Mortgage Payment Protection Insurance

In this page:

  • MPPI guide
  • Why buy MPPI?
  • Declining state help
  • Underwriting criteria
  • Premium costs
  • Policy standards
  • Policy exclusions

When you borrow money, you are committing yourself to pay back the loan over a set period, without the benefit of knowing what is going to happen to you during that time. You have no idea whether your circumstances may change to the extent that you are no longer able to make the loan repayments.

An MPPI policy pays your mortgage for you if you become unable to work for an extended period of time, as a result of redundancy, accident, sickness or disability. There are also other payment protection policies that can be obtained to cover credit card or loan repayments. If there is a reasonable chance you will find yourself out of work in the future, then this sort of policy can provide you with valuable financial assistance.

An MPPI policy should provide enough income to cover all your monthly mortgage expenses. If you have a repayment mortgage, this should be your capital and interest repayment and if you have an interest-only mortgage, the MPPI should cover your interest payment as well as your normal monthly contribution to the investment vehicle that will repay your loan.

Most non-mortgage PPI products are taken out for a length of time that corresponds to the life of the loan it is protecting. Some people cover themselves for slightly less than the loan period, in the assumption that they will somehow be able to make the payments for a short time, even if they lose their job. Only do this if you are absolutely sure that you will be able to cover your payments. Mortgage PPI is usually taken out for anything from one to five years at which point you can reassess and decide whether to renew the policy.

There is usually a deferral period - a length of time after you are unable to work or make the claim before you can start to receive insurance payouts. Typically this ranges from 30 to 60 days, though for non-mortgage related products, the deferral period can be as long as 90 or even 120 days.

Why buy MPPI?
When you are happy and healthy, paying out extra money to protect you against unwelcome and seemingly unlikely events can seem like a needless expense. So why bother?

Regardless of your relationship with the lender, if you fail to make a payment for that length of time, you will be in extremely serious danger of having your home repossessed. Unless you have sufficient savings to see you through any hard times, it is well worth considering the options that are available for helping you get through such circumstances.

Simply consider the following information and you may well be convinced:

  • 90 families have their home repossessed each day, the majority due to the financial problems associated with unemployment.
  • One in three people aged between 25-34 have experienced unemployment for a period in excess of one month.
  • Almost one in five working age households (3.4 million) has someone who is currently unemployed.
  • Today in Britain there are almost 1,000,000 persons who are registered as unemployed.
  • Every day 500 people in the UK become unemployed. 60% of unemployed men and 45% of unemployed women will be out of work for six months or more.
  • Every adult in Britain is five times more likely to suffer a serious disability than die before the age of 60.
  • Today in Britain, 2,900 people will start claiming state disability benefits.
  • 1,800,000 people in Britain are already disabled and have been unable to work for 12 months or more.

Declining state help
One of the main reasons for purchasing any sort of protection product is the long-term trend of the reduction in state benefits. For instance, if you fall ill, suffer a serious injury, or become unemployed for any reason, you will not qualify for state help with your mortgage repayments until nine months after you make a claim and then only if you qualify for income support.

Since October 1995 new mortgage borrowers will receive no state help for the first nine months of unemployment or disability. Existing mortgage borrowers receive nothing for the first two months, only 50% for the next four months and then full benefit for mortgages of up to 100,000 provided they qualify for Income Support. The Government themselves estimate that 70% of mortgage borrowers will not get Income Support due to savings, income, or a working spouse or partner.

In 1998 alone, the introduction of a new incapacity criteria resulted in 102,000 claimants being turned down for state benefit. An independent doctor (not your own) will carry out your assessment and you must be incapable of doing any work, not just your normal job, to qualify for state benefit.

Even if you do qualify, there is a reasonable chance that you will not receive the full amount of your mortgage repayment. As a result of this, the government is trying to work with the Council of Mortgage Lenders to encourage people to take out PPI policies for those first nine months when they won't be able to claim benefits.

And if you are one of the lucky ones who receive a payout, state benefits for a single person often amount to less than 60 per week. Could you manage on that? The typical state benefit for two adults with two children is 96 per week; the maximum is 134 per week. Could you support your family on this?

Underwriting criteria
Whilst some insurers will alter the premium cost to reflect the risk of underwriting the cover, many insurers will simply refuse to underwrite clients who fall outside their strict criteria.

