Written by: Andy Walton - Proposition Director - Protection
Fortunately, there are steps you can take to ensure that you’re safeguarded against any unforeseen circumstances that would prevent you from paying your mortgage - including taking out mortgage payment protection insurance.
What is mortgage payment protection insurance?
Mortgage payment protection insurance (MPPI) is a type of income protection that covers you should you find yourself unable to work due to ill health or an accident. This can prevent you from defaulting on your monthly payments, and the subsequent repossession of your home.
There are varying levels of mortgage payment protection insurance available, and the level of cover you opt for will help determine the cost of the premiums, so it’s important to choose the cover that best suits your circumstances.
As with any insurance policy, it’s important that you read the small print carefully to make sure there are no exemptions that may impact you.
Why would I need mortgage payment protection insurance?
Mortgages serve as the biggest monthly outgoing for the majority of homeowners, and a logical solution to ensure you can keep paying this on time each month, if circumstances were to prevent you from doing so, is to take out mortgage insurance - especially if you have a sole or low joint income, or don’t have any savings to fall back on.
Can I take a mortgage payment holiday instead?
While mortgage payment holidays have become increasingly popular, it’s important not to view this as an alternative to mortgage insurance.
Mortgage payment protection insurance will only be paid out after you have successfully made a claim, so you can continue to pay your mortgage on time each month. In contrast, a mortgage payment holiday means you are deferring paying on what you owe, and this could potentially impact your credit score, as well as future lending decisions.
How much does mortgage payment protection insurance pay out?
Mortgage payment protection insurance covers the cost of your mortgage in the event you need to make a claim, with most policies typically paying out for any time between 12 months and 2 years. You can choose for the policy to pay out more than the cost of your mortgage, so other bills are covered, or you can opt to receive a proportion of your salary. However, there’s usually a minimum period that the policy is required to have been in place for before either of these can be arranged, which we’ll go into more detail on below.
As always, bear in mind that the level of cover you choose will have an impact on the cost of your premiums.
When do I get the money?
You’ll usually need to be off work for a specified number of days before the policy starts paying out. This can range anywhere from 30 to 180 days. The longer the period you’re prepared to wait, the cheaper the policy will typically be.
With this in mind, evaluate your own circumstances. If you’re entitled to sick pay from your employer, take this into account when deciding how long you want for the waiting period to be. It’s also possible to take out a policy which doesn’t have a waiting period prior to making a claim. Whichever policy you opt for, make sure to do your research and read the small print before making any executive decisions.
What other types of protection are there?
In addition to mortgage payment protection insurance, there are a range of insurance products out there that offer protection against a range of circumstances.
Income protection
If you’re unable to work due to accident or illness, this policy pays out a proportion of your salary each month. It’s also worth noting that income protection policies typically pay out for a longer period than MPPI. While policies vary, they may pay out until you are able to return to work or reach retirement.
Critical illness cover
In the event that you're diagnosed with a serious illness, critical illness cover will pay you a tax-free lump sum under your policy. You could use a lump sum to either service the payments on your mortgage, or pay it off completely, depending on the amount you receive.
Life insurance
Life insurance policies are worth considering if you have dependents, as they pay out a lump sum in the event of your death. You can decide exactly how it’s paid out, whether this is to cover mortgage or rental payments, or to provide your loved ones with an inheritance.
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Frequently asked questions
Financial risk is how likely you are to experience financial setbacks due to unforeseen factors, such as death, critical illness, and disability.
Financial risk can be caused by a variety of circumstances. Some of these factors are in your control, like your level of spending and lack of insurance, whereas others are external, such as the economic climate and health issues.
By taking out protection policies, you can minimise the impact of these financial risks. This can be income protection or other forms of insurance, and also by having a healthy emergency fund, in case you face any financial risks that aren’t covered by your insurance.
Income protection offers financial support if you’re unable to work due to illness or injury. It replaces part of your income and will continue to pay out regular, tax-free instalments until you’re able to return to work.
Financial stability means you have enough income to cover your expenses and have a buffer for emergencies (protection policies and savings). Our Financial Risk Assessment can help you assess your current situation and inform you if any improvements could be made.
Unpredictable events can hurt your finances. Take a free Financial Risk Assessment to identify your vulnerabilities and explore protection options that plug the gaps, giving you peace of mind.
Important information
For insurance business we offer products from a choice of insurers.
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