Mortgages were seen in the boom years as a foolproof way of borrowing, leading to inevitable profits from soaring house prices. Now the recession has hit, many people are struggling to repay their mortgages by themselves - this is where mortgage protection comes in.

When mortgages were pain-free

During the boom years, many people were able to borrow up to six times their own salary – sometimes more – to buy a property. When times were good, it was just about feasible to keep up on the repayments, safe in the knowledge that the price of your property was steadily climbing, and would surely leave you in clear profit, should you need to sell up.

The sting in the tail of the mortgage

For many, the mortgage they were once so happy to be granted has now become a millstone around their neck. With negative equity virtually sweeping the country, the term ‘mortgage’ really has taken on a bitter taste, especially for those who, as a result of a slowing economy, have lost their jobs and can no longer afford to pay the monthly instalments. For them, mortgage protection would have been a very good idea in hindsight.

Where it all went wrong

A mortgage is usually taken out on the understanding that the borrower can pay the mortgage repayments out of their income. The mortgage provider calculates the risk they are taking that the borrower will be able to keep up monthly instalments, based on their salary, other income and their expenses.

Unfortunately, overconfidence by mortgage lenders, as well as borrowers, during the years leading up to 2007 led to many thousands of borrowers being lent sums that they simply wouldn’t be able to repay.

What is ‘mortgage protection?’

It’s only more recently, now that house prices are falling, that people have really started to discuss ‘mortgage protection’. Mortgage protection is an insurance policy which can cover the borrower in the event of redundancy, illness or injury.

How does mortgage protection work?

When you take out a mortgage, you will be told about the monthly payments you will need to make in order to pay it off in the given time period. There is an option to ‘protect’ your mortgage by paying a slightly higher tariff each month, or by taking out mortgage protection cover with a different provider. While the different mortgage protection products give different sorts of cover, they mostly relate to redundancy, illness or injury.

If you pay extra each month for mortgage protection which covers redundancy, it will mean that, in the event of you losing your job or suffering from an illness or injury which prevents you from working, the insurance company will pay your mortgage payments for you for a fixed term, and you will not face repossession of your property by the mortgage lender.

Is it worth it?

To decide whether it is worth taking out mortgage protection, it is important to think seriously about the likelihood of something happening which would cause you to be unable to pay the repayments (thereby potentially losing your property), and weigh this up against the disadvantages of paying extra on top of your mortgage payments while you are still employed and healthy.

As losing your home is likely to affect more people than yourself, it is also wise to talk it through with friends and family. The most important thing is to seek advice on your options, consider all possible outcomes, and make an informed decision, based on the facts.

Credit Choices offers free price comparisons and advice on mortgage protection for homeowners and first time buyers.

© 2010 Copyright Credit Choices - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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