When you take out a mortgage to buy or build your new home, there are so many extra fees and charges, that surely one of them is there to protect you? Unfortunately this is not the case as lenders only want to assess whether you can afford the loan now, and in the event of a few interest rate rises, but if you become sick or injured and are unable to meet your repayments, that is your own problem to solve. That is where mortgage protection comes in, because you do care what happens to your mortgage, your home and your family if you’re unable to meet your obligations for any reason, but first you need to know how to choose the very best type of protection for your needs.

What is Mortgage Protection?

While some lenders will require that you take out mortgage protection insurance if you are a high risk borrower – that is you are borrowing a loan amount very close to the property value – it is not usually a requirement of approval. This means it is up to you to add this extra cover to protect your home and your family’s security.

Mortgage protection will offer you a benefit payout if you become unemployed and unable to work, so that you don’t default on your mortgage repayments. While there are unemployment benefits you can apply for, these are often means tested, may not be enough to cover your loan amount, and if you have any savings you would be expected to use your own funds first before receiving unemployment.

With mortgage protection insurance you can start receiving a benefit payout after one month of being out of work because of illness or redundancy. A policy will usually continue to pay a benefit for 12 to 24 months during which time you are expected to be able to find new work, and recover from your illness. However, keep in mind that mortgage protection insurance will only pay out for eligible claims, and won’t pay out if:

• You are unable to work because of a medical condition you knew about, either diagnosed by a doctor or not, at the time you took out the insurance.
• You are unable to work because of a medical condition which persists or returns during the first 12 months of the policy.
• In the event you are pregnant, unless there are medical complications.
• You resign, take voluntary redundancy or are dismissed for misconduct or are unable to work because of your illegal activities.
• You are made redundant within 60 days of taking out the policy.
• Most policies won’t pay out if you are unable to work because of stress or a back injury.

One you notify your mortgage protection insurance provider that you are out of work and your unemployment has been verified as being eligible according to the conditions above, your payout will begin, usually one month after your salary ceases. In most cases the payments are made directly to your lender, but can be paid to your account, which is then debited for the loan amount as usual.

When Should You Take Out Mortgage Protection Insurance?

When you look at buying a house you’ll look at a thousand different contingencies – whether the backyard is big enough for a dog, whether the porch can be screened in to make another room, whether the shopping centre nearby is going to increase property values and whether you’ll get a promotion, a higher paying job or leave work all together to be a stay at home parent.

From as many different angles as you look at the purchase of your new home, there are actually few of those things you can ever be really certain of. One thing you will find though, is that no matter how hard you save, how much you compare home loans and interest rates and how good you are at finding a property bargain, your mortgage repayments will still likely make up the biggest expense in your budget each and every month – for the next 25 to 30 years. That is a lot of money to be accountable for each month, and a lot of time in which to hope nothing untoward happens to derail your plans. Now, when you look at the situation like that, you realise it is naïve to make your way through life and just hope that you’ll be able to maintain the financial commitments of your mortgage, and the security of your family and your life. Instead you need to consider taking out mortgage insurance to cover your mortgage repayments if for any reason you can’t.

It is important to take out mortgage insurance early on, because this is when your mortgage will be the biggest and you will be the most extended – as you’re probably also providing for a young family at the same time. While you don’t want to think about what can go wrong, death, illness and disaster won’t automatically pass you by just because you hope it will, especially since everyone else is hoping the same thing.

Your mortgage is not a set and forget investment, and you need to be planning carefully to protect yourself and your family now and into the future. However, you often have to act quickly for other reasons, as some insurers require you to have purchased insurance within the first two year of paying the escrow, while others will offer insurance until the fifth year.

When you take out mortgage insurance you will usually be taking it out for the full amount of the mortgage, at the beginning of the term. In the past, insurers would only pay out the remaining balance of your mortgage if you made a claim, but many insurers will now pay you the full amount of your mortgage whether you are one year, 10 years or 15 years into your mortgage and have paid off $1,000 or $20,000. In this instance the insurer will pay the benefit to you or your beneficiaries, to be used in any way you need to. Other insurers will allow you to keep your mortgage protection insurance to adjust into a life insurance policy as your mortgage commitment becomes less.

Who is suited to mortgage protection insurance?

In some cases you can be entitled to help from the state if you become sick, injured or die and are unable to pay your mortgage. However, these benefits often have waiting periods and eligibility criteria which will exempt you from payments if your partner earns a certain amount, or if you have a certain amount of savings which could go towards your mortgage. Therefore, if you want to make sure your family can preserve their way of life, maintain an emergency savings fund and feel secure in making their home loan repayments, you will need to organise for mortgage protection insurance.

