This autumn, give your mortgage a protection check-up

This autumn, give your mortgage a protection check-up

Autumn is often a time when homeowners start reviewing their finances, particularly as household costs, mortgage rates and other financial commitments continue to change.

If you have a mortgage, it is worth asking an important question:

What would happen to your mortgage if your circumstances changed unexpectedly?

While choosing the right mortgage rate and repayment term is important, protecting your ability to maintain those repayments can be just as important.  Mortgage-related protection policies can provide valuable financial support if you become seriously ill, unable to work or die. The right protection will depend on your circumstances, existing arrangements and the level of financial security you would want for yourself and your family.

Why consider protection alongside your mortgage?

For most homeowners, the mortgage is one of their largest monthly financial commitments.
You may have carefully considered how much you can afford to borrow, but it is also worth considering whether you could continue making the payments if your income were to reduce or stop.

For example, what would happen if:

• You were unable to work because of an illness or accident?
• You were diagnosed with a serious illness?
• You or your partner died?
• Your household suddenly lost one income?
• You needed to take an extended period away from work?

Savings may provide some protection, but many households would struggle to cover a mortgage and their normal living costs for an extended period without an income.

This is where protection insurance can potentially provide an important safety net.

What types of protection could you consider?

There are several different types of protection policy that may be relevant to homeowners. The right combination will depend on your circumstances and what you are trying to protect.

Life insurance

Life insurance can provide a lump sum if you die during the term of the policy. For homeowners with a mortgage, this could provide funds to help repay some or all of the outstanding mortgage, depending on the amount of cover selected.

It can also provide financial support for your family, helping them deal with other household expenses and financial commitments following your death. For couples, it is particularly important to consider the financial impact of one person's income disappearing.

Critical illness cover

Critical illness cover is designed to provide a lump-sum payment if you are diagnosed with one of the specific serious illnesses covered by the policy and meet the policy's definition and conditions.

The money could potentially be used to:

• Help repay the mortgage
• Cover household bills
• Replace lost income
• Pay for adjustments to your home
• Help with treatment or other costs

Critical illness policies vary considerably between providers, so it is important to understand exactly what illnesses are covered and the definitions that apply.  Not every serious illness will necessarily result in a claim being paid.  

There are also now more protection policies available that can include critical illness cover for children. In the heart-breaking event that your child is diagnosed with a covered critical illness, a pay-out could provide valuable financial support at what can be an incredibly difficult time. It could help cover the loss of income if you need to take time away from work to care for your child, as well as helping with household bills and mortgage payments, giving you one less financial worry when you need to focus on your family.

Income protection

Income protection is designed to provide an ongoing income if you are unable to work because of illness or injury, subject to the terms and conditions of the policy.  This can be particularly valuable because mortgage protection isn't just about clearing the mortgage balance.

You also need to consider how you would pay for:

• Your mortgage
• Council Tax
• Utility bills
• Food
• Insurance
• Transport
• Other household expenses

Income protection can potentially provide a regular income to help you maintain your financial commitments while you are unable to work.  The amount payable, waiting period and duration of payments will depend on the policy.

Do you really need protection if you have savings?

Savings are extremely useful and can provide an important financial buffer.  However, it is worth considering how long your savings would actually last.  For example, if your mortgage and household expenditure total £2,500 a month, £20,000 of savings would cover around eight months of those costs before allowing for any unexpected expenses.  An illness or period away from work could potentially last much longer. 

Protection and savings can therefore work alongside one another rather than being viewed as alternatives.

What if you already receive benefits through your employer?

It's worth checking what protection you already have before taking out additional policies.  Your employer may provide benefits such as:

• Death-in-service cover
• Sick pay
• Private medical insurance
• Other employee benefits

These can form an important part of your overall financial protection.  However, employer benefits can change if you change jobs, so it's important to understand exactly what you have and whether it would continue if your employment circumstances changed.

How much cover do you need?

There is no single answer that applies to everyone.  The amount of protection you need could depend on factors such as:

• Your outstanding mortgage
• Your mortgage term
• Your income
• Your partner's income
• Number of dependants
• Existing savings
• Employer benefits
• Other debts
• Your household expenditure
• Your long-term financial plans

For example, a young family with a large mortgage and dependent children may have very different protection needs from a couple approaching retirement with a much smaller mortgage. This is why protection should be considered on an individual basis rather than simply choosing a standard policy amount.

Review your protection when your mortgage changes

A mortgage review can be a good opportunity to review your protection arrangements too.

Your circumstances may have changed since you originally arranged your mortgage, such as:

• Your mortgage has increased
• Your income has changed
• You have had children
• Your children have become financially independent
• You have changed jobs
• Your savings have increased
• Your mortgage term has changed
• You have taken on additional borrowing
• Your existing protection policy is coming to an end

A policy that was appropriate several years ago may no longer provide the level or type of cover you need.

What happens if you don't have protection?

There is no requirement to take out protection insurance simply because you have a mortgage.  However, it is important to consider the potential consequences of not having it.

If you were unable to work for an extended period, you would still have your mortgage and other household bills to pay.  If you died, your family could potentially be left with the mortgage alongside the loss of your income.  For some households, existing savings and assets may be sufficient. For others, protection insurance could provide an important financial safety net.  

The key question is: could you and your family comfortably cope financially if the unexpected happened?

Don't assume your mortgage is automatically protected, as one common misconception is that taking out a mortgage automatically includes insurance to protect the borrower.  It doesn't.

Mortgage protection and other insurance policies are separate financial products and need to be considered separately.  It's also important to remember that different types of cover protect against different risks. Life insurance, critical illness cover and income protection are not interchangeable, and one policy may not provide the benefits offered by another.

Review your protection this autumn

As the nights draw in and we move towards the end of the year, autumn can be a useful time to carry out a wider review of your household finances.

If you have a mortgage, ask yourself:

• How much do I still owe on my mortgage?
• How long is left on my mortgage term?
• What would happen if I couldn't work?
• How long would my savings last?
• What employer benefits do I have?
• Would my family be able to maintain the mortgage if I died?
• Do my existing protection policies still provide enough cover?
• Have my circumstances changed since I arranged my protection?
• Have I taken any additional borrowing that needs to be considered?

Protecting your mortgage is about protecting your home and your lifestyle.

When arranging a mortgage, it's natural to focus on the interest rate, monthly payment and how much you can borrow. But the mortgage is likely to be a long-term financial commitment, so it is equally important to think about what could happen if life doesn't go according to plan.  The right protection arrangements can provide valuable reassurance and financial support when you and your family need it most

At Dentons Mortgages, we can discuss your mortgage and help you consider whether mortgage-related protection should form part of your overall financial planning.

As mortgage advisers, our role is focused on mortgage and protection advice within our qualifications and regulatory permissions. Where your circumstances require wider financial planning, such as pensions, investments, tax or estate planning, we may recommend that you also seek advice from an appropriately qualified specialist.

If you are reviewing your mortgage this autumn, why not review your protection arrangements at the same time?

Any information contained in this article is for general information only and does not constitute financial advice. It is essential that you seek independent advice from a qualified mortgage adviser.