The expert financial advisers at George Square explore what mortgage protection insurance is, the different types available in the UK, and the key factors to consider when deciding whether this type of cover could be worth exploring.
Buying a home is one of the most significant financial commitments many of us will make in our lifetimes. But along with the excitement of getting the keys to your own place comes the reality of monthly mortgage payments, often stretching over 25 years or more. Given the size and length of this commitment, it’s natural to wonder what would happen if your circumstances changed and you were unable to keep up with repayments.
What is mortgage protection insurance?
Mortgage protection insurance is a type of cover designed to help you pay your mortgage if you’re unable to work due to accident, sickness or unemployment. The term can refer to several different products, including:
- Mortgage payment protection insurance (MPPI)
- Income protection insurance
- Life insurance (with or without critical illness cover)
Each serves a slightly different purpose and may be suitable for different life stages or risk profiles.
Why might you consider mortgage protection insurance?
For most households, the mortgage is the single biggest outgoing each month. If something unexpected happened, such as a serious illness or redundancy, your ability to pay it could be compromised. Missing mortgage payments can lead to arrears, repossession proceedings, and in some cases, serious long-term damage to your credit rating.
According to recent data from the Financial Conduct Authority, one in ten people have no cash savings at all, and another 21% have less than £1,000 to draw on in an emergency, suggesting that many households could struggle to manage even a short period without income. Having an insurance policy in place could therefore provide you with peace of mind, knowing that you or your family would be financially supported in difficult times.
Types of mortgage protection insurance
Mortgage payment protection insurance (MPPI)
MPPI is a short-term policy that pays out a fixed monthly amount – usually up to your mortgage payment – for a limited period, typically 12 or 24 months. It can cover you if you’re unable to work due to accident, illness, or involuntary redundancy, although some policies offer fewer protections than others.
It’s important to note that MPPI policies often come with exclusion periods; this means you may not be able to make a claim until a certain time has passed after taking out the policy. Some also include a “waiting period” after the claim event, during which no benefit is paid.
MPPI could be worth considering if you don’t have a significant emergency fund, or if your employer doesn’t offer generous sick pay terms.
Income protection insurance
Unlike MPPI, income protection insurance is designed to replace a portion of your income (often up to 60-70%) if you’re unable to work due to illness or injury. It can continue paying out until you return to work, retire, or the policy term ends.
This type of cover may offer more comprehensive, longer-term support than MPPI, and the benefit doesn’t have to be used solely for your mortgage. However, it can be more expensive and may not include redundancy cover.
Life insurance (with or without critical illness cover)
If you have dependants or a joint mortgage, life insurance could ensure that your mortgage is paid off if you pass away during the term of the loan. You can choose level term insurance, where the payout remains the same throughout the term, or decreasing term insurance, where the payout reduces in line with your mortgage balance.
Adding critical illness cover may mean your mortgage is paid off if you’re diagnosed with a serious illness such as cancer, stroke, or heart disease. It’s important to read the policy conditions carefully, as not all illnesses are covered. Find out more about options for chronic illness cover in our recent blog.
Are you legally required to have mortgage protection insurance?
In the UK, you are not legally required to take out mortgage protection insurance in order to get a mortgage. However, some lenders may strongly encourage you to consider it, especially life insurance in the case of joint mortgages.
That said, just because it is not a legal requirement doesn’t mean it isn’t worth considering. The key question is whether you and your family could continue meeting your mortgage payments if your income suddenly stopped.
What to consider before taking out cover
It is vital you understand what is and isn’t covered before committing to a policy. Cost can vary significantly based on your age, health, occupation, and the level of cover. It may be worth comparing several providers or working with a trusted, independent advice firm like George Square, as we can search the whole market for you.
It’s also worth noting that every insurance policy will come with terms and exclusions. Common exclusions for MPPI and income protection include:
- Pre-existing conditions
- Self-inflicted injuries
- Pregnancy-related illness (unless complications arise)
- Redundancy if it was foreseeable when the policy was taken out
When mortgage protection might not be needed
Not everyone will need this type of cover. You may decide it’s unnecessary if:
- You have a large emergency fund that could cover your mortgage for 6-12 months or more
- You have generous employer benefits, such as extended sick pay or death-in-service
- The remaining balance of your mortgage is small, and you are close to paying it off
As always, these considerations are personal and should be weighed against your risk tolerance and financial goals.
Seek professional advice
- You have a large emergency fund that could cover your mortgage for 6-12 months or more
- You have generous employer benefits, such as extended sick pay or death-in-service
- The remaining balance of your mortgage is small, and you are close to paying it off
As always, these considerations are personal and should be weighed against your risk tolerance and financial goals.
To discuss which financial protection options are most appropriate for your circumstances, please call us on 0115 947 5545 or send us a message here.