Summary

Most homeowners have life insurance to repay their mortgage if they were to die. But death is only one of many risks. What other risks threaten your mortgage and how can they be offset? This article investigates and offers some solutions.

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OK, now you have a lovely new home and with it comes a lovely new mortgage. With the average mortgage advance standing at around £150,000 its a long-term commitment to repay a lot of money. The repayments also take a fair slice out of your monthly income.

What could go wrong with these financial arrangements and can you hedge your bets by insuring against the risks? After all you have a family to protect.

Most people would identify 5 main areas of concern, all of which boil down to your ability to maintain the mortgage repayments: (travel insurance)

Interest rates might increase and make the monthly repayments unaffordable
You might loose your job
You might be forced to take time off work through illness or accident
You may become permanently unable to work through accident or very serious illness
You could die before the mortgage is paid off.

The financial industry is packed with pretty shrewd people so itll come as no surprise to learn that there are financial products to help with each of these risks.

If you want to reduce the risk of interest rates rising to unaffordable levels, you should have discussed these matters with your mortgage adviser. He will then have told you about "fixed" and "capped interest rate" mortgages. As the name implies, a fixed rate mortgage fixes the interest rate you pay whilst with a "capped" mortgage, the lender agrees not to increase your interest rate above a pre-agreed level. Both types of mortgage revert to the standard variable rate after the fixed or capped period finishes which is typically after three or five years, depending on your lender.

Fixed rate mortgages are currently very popular accounting for 55% of new advances and there are some very good deals around. The capped rate for capped rate mortgages is usually set at the outset above the equivalent fixed rates available but the rate you pay is lower than the fixed rates. In this context your interest rate risk can be effectively controlled. After the end of the protected period you always have the option to re-mortgage and find another rate protected deal. There are never any guarantees on the rates that will be available but the mortgage market is highly competitive, especially for re-mortgages, and special rate offers abound. Its really a matter of knowing which lender to approach. When the time comes youd be well advised to ask a mortgage broker to search out the most suitable options.

Worried about paying your mortgage if you lost your job? Then you need Mortgage Payment Protection Insurance - but be aware that in its basic form, this insurance is really only designed to cover redundancy. If you resign or are fired for gross misconduct your unlikely to be insured. The cost? Online you can expect to pay around £2.45 per £100 of monthly mortgage payment for a policy which starts paying out 30 days after youve been made redundant and will pay out for up to 12 months. Youre sure to have been offered similar insurance by your bank or mortgage company but watch out, their premiums are likely to be two or three times higher for identical cover. (life insurance policies)

Mortgage Payment Protection Policies can also be extended to cover the third area of concern - you lose income through illness or accident. But before you rush into this insurance you need to ask your employer how long theyd continue paying you if you were off work. Remember, you only need to insure for the period after your employer stops paying. You would then receive statutory sickness pay, but the odds are youll need that income for general living costs. The cost for this insurance? Well, online itll again cost you around £2.45 per £100 of monthly mortgage payment for a policy which starts paying out after 30 days, However, if you combine illness, accident and unemployment cover all into one policy you can currently get combined insurance for around £3.95 per month. The essential point to remember is that these policies will only pay out for 12 months. That leads on to the fourth area of concern.

How would you pay your mortgage if you were unable to work again through a serious accident or critical illness? In this context it is important to appreciate the reality of the risk. The insurance industry estimates that 1 in 5 men and 1 in 6 women suffer a critical illness before their normal retirement age. Just think what a heart attack at 40 would mean to your family finances, especially if you have a mortgage with many years still to run. For many, insurance is a must.

The best option is to arrange insurance that totally repays the outstanding mortgage if you cant continue to work. That at least removes one big worry. The insurance you need is called Critical Illness Insurance but make sure "total and permanent disability" cover is included. This ensures that your mortgage will be repaid if you are incapacitated through an accident.

You can buy Critical Illness Insurance with "decreasing cover" where the size of the payout decreases as the years go by. This is ideal if you have a repayment mortgage where you are repaying the mortgage bit by bit each month. Decreasing cover is also the cheapest form of this Insurance.

If you have an interest only mortgage, the situation is different as the sum you owe your lender, remains constant. You certainly dont want the cover to decrease - so here you need Critical Illness Insurance with "level cover". (car insurance )

Did you Know?
According to Land Registry figures, there has been a huge increase in the number homes sold for £1m plus. Despite what youd expect, this hasnt caused the scramble for business youd expect from lenders. Many of them are exercising caution when it comes to the well-heeled mortgage seeker. Surprisingly, the best deals go to the smaller borrower. It seem as if lenders would prefer to lend 10 borrowers £150,000 each rather than one loan of £1.5m, in order to spread the risk.

It is, however, beginning to get easier to get

mortgage quotes

for high value homes. Recent figures from the Land Registry show a massive increase in the sales of million pound plus properties. (medical insurance)

Todays Tip
Dont buy direct from a Life Insurance Company until you have received at least two life insurance quotes from a specialist life insurance broker. That way youre bound to get a great deal.

Did you know?
Last year the average Contents Insurance premium rose by 2% to £151 and the average Buildings Insurance premium increased by 1% to just over £205. But within the market weve seen rises of as much as 6%.Thats why if you want cheap home insurance , it pays to get a range of quotes off the Internet - and never accept the first quotation you get.