Banks need to think outside the box on mortgage cover
Published 06/07/2014 | 00:00
We all know how much of a problem mortgage arrears are throughout the country - what doesn't get enough coverage though is the insurance on the loans in arrears.
Mortgage protection insurance repays your mortgage should you (or your partner if it is a joint loan) die before it is paid off in full. It can also cover you should a serious illness or disability prevent you from repaying your mortgage.
For most people, mortgage protection insurance is mandatory under section 126 of the 1995 Consumer Credit Act. However, there is almost nothing a bank can do after an individual draws down a mortgage to force that person to maintain their cover.
No matter how much you're struggling to repay your mortgage, consider the shortfall that could arise if you cancel your insurance - and either you or your partner becomes seriously ill afterwards.
I have often seen people cancel their mortgage protection cover as they try to rein in all spending - only to later become terminally ill or die. This creates a terrible situation. The sick person will spend their final days knowing the financial problems for their loved ones will last beyond their death. For the survivors who are likely to be left with a debt that already cannot be serviced, the threat of repossession could become very real.
It's false economy to cancel your insurance if you can't afford your mortgage repayments - it's akin to scrapping your car insurance if petrol prices go up.
All the same, if you are in arrears, it would be worth your while to reduce the cost of your cover - if you can.
So how would you go about doing that?
If you have an expensive policy with all the bells and whistles, call a broker and get a quote for a cheaper one.
Tell your bank that you intend to continue to pay for your mortgage protection insurance - even if it means it will reduce what you can pay your bank in mortgage repayments each month by the same amount. Collectors sadly don't care if you make a payment by making bad decisions elsewhere - their job is simply to get the money in and that is all.
If you cannot afford the insurance you have, try to buy a policy for as much as you can afford.
Remember, you may be overinsured or paying for expensive add-ons which you don't need - if this is the case, you should be able to save a few bob by getting a policy which is better tailored for you.
It would be a good idea for banks to take the lead here. If you hand back your keys and cancel your house insurance, they automatically insure your home on their own 'group policy'. In the case of customers in arrears, they could do the same for mortgage protection at a cheap cost.
Obviously this can't happen if there is a medical issue such as cancer.
In such a case however, a bank could undertake to pay the mortgage protection policy and claw back all monies paid and accrued upon death.
This wouldn't be as expensive or socially damaging as repossessing the home of a terminally ill person - or evicting their descendants when they die.
Some new thinking is critical in this area because the lack of it is behind some of the worst case scenarios we have seen in the mortgage crisis to date.
Charlie Weston is on holidays
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