You can take out mortgage protection cover to suit your needs, and pay out a benefit for:

• Life. To be insured in case you die, your mortgage is paid out.
• Disability. If you are unable to work because of illness or injury your monthly repayments will be paid.
• Involuntary unemployment. If you lose your job your mortgage repayments will be covered for a certain amount of time.
• Trauma. If you are diagnosed with a serious condition such having a heart attack, stroke, cancer, or you need an organ transplant or coronary artery surgery. This benefit is paid in addition to your mortgage protection benefit and can be as much as an extra $50,000.

How to compare mortgage protection insurance

Mortgage protection is looking after the most important thing in your life – your family’s security, so you want to make sure you know how to find the most reputable insurer, the most inclusive policy and the best benefits for your needs. Following are the things you should keep in mind as you compare mortgage protection insurance policies:

• Coverage. Look at what the benefit payout amount is designed to cover and make sure it can pay all of the expenses related to your mortgage including your interest and repayments. It is also time to consider how much coverage you should take out to be truly protected.
• Waiting period. If something happens to the main income earner of the family there will be enough emotional turmoil in the house without adding financial problems, so make sure that your benefit will payout as soon as possible so your family aren’t put under financial stress.
• Your dependents. Consider whether you have children, or even ageing parents, who depend on you, and how long they are likely to be dependent for and this will help you decide on the level and the term of cover.
• Other income. You may be able to look at lower levels of cover if your family has other sources of income, such as investments, or assets which could be sold. At the same time you don’t want your family to sell assets to pay the mortgage and then be left without any other assets – and where does the money come from when there’s nothing left to sell?
• Your risk factors. The costs of mortgage protection can vary depending on your health and lifestyle factors, so you may need to seek out a specialised insurer who has experience in catering to your needs.
• The provider. As well as insurers who specialise in certain health and lifestyle factors, when comparing insurers make sure you choose a company who is established and well respected, and one who is friendly and easy to deal with.
• Self insurer. You may be considering saving up to create a financial cushion in case you lose your job or are unable to work, as there are no conditions, no eligibility, no waiting periods and you can invest the money in the way you choose. This may be an option if your employer offers a generous sickness benefit policy, or if you have a partner who earns a good salary and would be able to cover the cost of the mortgage, but this is something to discuss with your financial planner.

Remember that as with most forms of insurance, the costs of the premiums are determined by a combination of your cover amount, and your risk factors. The waiting period you opt for and the benefit period you choose will also influence how much you pay for your mortgage protection insurance. Some insurers will also have extras you can add to your policy to help you cover the cost of your other household and lifestyle bills in case you are unable to work.

Benefits of Mortgage Protection Insurance

When you pay your mortgage you are paying for more than just a house, you are paying for somewhere you and your family can call home, somewhere you and they can feel safe and secure and the benefit of mortgage protection insurance is that no matter what happens to you, that safety and security doesn’t have to be jeopardised. According to the Council of Mortgage Lenders in the UK, more than 36,000 homes were repossessed and more than 169,000 mortgages were in arrears in 2010.

The important thing to remember is that these aren’t just numbers, they are families, couples and homes which are being turned upside down, because when you are unable to meet your mortgage repayments your lender will begin repossession proceedings after just a few months. Once your mortgage is in arrears or your home has been repossessed, you have a black mark on your credit rating so even if you are able to recover your financial stability, you will find it hard to borrow again, or qualify for a competitive interest rate.

Things to Look out for with Mortgage Protection

Make sure that when you take out mortgage protection you know the benefit period of your policy. Many policies are not designed to pay off a mortgage entirely, but instead just for 12 to 24 months while you get back on your feet after being unable to work. It is also important to keep the following conditions in mind when comparing mortgage protection to make sure you know what you are covered for:

• If you know there is a risk of you losing your job or if your employer is planning redundancies, taking out a policy with this knowledge can void your benefits.
• There is often a qualifying period from the time you take out the policy to the time you can make a claim. Often this is a period of three months.
• There can also be a waiting period from the time you make a claim to the time you receive your first payment so it is a good idea to keep an emergency fund for your family as well.
• Your employer may offer a generous sick pay benefit as part of your employment package, so look into whether this would be enough to cover your mortgage repayments and avoid the need for mortgage protection.
• Some common exclusions which will void a claim on a mortgage protection policy can include dangerous sports, existing medical conditions and self employment so make sure you read all of the conditions of your policy.

Income protection insurance may actually offer cover which is better suited to your needs, as it can pay you up to 75% of your income if you are unable to work because of illness or injury. This means you are covered for your mortgage repayments and your other bills, although you are not covered for redundancy. While income protection insurance can be expensive, especially if you have risk factors in your health and lifestyle, it will continue to pay out a benefit until you return to work, you retire or until your mortgage is repaid, unlike many mortgage protection policies which pay out for a period of up to 24 months.

Mortgage protection insurance can seem like just another unwanted expense at a very expensive time of your life, but that is precisely the reason you should be considering this type of insurance. If you are already sticking closely to a budget, saving hard and working harder, how will you be able to make ends meet if your income suddenly stops?