Should You Have Income Or Mortgage Protection?

By Author: Gavin Smith
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Should you have income or mortgage protection?

You may find it hard to imagine, but according to the Council of Mortgage Lenders (CML 49,000 UK homeowners lost their homes last year. And the CML predicts 39,000 will suffer the same fate this year*. A fall of 10,000 is encouraging, is there a reason to be complacent?

It can be very upsetting to have your home repossessed. Not a rented home, but the place you worked so hard to buy - maybe where you've raised your children; a place that's almost part of you. All because you're not able to pay your mortgage the way your provider wants you to.

It is likely an insurance company has spoken to you about cover that would protect your income, but you may not have been interested. Now though, with all the economic and unemployment uncertainty of recent years, it might not be such a bad idea after all. If you were out of work for a long time, how would you pay for your mortgage, let alone food and everything else you need?

Can't pay

Market researcher TNS Omnibus details the following interesting facts:

"32% of people made redundant would fail to ...
... meet their current living expenses in the first month, with one in 6 defaulting immediately."

Naturally those people are bound to get behind with their payments. So you can understand why many of them end up having their homes repossessed by their mortgage lenders.

But won't the government help them? Yes, there is some limited support available through the State Benefit System in the form of Income Support for Mortgage Interest. But the government won't help you:

" with mortgage repayments for the first 3 months of unemployment.
" with the portion of your mortgage that's over £200,000.
" or if your partner works more than 24 hours a week.

In addition, you'll be "means tested", with no assistance at all if your savings exceed £16,000.

It could be easy to understand why many working homeowners take out some form of mortgage or income protection. These people pay from £2 to over £5 per £100 guaranteed income. So if it comes to the worst and they lose their jobs, they'll still be able to pay their mortgage, keep their homes, and have some extra money to live on.

Who's protected?

helpucover is one of many insurers who provide mortgage and income protection. Their policy holders come from all sorts of occupations, ranging from building and manufacturing to IT and government and professions. Over the past six months, as some of them have lost their jobs, they've made 4,463 claims. The average age of these policy holders is 46. **

As the recent recession took hold, certain industries were hit hard - building, manufacturing and retail for example. helpucover saw the greatest number of claims they've had this year came from policy holders in those occupations.**

It's encouraging that there's been a rise in employment lately. But the near future still seems uncertain. There are fears in some quarters of a double dip recession. And the government plans swingeing public sector cuts that are bound to send unemployment figures up again.

The result will surely be more people having difficulty paying their mortgages.

Double dip?

Just to add his expert view, CML director general Michael Coogan says:

"Mortgage difficulties have so far been contained at lower levels than we expected at the start of the year, and by comparison to the 1990s recession.

"However, the safety net for borrowers is weakened by the prospect of higher interest rates, a possible rise in unemployment, a counter-productive stigma hanging over mortgage payment protection insurance, uncertainty over future debt advice funding, reduced government support for mortgage payments, and mortgage rescue schemes being reviewed as part of the deficit reduction plan.

"While we don't want to cry wolf, it seems obvious that the ongoing prognosis for arrears and possessions is far from a healthy all-clear. We hope the coalition government will not risk undermining the chances of extending the welcome trends this year by removing support mechanisms that work."

Even if there is "a stigma hanging over mortgage payment protection", it still seems like a sensible idea.

Sources
* - CML (August 2010)
** - helpucover (stats put together August 2010)