suggests you first look at other options. Check your savings and your employer's sick pay scheme, and weigh up separate income protection or critical illness cover.

Karen and James Lowe from Billericay in Essex are struggling to claim on the mortgage element of their combined life, critical illness and MPPI policy with Friends Provident. After suffering an eye haemorrhage, Karen had to stop work as a PA. But the insurer refused the claim following a doctor's report which did not categorically state that she could no longer work. An appeal is under way.