Taking out a new mortgage, whether you’re a first time buyer or a second home owner, is a big financial decision. It shouldn’t be made lightly, and one of the key things to consider is having a backup plan for paying off the mortgage if something goes wrong.
Below, we explore the advantages and disadvantages of mortgage protection insurance to help you decide whether you need it.
Is mortgage payment protection worth it?
When you apply for a mortgage, your lender will carry out checks to ensure that your financial situation is in the right place for you to afford your monthly payments. Typically, this will involve an analysis of your job role, salary and your existing financial commitments.
If your application is successful, your mortgage is granted on the expectation that you’ll be able to pay off your mortgage gradually over several years – but what happens if your financial situation changes and you’re no longer able to make your monthly payments?
Whether you become seriously ill, are injured, made redundant or even pass away, there’s a kind of mortgage protection to suit you. These policies help to pay off some or all of your mortgage in the event that you can’t.
As with any kind of insurance cover, there are pros and cons to mortgage protection insurance. Keep reading to learn more.
Benefits of mortgage protection insurance
We never know what’s around the corner, and mortgage protection insurance can help to keep you covered in the event of you being unable to work. Here are some of the most significant benefits of getting mortgage protection insurance.
- Peace of mind
One of the most obvious benefits of mortgage protection insurance is that it helps to cover your mortgage payments in adverse circumstances. In practical terms, this can mean it gives you the peace of mind that your loved ones will be provided for if something happens to prevent you from working and earning as normal.
This applies to temporary mortgage payment protection as well as longer-lasting mortgage life insurance. Whether you opt to cover monthly mortgage payments or receive a lump sum, these payments can help to keep your loved ones afloat in difficult times.
- Cost-effective
When you’re buying a home, naturally you don’t want to be paying for things you don’t need. The variety of different mortgage protection products available means that you can pick and choose the right one for your circumstances, needs and budget – which means that, as a type of insurance, it can be very cost-effective.
What does this mean? Well, your policy can be tailored to suit you, which has an impact on premiums. If you only want cover in the event of critical illness, you can choose that and avoid having to pay higher premiums to cover death, redundancy and unemployment as well.
- Customisable
Mortgage protection is not a one-size-fits-all solution – it can be tailored to fit your mortgage and needs. If your budget is tight, providers can work with you to find a suitable policy that won’t break the bank.
With mortgage protection, your cover amount can be tied to the value of your property. In some cases, you can choose decreasing cover, where the coverage amount lowers as you pay off your mortgage and owe less. Even if you choose a policy that remains the same throughout, the coverage amount will be based on how much you owe on your mortgage at the start of the policy.
Drawbacks of mortgage protection insurance
Not every form of mortgage protection insurance will be right for you, and it’s important to know some of the potential drawbacks out there so you can be ready to navigate them and find the best policy for your circumstances.
- Some policies will only cover your mortgage
Protecting your mortgage is the primary focus of mortgage protection insurance, but that might not be the only financial obligation you need to have covered.
A strict, mortgage-only protection policy will only provide the funds you need to pay the mortgage. This might free up other funds to cover household expenses like groceries and maintenance, but that isn’t always enough.
When browsing for mortgage protection insurance, it can be helpful to keep an eye out for policies that allow you to customise additional funds. This could allow you to pay a slightly higher premium in return for insurance that covers the costs of groceries, car payments and more – keeping you and your family more financially secure.
- Most mortgage payment protection policies involve a deferred payout
For policies that pay out a small amount monthly to cover your mortgage costs in the short term, there may be a deferment period before the payout is released. For example, if you lose your job due to critical illness, you may be required to wait 90 days, for example, until your insurance payout arrives.
This means you may need to rely on your own funds to get by until the payout comes – which could mean leaning on your emergency fund. A reputable provider will typically work with you to schedule your deferment period so that you start to receive payouts from the insurance once your statutory sick pay period is up. This means you should be able to receive funds the whole time without having to dig into your savings.
- Not all term durations are the same
Looking at the small print of your insurance policy is very important, as this could highlight a technicality that becomes important to you later. One important thing to know is how your payouts will work if you need them.
Some policies will pay out a lump sum intended to cover the whole of your remaining mortgage balance. Other policies, like income protection cover, are designed to support you in a more temporary way, by covering your monthly mortgage payments for a set period of time such as 12 months.
Because of this variation, it’s extremely important that you take note of how and for how long your mortgage protection insurance will pay out. You don’t want your mortgage protection payments to stop earlier than expected and leave you financially high and dry.
Mortgage protection insurance is an ideal way to prepare for your future and take the necessary precautions to keep your loved ones stable and protected financially. There can be drawbacks to different types of policies, so always make sure you understand exactly what you’re paying for, and remember that most policies can be customised to better suit your needs.
