The Billion-Pound Mortgage Swindle!

Each year, homeowners spend around £1 billion on this rip-off protection. We show you how to halve this cost overnight.

If you suddenly lost your job, had a nasty accident, or became too ill to work for a while, what would you fall back on to pay your mortgage?

Ideally, you'll have a decent-sized emergency fund in a high-interest savings account to turn to, say, enough to cover your usual household expenses for between three and twelve months. I'm a big fan of this method of self-insurance, because you earn interest on your money while it's untouched, and you may never have to dip into your fund.

On the other hand, you may have income protection: long-term sickness/disability cover which pays you a monthly benefit if you are unable to work for an extended period. These policies include a waiting period of between four and 104 weeks, during which you receive no payouts, and only a few include optional unemployment cover.

Hence, many homeowners rely on mortgage payment protection insurance (MPPI) as a safety net. This accident, sickness and unemployment cover normally pays out monthly benefits for up to a year. According to trade association the Council of Mortgage Lenders, at the end of 2005, 2.45 million of the UK's 11.6 million mortgages were covered by MPPI. In other words, just over a fifth (21%) of mortgage borrowers has MPPI policies.

Now for the bad news: over three-quarters of these sensible folk (76%) bought their MPPI policies from mortgage lenders. Sadly, mortgage lenders charge as much as they possibly can for this protection, making MPPI from mortgage lenders a definite 'Don't Buy'. Oh dear!

Recently, I checked the cost of mortgage payment protection insurance from the UK's leading mortgage lenders. Here's what I found:

The high price of MPPI from mortgage lenders (sorted from lowest to highest cost)

* Instead of charging a monthly premium calculated as a percentage of the monthly benefit, Lloyds TSB/C&G charges a monthly premium of 50p per £1,000 of mortgage advance. Hence, a £100,000 mortgage would incur a monthly MPPI premium of £50. Let's assume that the monthly repayment for this mortgage is £500. Lloyds TSB/C&G's monthly benefit is 1.3 times this amount, plus the monthly premium for household insurance, say, £30. Thus, the monthly benefit in this example is £680, making the cost of its MPPI policy a whopping 7.35%!

So, here's a brainteaser for you: how can the petite, six-branch Market Harborough BS (MHBS) charge just £3 per £100 of MPPI cover, when mortgage giants such as the Halifax and Abbey charge twice as much? The simple answer is that MHBS charges a fair price for its MPPI policy, which it provides to its customers on a 'next to no profit' basis. Thus, at half the price of rival policies, it's twice as nice! Alas, only MHBS mortgage borrowers can buy this five-star policy, so other borrowers must look elsewhere.

Having worked in the payment protection insurance industry for more than a decade, I know only too well how over-priced MPPI is. What's more, I know that it's possible to find high-value MPPI by shopping around for stand-alone cover. For the record, the cheapest MPPI policies come from Best Insurance, British Insurance, Burgesses, Helpupay, Paymentcare, mortgageprotect and the Post Office.

Don't buy MPPI from any other provider without comparing it to these Best Buys first, or you'll end up paying twice as much as you should for this valuable protection!

Compare insurance, compare mortgages and compare credit cards!

Disclosure: Cliff owns shares in Lloyds TSB and HBOS, the parent company of Halifax and Bank of Scotland.