An alarming number of mortgage borrowers are placing their family and their homes at risk by not taking out appropriate insurance cover with recent reports suggesting that as many as 50% may not have appropriate cover. This may be due in part to people misunderstanding the regulatory risk warnings provided by lenders on the associated mortgage paperwork when a mortgage is taken out.
Every mortgage holder knows how great it feels to finally receive the keys to their new home, after what often feels like an obstacle race to get there. But in their rush many mortgage applicants are skipping the regulatory warnings and not paying enough attention to the ongoing risks associated with a mortgage and how best to manage them.
Mortgage holders do of course insure against physical damage to the property. However this is to protect the lender’s own interests as much as it is to protect their own. Lenders do not want to be left with an outstanding mortgage, a burnt down house and homeless borrowers who might well have become bankrupt. That’s why lenders make sure sufficient buildings insurance is a compulsory condition of a mortgage offer!
But what about the other risks?
Mortgage holders should ask themselves ‘how in the future might we find ourselves unable to pay our monthly mortgage payments?’ ‘What will happen if we can’t?’ and ‘what action can we take now to prevent this happening?’
In answering the first question think about redundancy, illness/accident and the death of one of the mortgage holders. Redundancy may hopefully be short lived so that the loss of income might be temporary. Illness or accident could potentially be longer term and reduce income for a longer period of time, in the worst cases meaning that the person can never return to work. In the case of death the loss of income is permanent, which is potentially catastrophic in terms of maintaining mortgage payments.
The amount of potential loss depends on whether and how quickly you can replace the lost income. If redundancy is temporary then you may be able to get back on your feet relatively quickly. Illness or accident is potentially more serious, depending on the degree of severity which will affect when and if a person is able to return to work. Death is likely to have the greatest effect on the greatest number of mortgage borrowers because the loss of an income is permanent.
The answer to the third question is that insurance cover is available, specifically designed to help mortgage holders to manage these risks, by providing a financial safety net if the worst happens. Furthermore the cost of the monthly premiums is usually relatively low compared to the main mortgage payment, especially when compared to the cost of losing your dream family home, which unfortunately is the sad consequence for some of the 50% of mortgage holders with no appropriate insurance plan.
More information on specialist life cover can be found at Moneysworth.