Is insurance the best policy?

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

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.

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