Cover for a risk-free roof

Unemployment or ill health can lose you your home. Andrew Geldard looks at insurance schemes built in to mortgages
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Everyone knows taking out a mortgage is probably the biggest financial commitment we make in life. Not everyone realises it also represents a major financial risk if, for any reason, we are unable to keep up the monthly repayments.

That should not be a problem while our salaries provide a steady inflow of capital. However, what does the future hold should that inflow of capital cease through unemployment, sickness or injury? This is a relevant question when you consider that 25 million working days a year are lost through accidents and injury. The recent recession also serves as a painful reminder to many that employment should never be taken for granted.

Until this time last year, we drew comfort from the knowledge that if we were unable to work, the Government was on hand to pick up the pieces and provide mortgage payment benefits. So anyone out of work for between eight and 26 weeks would receive a government contribution of 50 per cent towards their mortgage interest payments, rising to 100 per cent after that period.

At the Woolwich, only 15 per cent of borrowers currently insure their payments. But as part of an ongoing process of transferring its responsibilities to the private sector, the Government withdrew this benefit to all new mortgage loans from last October. This in effect means that since then all new borrowers and anyone who simply remortgages will have to wait nine months before they qualify for any support. In most cases that means having to sell the house and hope to have something left over.

The new rules mean that mortgage payment protection policies (MPPs) - also sometimes known as accident, sickness and unemployment insurance (ASU) - have gone from being a quirky optional extra for the hyper-cautious to being the difference between keeping and losing the property. Most lenders now offer a comprehensive range of cover to help borrowers protect their mortgage loans. But exactly what type of cover is out there to protect our mortgage payments, how much does it cost and is it worth investing in?

At present, there are several lenders which are seeking to attract new borrowers by offering a period of free ASU insurance with new mortgages. With a few exceptions, free insurance tends to be available only for the first 12 months of the loan's duration. But it is a useful way to entice first-time buyers who are worried about taking the plunge into such a large financial commitment.

Skipton Building Society is at present the only lender that offers free unemployment insurance for the whole term of the mortgage. Another good deal comes from the Loughborough Building Society, which is offering free ASU insurance on all new mortgages for the first three years of the loan. But more typical of the free insurance market at the moment is the one- year ASU cover offered by the Alliance & Leicester.

For the greater duration, the financial burden will fall on mortgage borrowers to pay an extra monthly premium if they wish to ensure adequate cover in the event of illness or unemployment. It is important to make sure that the cover is suitable for your particular type of mortgage. Whatever kind of mortgage you have, however, make sure the cover provides contributions towards the repayment of capital or the cost of an endowment, PEP or pension policy as well as simply meeting the interest payments.

The range and price of insurance varies according to the lender chosen and cover required. Most lenders require policy-holders to have worked for their employer for three months before the cover begins, but they will take over the interest payments and, unlike the state housing benefit, they will insure the capital repayments and any endowment policy premiums, and some offer cover for housing-related bills like council tax and household insurance premiums as well.

Most ASU policies cost about pounds 6 a month for every pounds 100 of the mortgage repayment insured; thus, if you want to cover monthly payments of pounds 300, it will cost you an extra pounds 18 a month, but that can be reduced if you exclude a type of cover. For example, Bradford and Bingley provide ASU cover for 12 months at pounds 6.50 for every pounds 100, but this is reduced to pounds 3.50 if you remove unemployment cover.

The Woolwich Building Society also has two levels of cover, starting at pounds 3.50 for seven months' ASU protection and rising to pounds 5.25 for 12 months. This second level provides an added bonus by paying out a lump sum of up to pounds 50,000 towards the mortgage if the illness or injury results in the person never working again.

The Nationwide's policy, called PaymentGuard, gives its customers six possible options, including 24 months' ASU benefit for pounds 6.45 or, alternatively, just accident and sickness cover at pounds 2.95 for 12 months. Yet this extra financial commitment, particularly if you end up not requiring it, can represent quite a large sum of money over time.

It is also important to point out that most insurers pay the cover anything from 30 to 90 days in arrears, and also that once ASU insurance has been activated, it will not last indefinitely. The period of entitlement varies from 12 to 24 months, depending on the lender. It does not affect eligibility for state housing benefit after nine months but there is a danger that we may end up paying out more over a period of 10 to 20 years in premiums than we would receive in insurance benefits should we ever need to claim.

According to Celia Rowland, of the Halifax (Britain's largest mortgage lender), this is the gamble that applies to all forms of insurance. "It cuts both ways. Someone could just as easily make a claim within a year of taking out the insurance, which would mean they receive considerably more than they had paid in. The point of having mortgage payment insurance is that it allows you peace of mind to make commitments knowing that if something unforeseen happens, your house is still protected."

Andrew Geldard works in the financial services unit at Infopress public relations.

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