Recession or not, mortgage cover doesn't work

MOST of us will do anything to avoid unnecessary hassle when we are buying a house and sorting out the mortgage. So it is not surprising that most people do not take up lenders' offers of insurance that will pay the mortgage if they fall on hard times or become too sick to work.

But the Government has hinted that this type of insurance may become compulsory. In theory, mortgage payment insurance makes sense, especially at a time when the economy is predicted to be heading towards recession. The number of houses repossessed by lenders rose almost 10 per cent, to 17,310, in the first half of 1998.

The Government has openly asked all those involved in selling mortgages to broach the subject of mortgage payment protection with prospective buyers. The problem is that many of the insurance schemes around at the moment are expensive (costing about pounds 6 of every pounds 100 of mortgage payments you make) and are riddled with exclusions which make payout unlikely. Contract workers and part-time workers will have difficulty getting any cover. And most policies, generally sold under the term accident, sickness and unemployment (ASU) insurance, only pay out for a maximum of one year.

You may find that a mortgage lender will try to increase take-up of ASU by offering it free for six months. But beware - sometimes premiums on these "freebie" policies are higher than those on policies with no free period. So take the insurance, but check prices before you go ahead and pay after six months.

Many buyers can do without this cover if they save enough money to pay the mortgage for nine months. If you are still out of work or sick after nine months, you will be eligible for some state help with the mortgage.

There are alternatives to mortgage payment protection. You can buy insurance which pays out a percentage of your regular income in the event that you are unfit for work - chronic back pain or stress-related illnesses are the most common claims. Or you could opt for critical illness cover. It pays a lump sum if you are diagnosed as suffering from a serious illness - heart attack, cancer and stroke are the most common claims.

These are health insurance policies: only ASU insurance can help with payments if you are made redundant. But people who have problems with their work history are the biggest stumbling block to making this insurance compulsory. As Philip Watson, a director of mortgage specialist John Charcol, explains: "The disabled and the long-term unemployed are, in effect, uninsurable."

If you are advised to take out ASU, be aware that advisers get paid commission of 12 to 15 per cent. Do not buy if you feel you have been given a "hard sell" - under the new Mortgage Code you can complain if you feel you have been badly advised.

An Ealing-based independent adviser, Geoff Buckingham, advises would- be buyers to check the financial background of the insurer and look for a fixed premium for the period of cover, say five years, such as that offered by Capital Bank.

q David Burrows is deputy editor of `Planned Savings' magazine

Useless insurance

Many borrowers, particularly first-time buyers, mistakenly believe that a mortgage indemnity guarantee (MIG) gives them some protection if they can't pay the mortgage. It doesn't. MIG is the one-off insurance premium which some lenders charge when you borrow more than 75 per cent or 80 per cent of a property's value. (It is also called a "high lending fee".)

In fact, you pay the MIG money to the lender and it uses the cash to buy insurance in case you can't pay your mortgage. So you have no rights and the bank or building society can still repossess and sell off your home.

Unsurprisingly, there has been a lot of negative press about MIGs and some lenders have responded by scrapping MIG for loans of less than 90 per cent of a property's value. These include Abbey National and the Halifax. Northern Rock charges no MIG for loans up to 85 per cent.