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You could be wasting £10,000 on your mortgage insurance. Most homeowners pay up to four times as much as they need to, buying cover from their mortgage lender without shopping around. And the difference between the cheapest deal and the one they have can add up to a surprisingly large amount over 25 years.
Mortgage payment protection insurance (MPPI) provides short-term cover for loan payments, if you are unable to meet them due to accident, sickness or unemployment. With many fearing recession and mass job cuts, the number of people buying these policies is rising.
However, experts warn that most people are throwing money away by failing to shop around. Protection policies for a £100,000 mortgage can cost £12.25 per month at the cheapest lender and £50 at the most expensive. Spread over 25 years, the difference can add up to £10,000.
According to new figures from the Council of Mortgage Lenders (CML) and the Association of British Insurers, around 21% of all mortgage holders now have MPPI, with around 2.35m policies in force.
"What concerns us, though, is that people are not shopping around," says Emma Grainge of Marks & Spencer Financial Services (M&SFS). "Most MPPI policies are just sold off the back of the mortgage through a tick box system."
Indeed the CML admits that an astonishingly low 1% of MPPI holders bought direct from insurers. The vast majority (75%) buy straight from mortgage lenders, while the rest buy through mortgage or insurance brokers.
Most mortgage lenders charge between £5 and £7 a month to cover each £100 of monthly mortgage payments against accident, sickness and unemployment.
The typical policy has a 30-day excess, which means that no pay-out will be made during the first month of unemployment or sickness. They will then cover your mortgage payments for the next 12 months. Other (usually cheaper) policies have a longer waiting period of 60 days, while others pay out for 24 months rather than 12.
Yet by shopping around you could easily find a deal charging £4 per £100 of cover or less . M&SFS and mortgage broker London & Country both offer products at £4, while Pinnacle Insurance, which quotes according to age, is even more competitive for younger people.
A 24-year-old borrower who took out a 30-day excess policy from Britannia Building Society, for example, would find he was paying premiums of £7.14 per £100 of cover, costing him £514 a year to cover monthly mortgage payments of £600. By switching he could cut that yearly cost to as little as £109.
Broadly speaking, policies paying out for 18 or 24 months are more expensive. Those with 60 or even 90 day excess periods, or which offer only unemployment or accident and sickness are likely to be cheaper than 30-day accident, sickness and unemployment (ASU) policies. Things are further confused because a few lenders, including Bristol & West and Cheltenham & Gloucester, charge according to the size of the loan. Both charge 50p a month per £1,000 of loan. This means when interest rates are low, as now, these policies look extremely uncompetitive.
Some of the best rates offered by lenders are only available to their mortgage customers (those marked in bold on the table). In addition, if you have certain low cost mortgages with Chorley & District or Skipton building societies, you may already be tied into their insurance. The difference between these rates and those with no tie-ins is more than wiped out by the cost of ASU alone.
Patrick Bunton of London & Country, is against tie-ins. "There is a big danger that people who don't need the cover end up taking it out," he says. "Anyone with enough savings to cover a year of mortgage payments, or older people with a tiny debt left to pay off, do not need it."
But Philip Dearing of Market Harborough building society, which of fers the cheapest MPPI policy (exclusively to its borrowers) believes everyone should be forced to have payment protection insurance. "My personal view is that it should be a compulsory purchase with the mortgage, providing it is at a low cost. People's circumstances change all the time and they need to be sure that they can continue to pay the mortgage if they lose their job or are unable to work."
State help with mortgage payments has been slashed. You are unlikely to be able to get Income Support for Mortgage Interest unless you work less than 16 hours a week or have less than £8,000 in savings.
Even then, those who took out their mortgage after October 1, 1995 will only get help with interest on the first £100,000 of the mortgage, and will have to wait nine months for it. Those who took out their mortgages before then will have to wait two months to get 50%, and another four to get the full amount.
Lee Cross slashed her home and mortgage insurance costs by hundreds of pounds when she switched them earlier this year. The saving on the ASU insurance cover alone was £130 a year.
The change came when she and husband Don decided to remortgage to fund building work on their home in Wokingham, Berkshire. They switched from Stroud & Swindon building society to Woolwich Open Plan. When they first took out the Stroud & Swindon deal they hadn't bothered to shop around for ASU, buildings or contents cover.
"It seemed so much easier just to get it with the mortgage, and as it was just one figure going out each month we didn't really realise how much was going on insur ance," says Mrs Cross, 44. "When we did work it out, we realised we had been overpaying for years."
Determined not to make the same mistake again, Mr and Mrs Cross avoided the Woolwich cover, which at £5.95 to cover £100 of monthly mortgage payments, was pricier still than Stroud & Swindon's £5.20 (since reduced to £4.90.)
Instead they chose Marks & Spencer Financial Services, which charges £4 per £100, costing them £431 a year to cover their loan and endowment payments. They also switched their buildings and contents cover to Frizzell reducing the cost from more than £300 to just £65 a year.
What it costs
The cost per £100 of monthly mortgage payments
30 day claims excess
Pinnacle £1.52 - £5.57*
Chorley & District £3.35**
London & Country £4.00
M&S £4.00
Chelsea BS £4.73
Yorkshire BS £4.83
Stroud & Swindon £4.90
Bradford & Bingley £4.90
Nationwide BS £4.99
Direct Line £5.00
Royal & Sun Alliance
new mortgage £5.10
existing £6.10
NatWest £5.12
Biba £5.19
Coventry BS £5.20
Alliance & Leicester £5.25
IF £5.30
HSBC £5.94
Barclays/ Woolwich £5.95
Abbey National £6.04
Halifax £6.06***
Norwich & Peterborough £6.09
Legal & General
new mortgage £6.25
existing £7.30
Birmingham Midshires £6.33
Britannia BS£7.14
60 day claims excess
Market Harborough £1.75
CGNU £4.60****
Biba £4.78
Skipton BS £4.94**
Legal & General
new mortgage £5.25
existing £6.41
Royal Bank of Scotland £5.45
Portman BS £5.50
Northern Rock £5.78
Nationwide BS £5.99***
Bank of Scotland £5.99
Britannia BS £6.00
Bristol & West 50p per £1,000 of loan
Cheltenham & Gloucester 50p per £1,000 of loan
*Varies according to age
**With some cheaper mortgages certain insurances are compulsory
***Pays out for 24 months, not standard 12
**** Price quoted is for accountant, 35, living in north-west. Costs vary according to individual circumstances
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