What is mortgage protection and do I need it?

Have you ever thought about what would happen to your mortgage if you died unexpectedly?

Without your income, there’s a risk your loved ones would struggle to make repayments or, worse, be forced to sell their home.

Although death is a horrible subject to think about, planning ahead is crucial if you want to shield your family from financial shocks.

Taking out mortgage protection is one way of protecting your loved ones from life’s ‘what ifs?’. Read on to find out how it works and whether it could be right for you.

Mortgage protection is a type of life insurance

Mortgage protection is a type of life insurance that can help your dependants pay off the mortgage if you die during the policy term. For many families, the mortgage is their biggest expense, yet research by Aviva shows just 58% of mortgage holders have life insurance in place.

Mortgage protection is typically sold on a ‘decreasing term’ basis, which means the size of the payout your loved ones would receive falls over time. Usually, it’s linked to your mortgage repayments, so the payout will reduce in line with your outstanding mortgage balance.

Mortgage protection is designed to pay out on death, although some insurers will pay out if you’re diagnosed with a terminal illness with a life expectancy of less than 12 months.

If you want to be able to pay off your mortgage in the event of a serious illness, it might be worth taking out Critical Illness Cover. This is also available on a decreasing term basis.

Mortgage protection isn’t suitable for interest-only deals

Mortgage protection is predominantly aimed at people with repayment mortgages, where the outstanding mortgage balance reduces over time.

If you have an interest-only mortgage, it probably won’t be suitable because the loan is only repaid at the end of the mortgage term. A better option might be level term life insurance, where the amount of cover remains fixed over the course of the policy.

Think carefully about whether it meets you needs

Although mortgage protection is useful in helping your loved ones pay off the mortgage, it probably won’t provide them with much money to cover other expenses.

Utility bills, Council Tax, school fees and other monthly outgoings can soon add up, so there’s a risk your family won’t have enough money to cover everything. There are also your funeral costs to consider.

If you want your dependants to have a payout that covers the mortgage debt and other expenses, then level term life insurance might be more suited to your needs.

It’s worth checking whether your employer offers a death-in-service benefit. This usually pays out a lump sum worth four times your salary, so it could offer a financial safety-net alongside mortgage protection.

Make sure the payout doesn’t reduce too quickly

If decreasing term mortgage protection is right for you, it’s crucial to make sure the rate of decrease doesn’t exceed your mortgage interest rate. If it does, your family could be left with a shortfall when you die.

The maximum rate on the policy must be high enough to provide a buffer in the event of interest rate fluctuations. A mortgage broker will be able to check that the rate is sufficient and advise you on which type of cover most suits your needs.

Get in touch

Why not get a bespoke protection package at an affordable rate by contacting us? For more information, email enquiry@edinburghmortgageadvice.co.uk or call 0131 339 2281.

 

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