Mortgage insurance: Do you need it and why should you get it?

Mortgage insurance will cover you when you're unable to meet your mortgage repayments.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
If you fall into mortgage arrears, your home could be repossessed.

In this situation, it’s likely you’ll face severe financial difficulty and even the threat of homelessness.

It’s entirely possible that this could happen to you, perhaps due to losing your job or becoming too ill to work. Mortgage insurance will cover your mortgage payments if this happens, allowing you to remain in your home while you fix your financial situation.

Although this product is not compulsory, many homeowners see it as an intelligent investment, if only for their peace of mind.

What is mortgage insurance?

As with other forms of insurance, you’ll pay a monthly premium to be covered.

There are three types of cover:

  • Unemployment only
  • Accident and sickness only
  • Accident, sickness and unemployment

Your premium will mostly be calculated based on the level of cover you take out and the size of the mortgage payments being protected.

However, insurers will also consider your perceived likelihood of making a claim. Those suffering poor health or working in dangerous occupations will have to pay more, because they’re perceived as a bigger risk.

Your policy won’t usually cover you from the day you open your policy. Many have an exclusion period, during which you won’t be able to make a claim. These could be up to 180 days long, although policies with a “back to day one policy” will allow you to receive backdated payments.

If you make a successful claim, you’ll have your mortgage payments covered for a specific amount of time. Usually, it’s a maximum of two years. Some policies give you the option to also have other bills covered during this period, although you’ll pay a higher premium to get this.

What types of protection can you take to cover a mortgage?

There are several different types of mortgage insurance. Some will cover more payments than just your mortgage. Here is a round-up of the most commonly-used products.

  • Critical illness insurance. This will pay out a single lump sum if you become too sick to continue your job.
  • Income protection insurance. This will cover your whole income (or a high percentage of it) if you are unable to work. You’ll pay a higher premium, but receive a larger payout for a longer period.
  • Mortgage payment protection insurance (MPPI). This is usually sold alongside a mortgage, rather than as a standalone policy, and covers mortgage payments only.
  • Life insurance. This will pay compensation to your dependents in the case of your death.
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