Mortgage
insurance (MI) protects your lender from excess risk
when a home loan is over 80% of the purchase price.
It’s temporary and in most cases, you can cancel
it when your equity reaches 20%. With the protection
of mortgage insurance,
lenders are
willing to offer loans with very low down payments
even with no money down in some cases.
Mortgage insurance is no different than term life
insurance; in fact it is term life insurance. With
either, your policy lasts for a specified period
of time and pays if something happens to you or your
spouse if you are both insured. The real difference
is how much control you'll have over your policy
and how much you'll pay for it.
OK, now you have
a lovely new home and with it comes a lovely new
mortgage. With the average mortgage
advance standing at around $250,000 it's a
long-term commitment to repay a lot of money. The
repayments also take a fair slice out of your monthly
income.
What could go wrong with these financial arrangements
and can you hedge your bets by insuring against
the risks? After all you have a family to protect.
Most people would identify 5 main areas of concern,
all of which boil down to your ability to maintain
the mortgage repayments:
• Interest rates might increase and make
the monthly repayments unaffordable
• You might lose your
job
• You might be forced
to take time off work through illness or accident
• You
may become permanently unable to work through accident
or very serious illness
• You could die before the mortgage
is paid off
The financial industry is packed with pretty shrewd
people so it'll come as no surprise to learn
that there are financial products to help with
each of these risks.
If you want to reduce the risk of interest rates
rising to unaffordable levels, you should have
discussed these matters with your mortgage adviser.
He will then have told you about “fixed” and “capped
interest rate” mortgages. As the name implies,
a fixed rate mortgage fixes the interest rate you
pay whilst with a “capped” mortgage,
the lender agrees not to increase your interest
rate above a pre-agreed level. Both types of mortgage
revert to the standard variable rate after the
fixed or capped period finishes which is typically
after three or five years, depending on your lender.
Fixed rate mortgages are currently very popular
accounting for 55% of new advances and there are
some very good deals around. The capped rate for
capped rate mortgages is usually set at the outset
above the equivalent fixed rates available but
the rate you pay is lower than the fixed rates.
In this context your interest rate risk can be
effectively controlled. After the end of the protected
period you always have the option to re-mortgage
and find another rate protected deal. There are
never any guarantees on the rates that will be
available but the mortgage market is highly competitive,
especially for re-mortgages, and special rate offers
abound. It's really a matter of knowing which lender
to approach. When the time comes you'd be well
advised to ask a mortgage broker to search out
the most suitable options.
Worried about paying your mortgage if you lost
your job? Then you need Mortgage Payment Protection
Insurance - but be aware that in its basic form,
this insurance is really only designed to cover
redundancy. If you resign or are fired for gross
misconduct your unlikely to be insured. The cost?
Online you can expect to pay around £2.45
per £100 of monthly mortgage payment for
a policy which starts paying out 30 days after
you've been made redundant and will pay out for
up to 12 months. You're sure to have been offered
similar insurance by your bank or mortgage company
but watch out, their premiums are likely to be
two or three times higher for identical cover.
Mortgage Payment Protection Policies can also
be extended to cover the third area of concern – you
lose income through illness or accident. But before
you rush into this insurance you need to ask your
employer how long they'd continue paying you if
you were off work. Remember, you only need to insure
for the period after your employer stops paying.
You would then receive statutory sickness pay,
but the odds are you'll need that income for general
living costs. The cost for this insurance? Well,
online it'll again cost you around £2.45
per £100 of monthly mortgage payment for
a policy which starts paying out after 30 days,
However, if you combine illness, accident and unemployment
cover all into one policy you can currently get
combined insurance for around £3.95 per month.
The essential point to remember is that these policies
will only pay out for 12 months. That leads on
to the fourth area of concern.
How would you pay your mortgage if you were unable
to work again through a serious accident or critical
illness? In this context it is important to appreciate
the reality of the risk. The insurance industry
estimates that 1 in 5 men and 1 in 6 women suffer
a critical illness before their normal retirement
age. Just think what a heart attack at 40 would
mean to your family finances, especially if you
have a mortgage with many years still to run. For
many, insurance is a must.
The best option is to arrange insurance that totally
repays the outstanding mortgage if you can't continue
to work. That at least removes one big worry. The
insurance you need is called Critical Illness Insurance
but make sure “total and permanent disability” cover
is included. This ensures that your mortgage will
be repaid if you are incapacitated through an accident.
You can buy Critical Illness Insurance with “decreasing
cover” where the size of the payout decreases
as the years go by. This is ideal if you have a
repayment mortgage where you are repaying the mortgage
bit by bit each month. Decreasing cover is also
the cheapest form of this Insurance.
If you have an interest only mortgage, the situation
is different as the sum you owe your lender, remains
constant. You certainly don't want the cover to
decrease - so here you need Critical Illness Insurance
with “level cover”.
As with all these insurances, there's always a
twist to watch out for. With Critical illness Insurance
you always need to survive for a minimum period
following an accident or diagnosis of a critical
illness. If you don't, the policy will not pay
out. With most insurance companies the survival
period is 28 days although some have reduced this
to 14 days.
That leads on what happens if you were to die.
Most lenders insist on Mortgage Life Insurance
to repay your mortgage in one lump sum. However,
you really don't need it if you're single and living
alone. In these circumstances, if you would die,
your estate would simply repay your mortgage by
selling the property. For everyone else, Mortgage
Life insurance is the most commonly held form of
mortgage protection. Again it comes in a “decreasing
cover” format for those with repayment mortgages
and “level cover” format to repay interest
only mortgages.
All this insurance will not be cheap but there
are ways of significantly reducing the cost. Buy
a Mortgage Payment Protection Policy that combines
unemployment, accident and illness cover. Sometimes
this is called “unemployment and disability” cover.
This will save you about 20%. The cheapest way
to buy Critical Illness and Mortgage Life Insurance
is again to buy a combined policy. Here it's difficult
to be precise about the savings as the cost will
be strictly calculated on your own personal details
and health record - but you can certainly expect
to save 20-25%.
The final bit of advice is shop around for the
insurance. Your bank or building society will be
absolutely delighted to arrange it but you'll pay
top dollar. The Internet is by far the cheapest
way to buy all these insurances, especially if
you use one of the many discounting brokers. You'll
find these brokers if you search under “life
insurance”, “cheap life insurance”, “life
insurance quotes” or “Mortgage Protection
Insurance”.
Competition on the net is rife, so it's norm for
these brokers to cut commission and pass the savings
back to you through lower premiums. There are other
aspects you'll need to consider such as whether
to buy a policy with a “Guaranteed Premium” or
a “Reviewable Premium”. So you're best
advised to talk matters over with a life insurance
adviser. Ten minutes on the phone with an adviser
could save you more and avoid a lot of heartache.
