Is insurance the best policy?

Mortgage cover doesn't suit all buyers. Always read the small print, says Stephen Pritchard

Higher interest rates and steadily rising house prices are already stretching many homebuyers to the limit. But homeowners could face a sharp rise in their mortgage costs if plans for compulsory mortgage-payment-protection insurance (MPPI) are made law.

MPPI is currently optional and is paid out if a homeowner can't make payments because of illness, accident or unemployment. But the Treasury is in talks with debt charities and lenders about whether it should be obligatory.

The Government doesn't help homeowners with savings of more than £8,000 if they can't work, yet only 24 per cent of homeowners have MPPI. Confusing policies and high costs are to blame, say experts.

Richard Brown, the chief executive of the personal-finance website Moneynet, believes that the idea of compulsory MPPI is being driven by rising debt and mortgage arrears.

Yet under a compulsory scheme, many homeowners will be paying for costly cover that might give them little protection.

Says Brown: "We would caution against accepting quotes from high-street lenders, which are expensive when compared to stand-alone policies."

Is MPPI a bad idea?

No. It is a question of whether it is good value, and fits your circumstances.

The issue, as Brown points out, is that the main lenders' cover is costly. MPPI costs £5 per £100 of monthly mortgage repayments. On a £100,000 mortgage, paying £1,000 a month, you would pay £50.

Some firms charge much less. Moneynet quotes premiums starting at £2.45 per £100 (Cheltenham & Gloucester, meanwhile, charges £72.50, and HSBC £59.40, on a £1,000-per-month mortgage).

It is unlikely that your mortgage lender's quote will be the cheapest, so shop around for quotes from independent brokers.

The policy pitfalls?

MPPI does not have a great reputation. There are a number of exclusions, and there have also been cases of mis-selling. One mortgage broker, Regency Mortgage Corporation, was fined by the Financial Services Authority earlier this month for mis-selling MPPI.

Homebuyers should compare cover on a "like-for-like" basis. Each policy has its own rules. Does the MPPI cover interest and capital, or just interest? Are there any exclusions? How long will the policy pay out for? And how long do you have to wait before payments start?

Insurance firms usually exclude pre-existing medical conditions, as well as redundancy if there have already been layoffs or consultations about redundancies at an employer.

The self-employed should also approach MPPI with care. Some policies say that a self-employed person must have ceased trading and be signed on as unemployed to claim; others insist on a formal bankruptcy before they will pay out. Accident and sickness cover, or permanent health insurance (PHI), might be better value.

What would be the effect of compulsion?

There are practical difficulties with a compulsory MPPI scheme.

Mortgage and insurance experts warn that forcing homeowners to take insurance from their lenders could allow lenders to charge high premiums at will. But allowing homeowners to buy policies in the open market would also be difficult, since it would be hard to enforce and hard for lenders to know exactly what cover a third-party scheme would provide.

One option would be for the Government to set out a minimum set of standards for cover, along the lines of the CAT Mark for Individual Savings Accounts (ISAs).

But the fact remains that for many homeowners, other forms of insurance such as PHI, or covering themselves through savings, makes more sense.

"The problem for the Government would be making comparisons, and endorsing one type of insurance over another," says James Dalby, at the mortgage brokers London & Country.

PROMOTED VIDEO
News
people

Actress isn't a fan of Ed Miliband

Arts and Entertainment
Rooney Mara plays a white Tiger Lily in forthcoming film Pan
filmFirst look at Rooney Mara in Pan
Life and Style
health

Do you qualify – and how do you get it?

News
Food blogger and Guardian writer Jack Monroe with her young son
people
News
i100
News
Privately schooled, Oxford educated and a former editor of arguably the world's poshest magazine 'The Lady', it's perhaps unsurprising that Rachel Johnson rarely mixes with ordinary Proles.
people

The Mayor of London's sister, Rachel Johnson, apologises for shocking tweet about the PM

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

    £Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

    Citifocus Ltd: Operational Risk Analyst

    £Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

    h2 Recruit Ltd: Business Development - Telecommunications - £50,000 OTE

    £25000 per annum + £50,000 OTE: h2 Recruit Ltd: London, Reading , Southend, Al...

    Recruitment Genius: Call Centre Agent - £22,000 OTE

    £18000 - £22000 per annum: Recruitment Genius: As a Call Centre Agent you will...

    Day In a Page

    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?
    Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

    24-Hour party person

    Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
    Michelle Obama's school dinners: America’s children have a message for the First Lady

    A taste for rebellion

    US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
    Colouring books for adults: How the French are going crazy for Crayolas

    Colouring books for adults

    How the French are going crazy for Crayolas
    Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

    What would you do as a local politician faced with an impossible choice of cuts?

    Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
    Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

    Call me Ed Mozart

    Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
    10 best stocking fillers for foodies

    Festive treats: 10 best stocking fillers for foodies

    From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
    Phil Hughes head injury: He had one weakness – it has come back to haunt him

    Phil Hughes had one weakness – it has come back to haunt him

    Prolific opener had world at his feet until Harmison and Flintoff bounced him
    'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

    'I am a paedophile'

    Is our approach to sex offenders helping to create more victims?
    How bad do you have to be to lose a Home Office contract?

    How bad do you have to be to lose a Home Office contract?

    Serco given Yarl’s Wood immigration contract despite ‘vast failings’
    Green Party on the march in Bristol: From a lost deposit to victory

    From a lost deposit to victory

    Green Party on the march in Bristol
    Putting the grot right into Santa's grotto

    Winter blunderlands

    Putting the grot into grotto
    'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

    'It just came to us, why not do it naked?'

    London's first nude free runner captured in breathtaking images across capital