The factors which have to be taken into account are those that affect the risk of accident, sickness or unemployment, including:

  • Age
  • Health
  • The client's present and past health
  • The hereditary health records of the client's family
  • Occupation
  • Industry sector
  • Hobbies, including sports
  • Lifestyle (including smoking and drinking)

The type of policy and the term of the contract can also have an effect on the underwriting decision.

Premium costs
If your finances are tight then paying out for yet another insurance product may just seem like one expense too many. Then again think how much tighter things would be if you or your partner were unable to work.

The amount you have to pay to protect your mortgage depends partly on the policy details (usually the number of exclusions to the policy) and partly on the size of your monthly mortgage repayments. You may also be able to find introductory discount offers or even a fee-free period. You can also find additional benefits such as assistance in finding work when you become unemployed.

The cost of MPPI is usually quoted as an amount per 100 of benefit. In other words, it may cost 6 for each 100 of your monthly mortgage repayments. If you pay 750 per month on your mortgage, then your MPPI payment in this instance would be 45 (which is equal to 6 multiplied by 7.5).

The costs of payment protection vary depending on the type of loan you have taken. Credit cards, with their low maximum borrowing limits, are generally the cheapest to insure. It is possible to get PPI for less than 1 per 100.
Mortgage PPI can cost anything from 3 to 9 per 100 of borrowing. You should always check the policy details, but policies costing much over 5 per 100 of cover would seem to be quite expensive.

It is always a good idea to shop around and find the best deal for you - as with everything, some providers are more competitive than others

Policy standards
As a result of some mortgage lenders insisting on the purchase of non-competitive MPPI products, the Council of Mortgage Lenders (CML) and Association of British Insurers (ABI) have set out some minimum standards that they have agreed Mortgage PPI products should conform to. This is called the MPPI benchmark policy.

The norm is for this type of insurance to cover accident, sickness and unemployment.

A maximum of 60 days is permitted after a claim before payments commence, though you may not be able to claim within the first six months of taking the policy out. Many policies operate with 30-day deferral periods, but you will probably pay slightly more for this benefit.

Policies must provide payment cover for at least 12 months after the deferral period. Again, some have longer minimum payout periods than this, but your premium will be higher.

Some cases of medical conditions that were previously automatically excluded are now assessed individually.

The self-employed and sole traders can now get PPI for mortgage payments, but only if you meet certain conditions. You must have declared to the Inland Revenue that your business has involuntarily ceased trading before you are able to claim. You must also be seeking jobseekers allowance.

Contractors must have worked for their employer for at least two years. This can be the agency who finds you work - it does not have to be the same contract! Alternatively, you can usually claim if you have been working on a yearly contract that has been renewed at least once.

If there are to be any changes in the cost or scope of the cover of your policy, the provider must give you notice in writing at least six months prior to any change.

Some of the more flexible policies allow:

  • Joint cover for partners
  • Increased cover in line with additional borrowings
  • Increased cover in line with interest rate rises
  • Payment breaks to correspond with mortgage repayment holidays

Whatever type of PPI product you are buying, you should always ask for a copy of the policy details before you sign up for anything.

Take the document away from the store or place where you are buying it from and have a good look through. Some companies may not like you doing this, as you can lose your right to the cancellation period if they can get you to sign up for their product on their premises.

If they are confident enough of their product then they should be comfortable with you taking it away for closer scrutiny.

Policy exclusions
Not everyone is eligible to claim on a Payment Protection Insurance product in the first place. The following rules normally apply:

  • For a mortgage PPI product, you must have a mortgage!
  • You must be of a normal working age - between 18 and 65 years old.
  • You must have been in employment for at least six months prior to taking out the policy and have an average  working week of at least 16 hours.

Not all self-employed, sole traders or contract workers are able to get PPI for credit cards or loans

Assuming you are eligible for PPI, there are a number of common reasons why you may not get a payout if you make a claim, though some policies may not exclude all these situations:

You knew you were going to lose your job or be made redundant when you took out the policy.

  • Your work is seasonal.
  • You left work voluntarily.
  • You were sacked for misconduct.
  • You have received pay in lieu of the period of unemployment.
  • You have already had treatment or even simply knew about the medical condition, disease or illness that has caused your inability to work.
  • You claim for an illness, disease or medical condition that is not covered by the policy.
  • Many things such as pregnancy or backache are excluded - these should all be detailed in the policy document.
  • You didn't have the policy you thought you had.

Don't confuse mortgage PPI with a mortgage insurance guarantee (MIG). This is an insurance that you pay when you are borrowing more than 90% of the property value. The purpose of this insurance is to protect the lender and not you.