Is Mortgage Insurance Mandatory?
4 Sep 2019
The term ‘mortgage insurance’ is a loose one that can be applied to a range of insurance products, such as mortgage payment protection, mortgage protection in general, life insurance, income protection or critical illness cover amongst others. Terms like ‘mortgage life insurance’ and ‘mortgage payment protection insurance’ are most common, which can make things all the more confusing.
Mortgage payment protection insurance is basically insurance that helps to ensure mortgage payments are still paid in the event of anything happening to you that would stop you from being able to pay them.
There are other insurance products out there worth considering if you’re taking out a mortgage, so it can quickly become pretty bewildering when working out what is mandatory and what isn’t.
The short answer to this article title: not usually, but it’s definitely important
A lender won’t usually insist that you have a policy as a condition for accepting you for a loan. It’s much more likely to be the lender’s affordability test that dictates whether or not you are approved for a mortgage.
However, just because mortgage payment insurance is usually optional, it doesn’t mean that you should ignore it. Instead, you should ask yourself how you would cope if you weren’t able to meet your mortgage repayments – or for that matter, how your family would cope if you died.
If you don’t have any dependants and are purchasing a property by yourself, there might not be much of a need for mortgage payment insurance as if you were to pass away during the mortgage term, the property could be sold to pay off any outstanding mortgage. If you have a family however, you should seriously consider taking out mortgage protection insurance because if anything was to happen to you, it will impact your loved ones - and this type of policy can help to keep a roof over their heads.
Make sure you’re well-versed on your optionsAs mentioned above, there’s no single product that can be said to represent all possible forms of ‘mortgage insurance’, however, the general principle of these types of cover is the same – to cover your payments or replace your income in the event of you passing away or suffering an accident, illness or unemployment. It’s really important to familiarise yourself with the various products that come under the broad banner of ‘mortgage insurance’, so that you can select the most suitable policy for your needs. Critical illness cover for instance, is not the same as income protection insurance. While critical illness cover pays out a lump sum if you are diagnosed with any specific serious medical conditions, income protection replaces a proportion of your income in the event of illness or injury leaving you unable to work.
Another key factor to account for when comparing mortgage insurance options is the difference between level term and decreasing term cover. Level term is based on the same level of cover being provided throughout the term of the plan, whereas decreasing term policies pay out less over time as the amount of outstanding mortgage debt reduces.
Mortgage payment insurance vs mortgage protection insurancePutting all of the above to one side, your search for a mortgage insurance product is likely to boil down to two broad options: mortgage payment insurance or mortgage protection insurance. So, what’s the difference?
Essentially, mortgage payment insurance kicks in to cover your monthly mortgage payments if you aren’t working, until you get another job or are well enough to resume the job you already have. It could therefore save you from your home being repossessed if you lost your job and couldn’t keep up your mortgage repayments.
Mortgage protection insurance meanwhile, is a type of life insurance. Having this type of cover would mean that if you passed away without having finished paying off your mortgage, your loved ones wouldn’t have to worry about keeping up the payments themselves. You’ll be able to rest easy in the knowledge that even if the worst happened to you, the rest of your mortgage could be paid off to help your family stay in their home.
There are a few reasons why we would especially recommend mortgage protection insurance over mortgage payment insurance, if you do decide to buy a mortgage insurance policy. For one thing, if you buy mortgage payment insurance, you might be wasting money to duplicate a lot of the protection that you already have. The payouts from an existing income protection policy or critical illness cover that you already hold for instance, could be partly put towards paying off any mortgage debt whilst you recover.
Then, there’s the fact that mortgage protection insurance is the product that pays out a lump sum in the event of the death of the policyholder. If you want to be sure that your surviving relatives will be able to afford to stay in the family home, this is the product to get.
If you’re still unsure what your next steps should be in your search for the perfect mortgage insurance product, you can contact our experts here at LifeSearch for fee-free advice on 0800 316 7253.
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