Mortgage payment protection – needless or necessary?

A lot of mortgage holders are in a very vulnerable position at the moment.

This is partly due to the unusually low base rate – still sitting at just 0.5%. At the moment, the variable rates linked to it are also very low.

However, when the base rate rises – and sooner or later, it will – many variable rate mortgage holders are going to be in trouble.

For anyone already operating on a tight budget, a rise of just 0.5-1% (and the subsequent rise in their mortgage interest rate) could push them over the financial edge.

Is it worth protecting yourself?

Another worry mortgage holders face is related to the depressed and unstable employment situation – unemployment is set to rise even further in 2012.

If you were made unemployed this year – or were suddenly unable to work due to sickness – would you still be able to pay your mortgage? If the answer is no, it’s worth considering taking out some sort of protection product to provide a cushion if the worst does happen.

However, for many people, the word ‘protection’ now sets alarm bells ringing. The PPI mis-selling scandal has made many people inherently suspicious of other protection products.

In addition, research suggests that people are cutting back on insurance products, rather than buying more of them. If you’re on a tight budget, you’re probably not going to want to fork out yet another monthly premium.

What mortgage protection should you get?

However, if you do want protection, there are two main products to think about. Mortgage payment protection insurance (MPPI) is meant to cover your mortgage costs if you’re made redundant, or are unable to work due to an accident or sickness.

For a monthly premium, MPPI will pay you a set amount each month, usually for a period of no more than one or two years. Most policies also let you cover other monthly bills, like utilities, as well as your mortgage.

And then there’s income protection insurance, which provides a different type of cover and is typically more expensive. It doesn’t cover unemployment, but it will pay around 50% of your salary if you can’t work due to accident or illness.

Unlike most MPPI cover, it pays out until you go back to work, or until you reach retirement. And you can generally spend the amount you receive on whatever you want, making it more flexible than MPPI.

Which? Money’s Martyn Saville has previously written about income protection, and commenter Justin championed its cause:

‘[Income protection] was the first insurance I took out as a young man 20 years ago and I still have the policy now. It gave me peace of mind as I have always worked for an employer who didn’t provide anything more than statutory sick pay, so I knew what trouble I would be in if I fell ill.’

Rip-off or lifeline?

We’re currently investigating the MPPI market, and looking into the alternatives for mortgage holders who are worried about what the future might bring. So we’d love to know what you think.

Have you taken out MPPI or income protection? If so, has it been a financial lifeline, or have you had a bad experience when trying to claim? Would you rate one over the other, or do you think they’re both a waste of money?

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