What is mortgage payment protection insurance?

Mortgage payment protection insurance covers the cost of your mortgage if you become unwell or lose your job.

Your mortgage is probably your biggest monthly outgoing. If you were unable to work due to illness or redundancy, you’d still need to make repayments or risk losing your home.

There are two main options: you can either take out protection insurance specifically to cover your mortgage payments or get general income protection insurance (where the payments you would receive could be used for anything).

Mortgage payment protection insurance (MPPI) allows you to continue paying off your mortgage if you’re no longer receiving a secure income.

What are the different types of MPPI?

There are three types of mortgage payment protection insurance – unemployment only, accident and sickness only, and accident, sickness and unemployment.

Unemployment only – Covers you only if made redundant

Accident and sickness – Covers you only if you have a long-term illness or suffer a serious injury

Accident, sickness and unemployment – Covers you if made redundant and if you have a long-term illness or suffer a serious injury

How much will mortgage protection insurance pay out?

Insurers will pay you a set amount each month, typically for a period of up to two years.

Depending on the provider, you may be able to choose how your policy will pay out.

For example, you might want the policy just to cover the cost of your mortgage payments or you may want it to cover the cost of other bills, too. If you opt for the latter, providers will typically pay out 125% of your mortgage costs.

You can also choose to base the cover on your salary. Providers will typically pay out up to 50% of your monthly salary.

If you’re off sick for longer than two years, MPPI may not cover all of your needs, so an income protection policy may be more suitable.

How long must I wait before I claim MPPI?

Before claiming, you will need to be off work for a specified number of days. This is known as the waiting period, deferred period or excess period, and it can range from 30 to 180 days.

The longer the waiting period, the cheaper the policy is likely to be. So if your employer offers sickness benefits or you have some savings you could rely on for a few months, you may want to take out a policy with a longer waiting period.

Will my job affect how much I pay?

Your job or the type of employment contract you have may affect the policy you can get. Most insurers will categorise jobs in different risk categories. Below is an example of how insurers may classify your job’s risk level, with Class 4 being the highest risk.

• Class 1 Professionals, managers, administrative staff, staff with limited business mileage, admin clerks, computer programmers, secretaries.
• Class 2 Some workers with high business mileage, skilled manual workers, engineers, florists, shop assistants.
• Class 3 Skilled manual workers and some semi-skilled workers, care workers, plumbers, teachers.
• Class 4 Heavy manual workers and some unskilled workers, bartenders, construction workers, mechanics.

Most providers will now cater for self-employed people, but read the small print carefully to check you’re not exempt – for example, if you’re on a casual or fixed-term contract.

What are the alternatives to mortgage protection insurance?

Before you take out a mortgage payment protection policy, it’s worth thinking about whether other forms of insurance may be better suited to your needs.

Income protection

Income protection a proportion of your salary if you can’t work because of an accident or sickness. Some income protection policies pay out for a longer period than mortgage insurance, for example until you can go back to work or reach retirement.

Income protection is a more effective way of insuring against ill health than mortgage payment protection insurance, as you’re medically assessed when taking out the policy and will know in advance what you will and won’t be covered for.

However, it also tends to be more expensive than mortgage payment protection insurance.

Critical illness cover

Critical illness insurance pays a lump sum if you’re diagnosed with a serious illness, but it won’t provide a regular income.

Life insurance

Life Insurance isn’t really an alternative to mortgage payment protection, for the simple fact that it only pays out when you die.

But it’s worth considering if you have dependents as it will pay out a lump sum in the event of your death. You can opt for the lump sum to be enough to cover the cost of your total outstanding mortgage debt.