If you are taking out a mortgage, it is important to think about how the mortgage repayments would be met if something happened to you in the future. There are different ways of protecting your mortgage payments.
The Council of Mortgage Lenders have some useful information for consumers on their website.
What does mortgage protection do?
Mortgage protection helps you keep up with your mortgage payments if something happens that means you can't pay your mortgage. The cover may:
protect your mortgage repayments for 1-2 years if you are made redundant or you fall ill
pay off your mortgage if you become critically ill or disabled
pay off your mortgage in the event of your death (this would allow anyone living in the home, such as your spouse, civil partner or children, to continue to live there).
Different types of mortgage protection vary in cost, but bear in mind that if you are unable to meet your mortgage repayments you may be at risk of losing your home.
What is mortgage protection insurance?
This is life insurance, which would pay off the loan if you die, or your partner in a joint mortgage dies. Endowment mortgages already include life cover.
It's important to have mortgage protection insurance if you have a joint mortgage or a dependent who would need to live in your home if you die. Even if you don't have any dependents at the moment, you may wish to take out life insurance now. If your health deteriorates in the future you may find it harder or more expensive to take out life insurance at a later date.
Critical illness cover - mortgage protection insurance can also include critical illness cover. This will provide you with a lump sum if you are diagnosed with a serious illness such as cancer, heart disease or stroke. This lump sum can be used, for example, to pay off your mortgage, pay for medical care or carry out necessary adaptations to your home.
What is accident, sickness and unemployment (ASU) insurance?
ASU is cover that keeps up your repayments for a time if you're unable to work because of illness, an accident or being made redundant. It's sometimes called 'mortgage payment protection insurance' (MPPI), but is different from 'mortgage protection insurance' as above. Whether you need ASU insurance depends on whether you have enough savings or other assets that would keep you going for a while.
Suitability - Before deciding on a policy, you need to check carefully if it is suitable for you. Many will not cover self-employed, part-time or contract workers, for example, or may exclude payment for medical conditions which are already in existence when you take out the insurance policy.
Cost and payouts - ASU policies are quite expensive. Most won't pay out until a few months after you are unable to work, and then for no longer than a year or two. If you are entitled to sick pay from your employer for a certain period of time, make sure your ASU payments begin when this period is over.
If you're entitled to claim income support mortgage interest, the amount of insurance you receive is likely to affect the amount of benefit you can claim.
Mortgage indemnity guarantee (MIG)
A mortgage indemnity guarantee is an insurance policy which covers the lender if you default on the loan (don't pay off your mortgage). It is sometimes called a mortgage insurance premium (MIP). Our page on other mortgage costs has more information about Mortgage Indemnity Guarantees.
Last updated: 29 December 2014
Housing laws differ between Scotland and England.
This content applies to Scotland only.