Mortgage lenders give this product the hard sell and millions of borrowers are paying far too much for it.
Britain is a nation of keen homeowners, with seven out of ten properties being owner-occupied. By the end of 2004, homeowners owed a total of £875 billion across 11½ million mortgages - around £76,000 apiece. That's a big burden to bear!
But millions of homeowners are being ripped off, probably without even knowing it. You see, around 2.6 million mortgage borrowers 22% of the total - have bought mortgage payment protection insurance (MPPI). This optional protection meets your mortgage repayments if you are unable to work because of accident, sickness or unemployment. Most policies pay out for up to a year, but some pay benefits for up to eighteen months or even two years.
Given that illness and job loss are two of the major causes of mortgage arrears and repossessions, MPPI sounds like valuable protection, doesn't it? Indeed, at the right price, it would be essential cover. Sadly, almost three-quarters of mortgage borrowers who have MPPI (73%) purchased it from their mortgage lender. And, predictably, mortgage lenders charge the earth for their MPPI policies!
Typically, the MPPI sold by lenders costs between 5% and 8% of your mortgage repayment. In other words, on a £500-a-month mortgage repayment, expect to pay a monthly premium of £25 to £40. However, the true cost is a fraction of this amount. Indeed, mortgage lenders are pocketing up to £400 million a year in commissions just from selling MPPI!
On the other hand, MPPI from the small-but-beautiful Market Harborough BS is a not-for-profit product. As a result, MHBS charges a premium rate of just 2.5%. So, it would charge an annual premium of £150 to cover a £500 mortgage payment, compared to between £300 and £480 for other leading lenders! And though the MHBS policy is cheaper, it's no worse than other lender's policies, thanks to an industry "baseline" that lays down minimum product standards.
So, the golden rule is: don't buy MPPI from mortgage lenders (other than MHBS), unless you want to overpay by up to £300 a year - or an extra £7,500 over 25 years. Ouch! Instead, try shopping around for this cover and switch policies if you're already being taken for a ride. Helpupay, available through our Insurance centre, Freeinsuranceuk.com and Paymentshield.co.uk all offer low premiums.
Finally, remember that all insurance is a gamble - you pay the premium and the insurer carries the risk. But, with MPPI, the odds are too heavily stacked in favour of mortgage lenders and insurers!
More: Check out the great deals in our Mortgage and Insurance centres.
