Understanding mortgage payment protection insurance

For most homeowners, being unable to make monthly mortgage payments and ultimately losing the roof over their head is their biggest fear.

Mortgage protection, more commonly known as Mortgage Payment Protection Insurance (MPPI) provides cover against this happening, meeting your mortgage payments if you are unable to.

This type of policy offers reassurance that in the event of accident, sickness or unemployment stopping you from working, your mortgage repayments will be met.

You don't legally have to have this type of cover, but if you are a homeowner it is definitely worth considering. However, many people pay over the odds for MPPI, so if you already have a policy in place you should review it and check the terms meet your requirements and that you could not obtain equivalent or better cover for less.

Why is MPPI important?

While, in some circumstances, there may be some help available from the state if you run into trouble and are unable to make your mortgage payments, not everyone will be eligible.

And even if you do qualify for help, it will usually only cover the cost of the interest on your mortgage only - not the repayment costs. Both these can be covered by an MPPI policy.

Do I need cover?

If you wouldn't be able to cover your mortgage payments and other outgoings with your savings in the event that you were unable to work due to accident, sickness or unemployment, then it may be suitable.

Bear in mind that most MPPI policies will only pay out for a maximum of a year, so if you do have sufficient savings in place to tide your over for this length of time, then you may not require cover.

Check how much your employer is likely to pay you in the event that you get made redundant. If you have worked at your company for several years, the chances are you may get a decent payout, which would mean you might be paying for the unemployment element of your mortgage payment protection policy unnecessarily. If this is the case, you may be better off going for accident and sickness MPPI cover only.

You should also consider the amount of sick pay you might be entitled to from your employer if you fall ill and are unable to work. Again, if this is generous, then it might be worth opting for unemployment cover only.

How do policies work?

As a general rule, mortgage payment protection policies will start paying out either 31 days or 60 days after you are unable to work. However, many policies are 'back to day one' plans. This means that the benefit you receive is backdated to the date you were first out of work.

Most polices only pay out for up to 12 months, although you can get policies which will only pay out for as little as three months. Monthly payments are capped, usually at £1,500 or £2,000 a month, so if you have a very large mortgage, you will need to think about how you will cover any surplus.

Policies won't usually allow claims for unemployment within the first three to six months.

What else should I know?

Remember that if you receive a payout from your MPPI policy, this could affect your entitlement to some income-related benefits.  Find out whether the policy pays you directly, or your lender.

You should also check that you don't have any other kind of cover already in place which might protect you in the event you are unable to work. For example, if you have income protection cover, this will guarantee a regular income if you are unable to work for a protracted period  due to illness or disability. It will pay out until you are well enough to return to work, or until the end of the policy .

Income protection won't, however, pay out in the event that you become unemployed, so if you already have this type of policy, you might also want to consider taking out an unemployment-only mortgage payment protection plan too so that you are fully protected.

Bear in mind that if you take out unemployment cover knowing that redundancy is on the cards, the chances are the policy won't pay out.