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Mortgage Protection Insurance is a term used to encompass various types of cover designed to protect borrowers from events that could severely impact upon their ability to maintain mortgage payments. There are different variations but when connected to a mortgage they are all there to provide peace of mind and usually fall into the following categories:
As a rule, if the policyholder dies within the term, then the sum assured should be enough to pay off the outstanding mortgage balance and ensure the borrower’s dependants aren’t left with a debt they might not otherwise be able to manage. Our mortgage advisors in Middlesbrough are able to run through all the different types of life cover and recommend the most suitable plan for you.
There’s an argument that says that life cover is taken for the benefit of other people – i.e. your dependents – because sadly you won’t be around to see any benefit yourself. However, these days, thanks to improvements in the sort of medical treatment available, many people now survive conditions that once might have been fatal.
Nevertheless, whilst undergoing what may be long spells of treatment and recovery, it could have a marked effect on your ability to meet your financial commitments. This has led to the development of Critical Illness Insurance.
Critical Illness Insurance works similarly to Life Assurance, in that it is usually taken for a specific term of years and can have different options such as level/increasing etc. It is designed to pay out a lump sum and, like Life cover, for borrowers, it is typically taken on a decreasing term basis in line with the reduction of your mortgage balance.
The key is that the benefit is paid if you fall victim to one of several specified critical illnesses, and pays out whatever the long term prognosis of that illness. The type of illnesses covered varies from company to company, that’s why this type of insurance cannot be solely price driven and advice is recommended.
In practice many companies will offer Life and Critical Illness Critical cover as a combined policy and would usually pay out on the “first event” i.e. whatever happens first – either death or a serious illness – the pay-out is made. They can also be written on a single or joint life basis.
Whereas Life and Critical Illness cover pay out a lump sum, “Income Protection” pays out a monthly sum designed to replace your wages in the event of you being unfit to work. Unlike Critical Illness coverage, there are no restrictions on the illnesses or injuries covered, the only factor being whether they make you unfit to work.
There are however restrictions on how much you can cover and how quickly benefits would start to be paid. Like Life and Critical Illness cover, these policies are underwritten based on your health and lifestyle at the time you apply. All income protection policies are written on a single life basis.
Similar in many ways to Income Protection these policies also cover you should you be made unemployed. Benefits are usually linked to your mortgage and other costs (rather than necessarily your wages) and would usually be paid one month “in arrears” after a successful claim.
These policies are only underwritten at the time of a claim rather than at the outset, which can sometimes mean there can be some confusion/delay as to whether a claim would actually be met. They are clearly a useful safety net if you are made long-term unemployed but be sure to check the details of how/when any unemployment benefits would be paid out, as it may be that you would have returned to work before any monies become due.
Probably the least common of the “mortgage protection” type policies but can often be valuable – particularly for those with young families. These plans can be taken to cover Life and/or Critical Illness and are underwritten on an application in the same way as mentioned above.
However, unlike the traditional forms of policy, rather than pay out a lump sum, the cover would pay an annual or monthly income for the remainder of the term of the plan. Thus it can replace the income of the main breadwinner for a number of years, dependent upon a particular client’s circumstances and, because of this would usually be written on a level or basis, or an index-linked basis designed to keep up with inflation.
There’s an old adage that says you can never have too much insurance. Certainly, many people have one or more of the different types of policy and it would be wrong to think of Mortgage Protection Insurance as just an “either/or” choice.
However, in the real world, affordability plays a massive part, so whilst it would be fantastic to cover yourself for every potential opportunity, a good advisor will sit down with you and tailor the type of cover to be the most suitable combination to your family’s priority and budget.
If you do take more than one type of policy, however, your advisor would usually place all the cover with one provider. This is to save you the additional policy administration charges which individual policies carry but which are reduced when bringing all the policies under one plan.
When you take on any mortgage type, you will be paying capital (the balance) and the interest (at a percentage of the remaining balance) at the same time. If you want to reduce the amount of interest you pay per month, it may be beneficial to take out an offset mortgage in Middlesbrough.
