Owning a home is a significant milestone, but it comes with the responsibility of a mortgage—a long-term financial commitment that can be a substantial part of your monthly expenses. With the average mortgage in the UK standing at approximately £150,000, it's crucial to consider how unforeseen events could impact your ability to keep up with payments. This article delves into the various risks homeowners face and the protective measures available to ensure financial stability.
Homeowners often recognize the importance of life insurance to cover their mortgage in the event of their death. However, death is just one of several risks that could jeopardize your mortgage payments. Here are five key concerns that could affect your ability to maintain mortgage repayments:
To manage the risk of rising interest rates, it's essential to discuss options with a mortgage adviser. Fixed-rate mortgages, which lock in your interest rate, account for 55% of new advances in the UK, according to UK Finance's Mortgage Trends Update for June 2021. Capped-rate mortgages, on the other hand, set a maximum interest rate level, offering some protection against rate hikes. After the initial fixed or capped period, typically three to five years, you can consider remortgaging to find another rate-protected deal. The competitive nature of the mortgage market often presents special rate offers, making it worthwhile to consult a mortgage broker for the best options.
Concerned about making mortgage payments after losing your job? Mortgage Payment Protection Insurance (MPPI) is designed to cover redundancy, but it's important to note that voluntary resignation or dismissal for gross misconduct typically isn't covered. Online, the cost for this insurance is around £2.45 per £100 of your monthly mortgage payment, with policies paying out after a 30-day waiting period and covering up to 12 months. However, premiums from banks or mortgage companies may be significantly higher for similar coverage.
MPPI can also extend to cover loss of income due to illness or accident. Before purchasing, check with your employer regarding their sick pay policy, as you only need insurance for the period after employer payments cease. Combining unemployment, accident, and illness cover into one policy can reduce costs, with combined insurance available online for approximately £3.95 per £100 of monthly mortgage payment.
The risk of critical illness is substantial, with the insurance industry estimating that 1 in 5 men and 1 in 6 women will suffer a critical illness before retirement age. Critical Illness Insurance, which includes "total and permanent disability" cover, can repay your outstanding mortgage if you're unable to work. The type of cover—decreasing or level—depends on whether you have a repayment or interest-only mortgage. Be aware of the survival period requirement, which is typically 28 days, although some insurers have reduced this to 14 days.
Mortgage Life Insurance is essential for most homeowners, except perhaps for single individuals with no dependents. This insurance repays your mortgage in one lump sum upon death, with decreasing cover for repayment mortgages and level cover for interest-only mortgages.
To save on insurance costs, consider combined policies that cover multiple risks. Shopping around, particularly online, can yield significant savings, as discounting brokers often pass on commission savings through lower premiums. It's also worth discussing with a life insurance adviser whether a policy with a "Guaranteed Premium" or a "Reviewable Premium" is more suitable for your needs.
While insurance can be an added expense, it provides peace of mind and financial security. By carefully considering your options and shopping around, you can find affordable coverage that protects your home and family from life's unpredictable events. Stay informed, fit, and well-insured to navigate the challenges that may come your way.
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