Cheap loan cover keeps families safe as houses

Which is the better deal: the mortgage rate of 6.75 per cent offered by Standard Life Bank or the 6.75 per cent recently announced by Abbey National and the Halifax? It depends whether you take out these lenders' mortgage payment protection insurance (MPPI).

This cover aims to meet your mortgage payments and other mortgage-related bills for a minimum of 12 months if you are unable to work as a result of an accident, sickness or unemployment - which is why it is also known as ASU cover. For people who could not rely on a partner's income to tide them over, for example, or who do not have a lump sum equal to 12 times their monthly mortgage payment that could be used to avoid falling into arrears, the mortgage industry believes MPPI is a must.

It is also good for business. Since it started selling the insurance at cost, the Market Harborough building society's mortgage arrears have fallen to an all-time low. 'We don't look to make a profit on MPPI because it's good for the society as well,' says spokeswoman Alison Dodd.

For most other lenders, the idea of passing on in lower premiums the savings gained from having fewer customers in arrears and fewer expensive repossessions is clearly unappealing.

In a survey of the top 30 mortgage lenders, Cash has found that even the cheapest premium - £3.71 for every £100 of cover, charged by Standard Life - is just over twice the £1.75 paid by Market Harborough borrowers. However, in comparison with what other lenders charge, Standard Life - which sells MPPI only to its own borrowers - is giving its customers a good deal. Although borrowers with Abbey National and Halifax pay the same rate on their mortgage, they are spending more than one-and-a-half times as much on MPPI premiums.

This is also true of the other lenders which charge around £6 per £100 (see table). Over a year, the cost of covering a monthly mortgage payment of £500 with the most expensive MPPI would be nearly £150 more than the cheapest policy.

The Halifax argues that its policy offers good value because the cover is better. Instead of the usual 12-month limit for claims, in common with MPPI from Norwich & Peterborough building society, the Halifax policy will pay out for up to 24 months. For an additional premium, the Britannia and Nationwide building societies offer this kind of extended cover as an optional extra.

But is an extended payout period worth paying for? The claims experience of Abbey National suggests not. It says the average claim for accident or sickness lasts less than five months, while the average for those caused by unemployment is just under six months.

However, the Halifax does offer one thing that others typically don't: it says it won't refuse to pay claims resulting from the recurrence of an illness from which a policyholder suffered in the 12 months before taking out the policy. But while this benefits some Halifax customers, whether a policy excludes pre-existing medical conditions or not is largely irrelevant to those without a chequered medical history.

Healthy Halifax customers - along with those of other lenders - who want both accident and sickness and unemployment cover could save money by switching to an MPPI policy from Marks & Spencer Financial Services (0800 363 448) which costs £4 per £100. However, switching is not advisable if you have had a period of unemployment. A new policy will not meet future unemployment claims until you have been working continuously for at least a full six months since you were last on the dole.

Although the M&S policy is cheaper than those offered by most lenders (except Standard Life), it won't be the best for everyone. This is because, like many lenders, the store chain adopts a one-size-fits-all approach and sells only full ASU at a flat-rate price.

Norwich Union Direct (0800 121 008) takes a more tailored approach and adjusts its premiums according to such factors as age, gender, occupation and where you live. This means that low-risk customers do not subsidise those who are at greater risk of claiming. But flexibility generally favours the young and healthy and those in 'safe' jobs.

Tailoring cover to your circumstances is also an option with lenders such as Norwich Union, which allows you to pay a lower premium by excluding things you may not need.

For example, employees who belong to a decent sick-pay scheme at work should think twice before buying accident and sickness cover. And unemployment cover can be unsuitable for the self-employed, because policies pay out only if you have ceased trading through no fault of your own, have told the Inland Revenue about it and have registered for Job Seekers' Allowance.

Covering only against accident and sickness, or just for unemployment, can halve the cost of MPPI. For example, borrowers at Yorkshire building society who buy either accident and sickness or unemployment cover pay £2.17 per £100 rather than the £4.13 for full all three.

For other borrowers who do not need full ASU cover, the £2.25 per £100 charged by Securityfirst (01376 347369) is likely to be a better deal than the policy offered by their lender.

An alternative is to forget MPPI altogether. Faced with falling sales of personal pensions, life insurers are increasingly turning to the income-protection market.

For between £10 and £36.50 a month, for example, a non-smoking 40-year-old man could buy income protection from Legal & General which would pay£500 a month in the event of accident or sickness.

Both cost and benefit are comparable with MPPI. But unlike with MPPI, if an illness meant returning to work on lower pay, a benefit in line with the lower earnings would go on being paid. Norwich Union offers similar cover for between £10.25 and £25.25 a month.