Mortgage payment protection insurance ‘con’

With banks seemingly collapsing every day, and thousands being put out of work, mortgage payment protection insurance sounds like a brilliant idea. What it does is pay your mortgage when you can’t, due to losing your job through redundancy or ill-health. Sometimes payments start immediately, and sometimes after a couple of months. Policies usually only pay your mortgage for 12 months. After that, even if you haven’t got a new job, the State gives you protection to some extent because it meets some of the interest on your mortgage.

The ‘con’ is that a lot of banks and building societies have been offering the insurance at vastly inflated prices - sometimes five times what you might have to pay if you shopped around. Some banks have been getting people to pay an annual premium of 5% of the year’s mortgage interest which is the maximum payout. That’s equivalent of having a £500,000 house and paying fire insurance premiums of £25,000 a year! And you might go on paying this year after year. After 10 years you would have paid half the amount you might need if you then got made redundant. At those rates, you’re better off just relying on savings.

However, there are some much cheaper deals around. The law says that solicitors aren’t allowed to recommend specific policies, so all I can say is that you shouldn’t just look at those comparison web sites because they only list companies they have a business relationship with. You should check around on the web a lot more carefully for the best deals. If you shop around, you can find prices which are about one fifth of the cost of the deals offered by mortgage lenders. By the way, a lender isn’t allowed to make taking out this kind of insurance through them a condition of the loan, so you can always shop around.
You can get separate cover for redundancy or for health problems. You don’t have to cover every risk, and that can make it cheaper as well. (This whole sector of the market is called “payment protection insurance” or “ASU cover” for accident sickness or unemployment.)

It’s well worth looking at the Financial Services Authority website which has a
section called “Money Made Clear” which explains payment protection insurance in simple words.