Once upon a time the state paid the interest on your mortgage for you if you were unemployed or too ill to work. In 1995, however, the government implemented a new system and is now encouraging homebuyers to take out private cover for their mortgage payments.

This is called mortgage insurance and has been introduced as an alternative to State intervention. The aim of mortgage insurance is to cover your mortgage payments should you be made redundant or all ill and become unable to work. A mortgage insurance policy should cover your monthly interest, capital repayments and any other additional expenses such as investments used as repayment vehicles, as the cost is based on the size of your monthly mortgage expenses.

Choosing a policy

You may be the main earner and your family may rely on your income so the wider the circumstances your mortgage insurance policy covers the better. However, you should look at your personal circumstances before making a decision about which mortgage insurance policy to choose. There are many different mortgage insurance polices available, offering anything from life insurance to cover for disability, sickness and critical illness.

The small print

Always look at the small print before you commit yourself to a mortgage insurance policy, as there may be restrictions built in. Most mortgage insurance policies won’t pay out in the first three months of taking it out. If you make a claim after this period, you should receive a payout after 60 days. The benefit is usually calculated on a daily basis and paid one month in arrears, so for the first two months you will have to meet the mortgage payments yourself. Some existing mortgage insurance policies delay payment and will only issue funds after 90 or 120 days, although new policies should all pay out after 60.
Another factor you should consider is any exclusions in a mortgage insurance policy. Insurers are likely to exclude any medical conditions you have had before you take out the mortgage insurance policy. Others might exclude stress, back problems and pregnancy.

Employment status

You should also check whether you are covered if you work part-time or are on a temporary contract. It is a good idea to investigate your insurer’s attitude to unemployment. For example, if you undertake any training while unemployed, does your insurer expect you to be actively looking for a new job at the same time?

The cost

The price of a mortgage insurance policy is usually based on the number of exclusions featured, and in some cases on the level of commission the insurer is receiving. Prices can vary widely with quotes ranging from £2.45 to £9 per £100 of cover, so it’s best to shop around before you part with your money.
However, as a rough guide, the ABI’s mortgage insurance benchmark policy suggests a premium level of around £4.50 for each £100 of cover. If you decide to buy your mortgage insurance cover directly from a broker or insurance company, you may benefit from introductory discounts and lower rates.

Taking a policy from your mortgage lender

When choosing a mortgage insurance policy, many homebuyers opt for the policy offered by their lender, especially if the insurance is free for the initial period of the mortgage. This might seem attractive but you should consider the package as a whole. While you may not have to keep the mortgage insurance policy when the free period comes to an end, you will have to pay for it if you decide to take it on and it may not cover everything you need. Make sure the cost is competitive too.