When applicants like first time buyers in Middlesbrough look to get an offset mortgage in Middlesbrough, their mortgage lender will open them up a savings account, to run alongside their mortgage term length. You will not be paying back the capital balance of your mortgage from this savings account; instead, you will lower your interest.
To use an example of this, you had a £100,000 mortgage to pay off and you chose to put £20,000 into your savings account, there will still be a £100,000 mortgage for you to pay per month. However, you would only be paying interest on £80,000, with the remaining amount free from interest.
The amount of interest you usually pay is calculated as a percentage of your mortgage balance, which increases the total amount you pay. With this in mind, the more interest you offset into your savings account, the less you’ll have to pay overall, which can save you money.
As we said, the money you will put into your savings account must be offset by your interest, which will reduce your overall mortgage payments. Unlike for a standard savings account, you do not pay tax on it. This is certainly more beneficial for taxpayers with higher rates.
One possible drawback of this type of mortgage is that your savings will not grow like a standard savings account. No interest will be earned on an offset mortgage savings account.
Even with this, a potential mortgage applicant may still not be deterred, especially since you could save so much by offsetting interest. Another good side is that the account has a lot of flexibility.
Looking back at the previous example of a £100,000 mortgage and savings of £20,000, if you then needed to use some of your savings, in perhaps an emergency situation, you can do this. It’s important to remember though, you would once again be paying interest on a higher amount.
So whilst perhaps you are only paying interest on £80,000 at that time, if you were to draw out £10,000, you would then be paying interest on £90,000 again until you had enough funds to deposit back into your offset mortgage savings account.
You will always be responsible for your monthly mortgage payments, but you will pay much less on your interest overall.
If you ever got to a point where you could offset the entire balance closer to the end of your term, perhaps through some handy work bonuses or inheritance, you would still be responsible for your capital repayments, you would just have much less interest.
This means that while offsetting your entire mortgage balance would effectively reduce your interest rate to nothing, the capital will still be there (your mortgage will consist of capital and interest) and must be repaid.
Depending on who your mortgage lender is, you can make overpayments of your mortgage by a certain additional amount per year. Typically, it is up to 10% per year, although it is always worth asking your mortgage lender first.
Overpaying by too much per year can lead to you potentially owing an early repayment charge.
While you may have restrictions on how much you can overpay your mortgage balance, you have the freedom to put as much as you want into your savings whenever you want to.
There are many factors to think about when taking out an offset mortgage in Middlesbrough, as to whether it is the most suitable option for you. This might be a difficult choice to make, especially to first time buyer in Middlesbrough and those who are looking for expert remortgage advice in Middlesbrough.
It is all about the advantages and disadvantages. As we said, higher-rate taxpayers will benefit from it because their savings are tax-free. You can also use the flexibility to withdraw and deposit funds as you wish.
Another positive, especially if you apply for a first time buyer mortgage in Middlesbrough, is that someone else may have the option to offset against your mortgage, meaning a family member or friend could help bring your payments down, though this depends on the mortgage lender.
At the end of the day, you at least need to be making significantly large payments into this savings account to see the benefits and to outweigh the costs that are involved with offset mortgages.
To speak to a mortgage advisor in Middlesbrough, book a free mortgage appointment today and we’ll look to see if an offset mortgage, or discuss the many different types of mortgages in Middlesbrough, to find you something more suitable.
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UK Moneyman Limited is Registered in England, No. 6789312 | Registered Address: 10 Consort Court, Hull, HU9 1PU.
Authorised and Regulated by the Financial Conduct Authority.
We are entered on the Financial Services Register No. 627742 at www.register.fca.org.uk
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Middlesbroughmoneyman.com & Middlesbroughmoneyman are trading styles of UK Moneyman Limited, which is authorised and regulated by the Financial Conduct Authority.
UK Moneyman Limited is Registered in England, No. 6789312 | Registered Address: 10 Consort Court, Hull, HU9 1PU.
Authorised and Regulated by the Financial Conduct Authority.
We are entered on the Financial Services Register No. 627742 at www.register.fca.org.uk
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