Now you have a beautiful new home. And with it, a wonderful new mortgage. The average mortgage loan is around PS150,000. This means that you will need to make a long-term commitment and repay the money. Repayments take a significant portion of your monthly income.
How can you protect yourself from financial disasters? You have a family to safeguard.
Most people will identify five main areas of concern. All of these are related to your ability to pay the mortgage.
- The monthly payments might not be affordable due to rising interest rates
- Your job could be at risk
- In the event of an accident or illness, you might have to miss work.
- Accidents or serious illnesses can make it impossible to work permanently.
- It is possible to die before your mortgage is paid off
Financial products can help you manage all of your risks.
Talking to your mortgage advisor is a good way to lower the chance of interest rates increasing to unaffordable levels. The adviser will inform you about fixed and capped interest rate mortgages. A fixed-rate mortgage sets the interest rate that you pay. However, a capped mortgage allows the lender to agree not to raise your interest rate beyond a pre-agreed level. After the fixed or capped period ends, the standard variable rate for both types of mortgages will revert back to the original rate. This can vary depending on which lender you have.
Fixed rate mortgages account for 55% of all new advances. There are also some great deals. While the capped rate for capped-rate mortgages is typically higher than comparable fixed rates, the rate that you pay will be lower than the fixed rates. This allows you to manage your interest rate risk. You always have the option of remortgaging and finding another rate-protected deal after the protection period ends. Although there are no guarantees about the rates available, the market for mortgages is very competitive, particularly for remortgages. There are also many special rate offers. It is a matter of choosing the right lender. It’s a matter of knowing which lender to approach when the time is right.
Are you worried about your ability to pay your mortgage if your job is lost? Mortgage Payment Protection Insurance is what you need. However, in its basic form this insurance does not cover redundancy. You are unlikely to be covered if you resign, or are fired because of gross misconduct. How much? The cost? Your bank or mortgage company will have offered you similar insurance, but their premiums may be twice or three times as high for the same coverage.
You can also extend your mortgage payment protection policies to include income loss due to illness or an accident. Before you jump into this insurance, make sure you ask your employer how long they would continue to pay you if you were not working. You only need to be insured for the time your employer stops paying. While you would be entitled to statutory sick pay, it is unlikely that you will need this income for your daily living expenses. How much does this insurance cost? It will cost you about PS2.45 per PS100 monthly mortgage payment online for a policy that starts paying out after 30 calendar days. However, you can combine your unemployment, illness and accident coverage into one policy for as low as PS3.95 per months. These policies are only valid for 12 months. This brings us to our fourth concern.
What would you do if you could not work due to a serious injury or illness? How would you pay your mortgage? It is important to understand the risks involved in this situation. According to the insurance industry, 1 in 5 and 1 in 6 men will suffer from a critical illness prior to their normal retirement age. Imagine what a heart attack at 40 could mean for your family finances, particularly if you have a mortgage that has many years left to go. Insurance is essential for many.
If you are unable to continue working, it is best to get insurance that completely repays your mortgage. This eliminates one major worry. You will need Critical Illness Insurance. Make sure you have “total and permanently disabled” coverage. This will ensure that your mortgage is repaid in the event of an accident.
Critical Illness Insurance can be purchased with “decreasing coverage”, where the payout size decreases over time. This is an ideal option if you have a monthly repayment mortgage. This Insurance is the most affordable.
The situation for an interest-only mortgage is different because the amount you owe to your lender remains constant. The amount of coverage you have should not decrease. This is why Critical Illness Insurance provides “level” coverage.
There are always twists and turns to insurance policies. You must be able to live for at least one year after an accident or diagnosis of critical illness. The policy will not pay if you do not meet the minimum requirements. Most insurance companies have a 28-day survival period. However, some have reduced it to 14 days.
This leads to the question of what happens if your spouse dies. Mortgage Life Insurance is required by most lenders to pay your mortgage in one lump sum. If you are single and live alone, however, you don’t really need it. If you were to die, your estate would repay your mortgage by selling your property. Mortgage Life insurance is the most popular form of mortgage protection. It is available in two formats: a “decreasing coverage” format for people with repayment mortgages, and a “level cover” format for people who have interest-only mortgages.
Although all this insurance is not cheap, there are many ways to reduce the cost. A Mortgage Payment Protection Policy combines coverage for illness, unemployment and accident. This is sometimes called “unemployment-disability” coverage. This will help you save around 20%. A combined policy is the best way to purchase Critical Illness and Mortgage Life Insurance. It’s hard to estimate the savings here as the cost of your policy will depend on your personal information and health history. However, you can expect to save between 20-25%.
Last but not least, shop around for insurance. Although your bank or building society will arrange it for you, they’ll charge top dollar. You can buy insurance online for a fraction of the cost, especially if one of the discounting brokers is used. These brokers can be found by searching for “life insurance”, cheap life insurance, “life insurance quotes”, or “Mortgage Protection Insurance”.
There is plenty of competition on the internet, so it’s common for brokers to reduce commissions and pass savings back to customers through lower premiums. You’ll also need to decide whether you want a policy with a guaranteed premium or a reviewable premium. Talking to a life insurance advisor is advisable. Talking to an adviser for ten minutes could save you a lot of time and prevent you from wasting your time.
Lucky, stay fit, happy, and insured!