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Mortgage Insurance – It always pays to shop around
Key Points :-
- In a Mortgage Brokers Federation survey, three out of
four homeowners said meeting mortgage repayments would be their biggest
financial worry if they lost their jobs.
- Even if state aid is received it will not cover the capital
part of the mortgage payments or the premiums on an endowment policy.
- In the past, the only time you could buy mortgage insurance
was when you were taking out a mortgage or re-mortgaging; now mortgage insurance
can be purchased at any time during the mortgage term.
Persuading clients to buy Mortgage Insurance through
a broker or Independent Financial Advisor, instead of a lender, could save
them money and increase take-up.
On most people’s scale of financial priorities, keeping
a roof over their heads is probably at or near the top.
In a survey conducted this month by the Mortgage Brokers
Federation, three out of four homeowners listed meeting their mortgage repayments
as their biggest financial worry if they were to lose their jobs.
Notwithstanding this, almost half of the
UK workers would not have an adequate financial
backup – either through savings or by insurance – if they lost their job,
the survey revealed.
The survey showed alarming gaps in the nation’s finances,
with a third of respondents saying they would hope to rely on state social
security benefits if they were unable to find employment after redundancy.
The statistics are worrying according to Richard Longfellow,
Director of the Mortgage Brokers Federation. He said: “People are very aware
of the risks of redundancy for long-term illness and yet they are still not
making adequate provisions.”
Households in Wales
and the Midlands were
found to be the least well prepared for redundancy. Only 37% of those in the
Midlands said they would be
able to cope with redundancy and in Wales
the figure dropped to 26%.
In Scotland
, only 57% of households said they would be prepared if the main wage
earner was to be made redundant. Only 25% said they had enough income protection
insurance to cover their mortgage and living expenses in the event of redundancy.
Mr Longfellow added: “We found a lot of contradictions in
the report.” For example, he said many households were aware of how little
they would receive from the state. But despite this most had not thought about
how they would supplement it.
According to the Council of Mortgage Lenders, less than
a third of homebuyers have taken out mortgage insurance to cover their mortgage
payments if they were unable to work as a result of unemployment, sickness
or accident.
Some independent brokers argue that the low take-up of mortgage
insurance is because high-street lenders are making the mortgage insurance
too expensive.
Peter Williams, deputy director-general of the Council of
Mortgage Lenders, said: “We are trying to encourage all home buyers to think
carefully about how they will meet their mortgage repayments if they lose
their job or are unable to work through illness or injury.”
Research from the London School of Economics has indicated
that 55% of borrowers need mortgage insurance cover. The remaining 45% are
regarded as less at risk, either because they have a small mortgages or the
ability to repay it by other means.
Mr Williams said: “One of the reasons some people do not
take out mortgage insurance is that they believe they will receive sufficient
money from the state to tie them over.”
However, state help has been reduced in recent years. The
basic benefit for someone who is unemployed is less than £60 a week, while
the amount of financial help given towards a mortgage will depend on when
it was taken out.
Anyone who took out this mortgage on or after 2nd
October 1995 will receive nothing for the first nine months.
Those who took out their mortgage earlier will start to
receive a contribution to half their interest payments after 8 weeks, which
will continue for four months. After that, the state will make full interest
payments, but only for mortgages of up to £100,000, provided the borrower
qualifies for income support. But many homeowners do not receive income support
because they have a working spouse or partner, or savings of more than £8,000.
Even if state aid is received it will not cover the capital
part of the mortgage payments or the premiums on an endowment policy.
The Council of Mortgage Lenders would also like to see the
£100,000 loan limit increased and interest payments that match the actual
rate paid by the borrower. Mr Williams Explained: “The government pays a standard
rate of interest, which may be higher or lower than the rate actually paid.”
Homeowners that buy mortgage insurance can have their full
mortgage payments, including endowment premiums and other expenses such as
home insurance, paid for up to two years, or until they find work.
Payments normally start after a “waiting” period of 30 to
60 days. The cost of mortgage insurance is typically around £5 for every
£100, so if your mortgage repayment is £500 a month the premium will be £25.
If you have a joint mortgage with a partner or spouse, a
proportion of the insurance can be allocated to each person so that if one
person is unable to work, an appropriate share of the benefit will be paid.
In the past, the only time you could buy mortgage insurance
was when you were taking out a mortgage or were re-mortgaging.
Now mortgage insurance can be purchased at any time during
the mortgage term provided you are in steady employment and are not aware
of any reason why you are likely to lose your job in the near future.
As an extra precaution, though, insurers include an exclusion
period of three months after the start of the mortgage insurance policy until
you are covered against unemployment.
Mr Williams said that Mortgage Insurance had a “mixed reputation”
in the past but added: “The perception that it is difficult to claim on these
policies is not true.
“Our research found that between 85% and 90% of claims are
met and that those receiving payments are normally very satisfied.”
Another important factor in influencing the take-up of any
type of insurance is its cost.
Daniel Rothschild, director of the Mortgage Brokers Federation,
said that many people have been put off mortgage insurance by inflated premiums.
He said: “High-street lenders are grossly overcharging for mortgage insurance
policies, with borrowers paying hundreds of thousands of pounds over the odds
for sometimes inferior cover.
“There is no need for borrowers to buy this cover from their
lenders. They are often paying the price of ignorance that they can shop around.”
The average cost of Mortgage Insurance from the UK’s
top-10 lenders is £5.78 per £100. In comparison, it is possible to purchase
comparative mortgage insurance from a multitude of websites on the internet
from less than £4 for every £100, or £26 to cover a mortgage payment of £650
a month.
Mr Rothschild said: “Lenders are clearly profiteering at
the expense of their borrowers. All mortgage insurance is obtained from the
same source. The only difference is that lenders take more commission, sometimes
in excess of 70% of monthly premiums.”
The view is also confirmed by Mike Williams, chief executive
of the British Insurance and Investment Brokers Association. He said: “Brokers
and Independent Financial Advisors provide mortgage insurance policies that
are better in price, cover and service than those offered by lenders and they
are able to dovetail their Mortgage Insurance into existing insurance arrangements
to avoid duplication and unnecessary additional cost.”
Clearly, shopping around or seeking the advise of an independent
broker or Independent Financial Advisor is not only worth while, it also could
save clients thousands of pounds over the lifetime of their mortgage.
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