Many column inches have been devoted to the ‘virtues’ of mortgage payment protection insurance (MPPI) of late, particularly in the light of cuts to State support for borrowers and the recent Government/industry initiative to increase penetration of cover. A number of lenders have also jumped on the MPPI bandwagon, either launching products in their own right or linking up with existing providers to take advantage of the potential growth in the market.
Given that only 19% of the mortgaged population has cover in place, this focus on protection makes sense. But the attention being devoted by the Government and industry to MPPI is, I believe, firstly unjustified and, secondly, dangerous in that it is encouraging the public to take out a product that is often poor value and inappropriate. This particular product has a captive market in that it is virtually the only protection policy that covers unemployment and that is available to a wide range of people, regardless of occupation. But that is where the product’s so-called ‘virtues’ end.
A friend of mine was recently quoted a monthly premium for MPPI of £86 to cover a mortgage payment of £1,100 per month. To charge such a premium is at best absurd, at worst verging on the criminal. Over 25 years this would equate to premiums of £25,800 to cover a liability of £13,200. But it comes as a shock to find that this level of premium is not unusual in the MPPI market.
A survey carried out by the Observer recently showed that the average MPPI premium among the top 10 lenders was £6.04 per £100 of cover, the most expensive being £7.25 from Cheltenham & Gloucester. So even if my friend had been ‘fortunate’ enough to be mortgaging with an ‘average’ lender, she would still be facing a steep monthly premium of £66.44.
Fortunately, in this case, as in most, the lender’s MPPI was not a compulsory part of the mortgage offer. Brokers are usually free to shop around for a better deal for their clients. A client who can spare £86 per month and who is not averse to a little risk-taking may be better advised to stick the cash into a high interest account or ISA rather than pay it into the black hole of MPPI. But if, due to a client’s occupation for example, MPPI is the most appropriate product, then better rates can be found from smaller specialist providers, particularly from some Lloyd’s insurers where premiums start at £3.75 per £100 benefit.
But there is a more comprehensive, better value and unsung alternative to MPPI, which the industry and Government should focus their energies on developing and promoting. A handful of providers, including L&G, MGM and Scottish Provident, offer long-term mortgage protection products that pay out in the event of accident or disability for the entire term of the mortgage plus up to 12 months’ cover for unemployment. Given that these policies offer a potential pay-out 25 times the length of standard MPPI, their premiums are highly competitive and represent exceptional value, comparatively speaking. The MGM plan for, example, costs from £46.34 per month for a monthly benefit of £1,000 for a 30-year-old male. L&G charges £53.11 for the same cover. The average MPPI equivalent from a top 10 lender for the same level of cover but with only a 12-month payout is £60.40. Enough said?