Now that you have a nice new house, you also have a nice new mortgage. With the average mortgage advance being around GBP150,000, it's a long-term commitment to pay back a lot of money. Your monthly income is also taken up by the payments.
What could go wrong with these financial plans, and can you cover the risks by buying insurance? After all, you need to keep your family safe.
Most people would say there are 5 main things to worry about, and they all have to do with your ability to pay the mortgage:
Interest rates could go up, making it impossible to make the monthly payments.
- You might loose your job
You might have to take time off work if you get sick or have an accident.
You could lose your job for good because of an accident or a very serious illness.
You could die before you pay off the mortgage.
There are a lot of smart people in the financial industry, so it shouldn't be a surprise that there are financial products to help with each of these risks.
If you want to lower the chance that your interest rates will rise to a point where you can't pay them, you should have talked to your mortgage adviser about these things. He will then tell you about mortgages with "fixed" and "capped" interest rates. With a "fixed rate" mortgage, your interest rate stays the same, as the name suggests. With a "capped" mortgage, on the other hand, the lender agrees not to raise your interest rate above a certain level. After the fixed or capped rate period ends, which is usually after three or five years, depending on your lender, both types of mortgages go back to the standard variable rate.
Fixed-rate mortgages are very popular right now, making up 55% of new loans, and there are some great deals out there. When you get a capped-rate mortgage, the initial rate is usually set higher than the equivalent fixed rates, but the rate you pay is lower than the fixed rates. In this situation, you can do a good job of controlling your interest rate risk. After the rate-protected period is over, you can always refinance and look for another rate-protected deal. There are no guarantees about the rates that will be available, but the mortgage market is very competitive, especially when it comes to re-mortgages, and there are lots of special rate offers. It really just comes down to knowing which lender to go to. When the time comes, you should ask a mortgage broker to look for the best options for you.
Worried you wouldn't be able to pay your mortgage if you lost your job? Then you need Mortgage Payment Protection Insurance, but keep in mind that in its simplest form, this insurance is only meant to cover being laid off. If you quit or get fired for very bad behaviour, you probably won't be able to get insurance. How much? Online, you can expect to pay about GBP2.45 per GBP100 of your monthly mortgage payment for a policy that starts paying out 30 days after you lose your job and pays out for up to 12 months. You've probably been offered similar insurance by your bank or mortgage company, but be careful: their premiums for the same coverage are likely to be two or three times higher.
Mortgage Payment Protection Policies can also be made to cover the third worry, which is that you lose money because you get sick or have an accident and can't work. But before you buy this insurance, you should ask your boss how long they would keep paying you if you were sick or hurt and couldn't work. Don't forget that you only need insurance for the time after your employer stops paying. You would then get statutory sick pay, but it's likely that you'll need that money to pay for everyday things. How much does this insurance cost? Well, an online policy that starts paying out after 30 days will cost you about GBP2.45 per GBP100 of your monthly mortgage payment. But you can get health, accident, and unemployment insurance all in one policy for about GBP3.95 per month if you bundle them all together. The most important thing to keep in mind is that these policies will only pay out for a year. So, that brings us to the fourth worry.
How would you pay your mortgage if you got sick or hurt badly enough that you couldn't work again? In this situation, it's important to understand how real the risk is. The insurance industry thinks that one in five men and one in six women will get a serious illness before they reach the age when they would normally retire. Think about what it would mean for your family's finances if you had a heart attack at 40, especially if you still had a long time left on your mortgage. Many people have to have insurance.
The best thing to do is get insurance that will pay off your mortgage in full if you can't keep working. At least that takes away one big worry. Critical Illness Insurance is what you need, but make sure it covers "total and permanent disability." This makes sure that your mortgage will be paid back if you get hurt and can't work.
You can buy Critical Illness Insurance with "decreasing cover," which means that as time goes on, the size of the payout will get smaller. This is perfect if you have a mortgage that you pay back in small amounts each month. This insurance is also the least expensive when the amount of coverage goes down.
If you only pay the interest on your mortgage, things are different because the amount you owe your lender stays the same. You don't want the coverage to go down, so you need "level cover" from your Critical Illness Insurance.
As with all insurances, there is always a twist to look out for. With Critical Illness Insurance, you must always live for a certain amount of time after an accident or a critical illness diagnosis. If you don't, you won't get any money from the policy. Most insurance companies have a 28-day survival period, but some have cut it down to 14 days.
That brings up what would happen if you died. Most lenders won't let you pay off your mortgage in one lump sum without Mortgage Life Insurance. But if you're single and living alone, you probably don't need it. In this situation, if you died, your estate would just sell the house to pay off your mortgage. Mortgage life insurance is the most common way for everyone else to protect their mortgage. Again, it comes in "decreasing cover" and "level cover" formats for people with repayment mortgages and interest-only mortgages, respectively.
All of this insurance won't be cheap, but there are ways to save a lot of money. Buy a Mortgage Payment Protection Policy that covers you in case you lose your job, get hurt, or get sick. This kind of insurance is sometimes called "unemployment and disability" cover. You'll save about 20% if you do this. Again, buying a combined policy is the cheapest way to get Critical Illness and Mortgage Life Insurance. Here, it's hard to say exactly how much you'll save because the cost will depend on your personal information and health history. However, you can expect to save 20–25 percent.
The last piece of advice is to compare insurance prices. Your bank or building society will be happy to help, but you'll have to pay top dollar. Buying all of these insurances over the Internet is by far the cheapest way to do it, especially if you use one of the many discounting brokers. Search for "life insurance", "cheap life insurance", "life insurance quotes", or "Mortgage Protection Insurance" to find these brokers.
On the Internet, there is a lot of competition, so it's common for brokers to cut their commissions and pass the savings on to you in the form of lower premiums. You'll also need to think about other things, like whether you want a "Guaranteed Premium" or a "Reviewable Premium." So, you should talk to a life insurance adviser about what to do. Ten minutes on the phone with a financial advisor could save you a lot of money and heartache.
Have luck, stay healthy, happy, and insured.
