If you can't pay your mortgage, who will? You could take out insurance to protect yourself, but this is usually an incredibly expensive way to buy peace of mind.
Yesterday, we wrote about Income Support for Mortgage Interest (ISMI), the state benefit paid to homeowners who are out of work and unable to pay their mortgages. The government is keen to cut the cost of supporting sick and unemployed homeowners, which is why ISMI is such a terrible safety net. If you plan to rely solely on the government when times are hard, you run the risk of repossession.
So, what are the alternatives? This article explains the steps you can take to hang onto your home when you're having payment difficulties. However, what if you're comfortable at the moment, but are keen to manage future uncertainties? Watch out for:
Mortgage payment protection insurance (MPPI)
MPPI is an insurance policy that covers your mortgage payments; you can usually choose to protect other housing expenses on top. It pays monthly benefits if you are unable to work because of accident, sickness or unemployment, which is why it's also called ASU cover. MPPI sounds ideal, doesn't it - an insurance policy to reduce the everyday risks facing homeowners? Sadly, unsavoury industry practices mean that MPPI is far less attractive than it should be.
The main problem is that almost everyone who wants MPPI buys it from mortgage lenders. Unfortunately, people in captive audiences always get taken for a ride, and mortgage interviews are no exception to this rule. What happens is lenders charge as much as they possibly can for this cover, knowing that we have no idea of its true worth (the same goes for home insurance).
Typically, you'll be charged £5 to £8 per £100 of cover per month (5% to 8%) for an ASU policy that pays up to 12 monthly benefits during the course of a single claim. This is a complete and utter rip-off, as the true cost is a fraction of the premiums charged. For example, the small-but-beautiful Market Harborough BS (MHBS) humiliates its larger rivals by charging £1.75 per £100 per month, which equals just 1.75% of your monthly benefit!
As a mutual building society owned by its members, MHBS has taken the decision not to make a profit on its MPPI plan, which is only available to its borrowers. MBHS only charges enough to cover payouts to claimants and its administration costs, whereas other lenders charge up to four times as much. £500 of cover costs a mere £8.75 a month at MHBS, compared to £31.65 for Birmingham Midshires' one-year policy!
You'll pay even more for policies that pay out for up to two years for any one claim: Birmingham Midshires charges an unbelievable 9.88% a month for its two-year policy. So, you can see that mortgage lenders are making massive profits at our expense: up to 80% of the premiums they collect!
So, with the honourable exception of MHBS, don't buy MPPI from mortgage lenders. Instead, shop around for MPPI: try looking online or contacting a few insurance brokers, as most stand-alone policies easily undercut mortgage lenders' premiums.
Even better, check out helpupay, which thrashes all the major lenders and comes from a leading supplier of MPPI, Pinnacle Insurance. Norwich Union, another Fool partner, also sells stand-alone MPPI - you can get a quote from NU here.
In Part Three of this series, I'll explain how to compare MPPI policies, and reveal another way to protect yourself against accident or sickness: income protection insurance.
The author owns shares in HBOS plc, the parent company of Birmingham Midshires.
More: Part One | Part Three | Dealing With Unemployment | Find a better Mortgage.
