Homeowners must protect themselves against unemployment

Homebuyers who lose their jobs face the real possibility of their homes being repossessed as the government moves to cut State benefits.

State help

Support for Mortgage Interest (SMI) pays mortgage interest - but not capital repayments - on a home loan of up to £200,000 after 13 weeks of unemployment. SMI currently assumes homebuyers are paying interest on their mortgages at 6.08% - regardless of the actual rate paid.   But from October of this year the rate will be based on the Bank of England's published monthly average mortgage interest rate, now 3.65%. The Council of Mortgage Lenders and the Consumer Credit Counselling Service, a debt advisory charity, warn the reduction will result in some recipients losing their homes.

There are, in any case, tough limitations excluding vast numbers of homebuyers from claiming SMI so it would be unwise to rely on this benefit to fund your mortgage should you be made redundant.  Most couples won’t qualify because you are ineligible if your partner earns more than approximately £5,000 a year.  Anyone with savings of £16,000 or more is also ineligible. 

To qualify you must be receiving Income Support, Income Based Job Seekers Allowance, Employment & Support Allowance or Pension Credit. So if you’ve recently lost your job it is important to sign on.  Benefit is paid for a maximum of two years.  Those most likely to qualify will be single homeowners with little or no savings. 

Help yourself

The answer for most homebuyers is to take out Mortgage Payment Protection Insurance (MPPI) – not least of all because many homebuyers have mortgages larger than £200,000.  MPPI provides monthly cash sufficient to pay your mortgage or loan repayments in the event that you are made redundant, or are laid off work through sickness.  The CML estimates that less than 20% of homebuyers have MPPI cover.

Many homebuyers are reluctant to buy MPPI because of the extra cost and the fact that these policies, usually sold by the mortgage lender, have earned themselves a bad name by association with Payment Protection Insurance (PPI) sold by the banks to cover personal loan repayments and often charged as a lump sum premium up front.  Lump sum PPI policies have now been banned.  

Bad name

Some MPPI policies have been overpriced and mis-sold to homebuyers who have been unable to make a successful claim because of restrictions contained in the small print.  For example, your claim will be rejected if you had been notified that you will be made redundant.  Anyone who is self employed cannot claim.   You may not be able to claim if you receive redundancy payments from your former employer. 

‘MPPI is not for everybody and we believe people should take independent advice,’ says Nel Mooy, managing director of specialist payment protection broker, British Insurance.  ‘We have had some standard letters from claims organisations and there seem to be an industry in making claims.  This is a pity because it damages the overall reputation of MPPI,’ she says.

But there are many good policies around.  With unemployment likely to rise as the government spending cuts start to bite, homebuyers would be wise to consider taking out a policy now – before heavy redundancies are announced and premiums for cover rise.  So what cover do you need, how much is it likely to cost and is it worthwhile? 

What cover do you need?

The first thing to understand is that there is a difference between Mortgage Payment Protection Insurance (MPPI) and the similar cover called Income Protection Insurance (IP).  With MPPI (and PPI cover for personal loans) the benefits are sometimes paid direct to the mortgage lender or to the bank which made the loan and the benefits are not treated as income when people are assessed for means-tested State benefits like income based Job Seekers Allowance or Support for Mortgage Interest.  But IP is treated as income and will affect entitlement to State benefits.  IP is also taxable but MPPI and PPI are not.