How would you pay your mortgage if you fell ill or lost your job?
So you've bought a home and you've taken out a mortgage. It's all going swimmingly, but have you ever thought to stop and question how you would cope if you lost your job or fell ill, and were unable to keep up your mortgage payments?
Would you qualify for help with your mortgage payments from the Government? Should you take steps to protect your income now and ensure your mortgage is paid? What are the risks involved with such insurance?
Government Generosity
The Department for Work and Pensions provides financial assistance to struggling homeowners in the form of Income Support Mortgage Interest (ISMI) payments.
ISMI will not help you to pay off your capital debt to the mortgage lender, but it will help you to meet all or part of the interest payments you owe on your mortgage.
ISMI may also cover the interest on loans taken out to help pay for essential repairs such as a new bath or toilet, or to fix your heating system.
However, it is worth pointing out the restrictions and limitations of ISMI:
You are only eligible for ISMI if you have been claiming income support, income- based jobseekers allowance or pension credit for nine months. However, if you are over 60 or took out your mortgage before 2nd October 1995, different rules apply, so contact the Department for Work and Pensions to find out more.
- You can only claim help with the interest payments on the first £100,000 of your mortgage borrowing. The interest on any amount larger than this will have to be paid by you alone.
- You are excluded from payments altogether if you have more than £8,000 of savings, or have a joint mortgage and only one of you loses your income.
- Unless you are disabled, if you took out a mortgage after you started claiming benefits then you may not be eligible for any help.
- The interest payments you receive may not necessarily be the interest rate you pay on your mortgage. The rate is based on the Bank of England Base Rate plus an additional percentage, currently 1.58%. This rate is used to assess all payments of mortgage interest and currently stands at 7.33%. So if you pay your lender a higher rate of interest than this, again you will have to make up any shortfall in the amount owed.
For many homeowners, nine months is a very long time to wait, on benefits, to receive any help from the Government.
So what's the alternative? Private measures you can take to prevent financial misfortune should the worst happen include taking out a Mortgage Payment Protection Insurance Policy (MPPI).
MPPI pays your monthly mortgage payments for a specified period if you suffer accident, sickness, or unemployment. You pay a premium each month while the mortgage is running. If you then need to claim, the policy starts to pay out (usually direct to your lender) to cover your mortgage.
Currently, only one in five mortgages are insured, as sales of MPPI continue to decline. Part of the reason for this is that Payment Protection Insurance (PPI) for loans has received a bad rap from the media in recent years, including on The Fool.
Although MPPI is different from PPI, the pitfalls are clear. As highlighted in The Shocking Cost Of Mortgage Cover, many schemes are expensive to take out and may not always pay out when things go wrong. Even when they do, MPPI payments normally only last for a year and can be substituted with an alternative policy, such as income protection insurance. These policies tend to be more expensive but have the added benefit of not expiring after 12 months.
So relying on the government, taking out MPPI or income protection insurance all have their drawbacks. Perhaps the best solution is to build up an emergency savings fund to cover any problematic periods. And if you do find yourself in trouble, the first thing you should do is speak to your lender. That way, you'll have less of a chance of being caught in a Mortgage Trap.
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