A mortgage is a long-term commitment and has to be met regardless of any short-term issues with your income such as unemployment or being temporarily unable to work through illness or injury. With that in mind, it’s worth looking at how you can be sure to make your mortgage repayments are made even if you face adverse circumstances.
Only take on a mortgage in the first place if you’re sure you can manage it for at least five years
The house-buying process is something of an anomaly in a world where people have become used to buying and selling products at the click of a button. It’s slow and there can be a lot of up-front costs associated with it such as surveyor’s fees, legal fees (conveyancing) and stamp duty and that’s before you get to moving costs and the cost of furnishing your new home. Homeowners also have to be realistic about the fact that the process of selling a home, even in a buoyant market can take much longer and be more stressful than just handing in a month’s notice on a rental contract and that letting out a property as a means to pay the mortgage while you are away from it may be a whole lot more complicated than it sounds. In other words, think carefully before you commit to a house purchase in the first place, as a minimum you should be confident about paying your mortgage for the next five years.
Keep your mortgage within your means
This advice should be less relevant than it used to be since the Mortgage Market Review obliges lenders to look at affordability rather than just to headline income figures, but it’s still worth repeating. Just because you can get a mortgage of a certain level, doesn’t mean you necessarily should. Also, just because you can borrow from family and friends to put together a (bigger) deposit doesn’t mean you necessarily should either.
Make sure you still have some cash savings
When it comes to deposits it’s generally a case of the bigger the better, but using up all your cash in hand leaves you with nothing to fall back on in an emergency. If at all possible, aim to keep at least three months of living expenses, including mortgage payments, set aside “just in case”.
Look at life insurance
Having life insurance may well be a condition of your mortgage but if it’s not and you have dependents then it’s strongly recommended to look into it anyway and even if you don’t it could still be beneficial if it allows you to make life less stressful for those left behind. If you are only taking out life insurance to cover your mortgage, then you can reduce your level of cover as you pay back your mortgage.
Consider some form of income-protection insurance
In the context of ensuring that a mortgage continues to be paid even if you are experiencing adverse circumstances, there are three forms of insurance it is worth considering. (Mortgage) Payment Protection Insurance is a form of insurance which guarantees that a specific credit commitment will be met if the claimant fulfills the relevant conditions. These are usually accident, sickness and unemployment, hence its alternative name of ASU cover. The self-employed may be able to get similar cover but without the unemployment clause or they may wish to look at the second option which is Income Protection Insurance. This is much the same as MPPI except that the income may be used as you wish. Your third option is Critical Illness Cover, which, as its name suggests pays out if you are diagnosed with one of a range of serious illnesses and, again, the payment can be used as you wish.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There are other providers of Payment Protection Insurance and other products designed to protect you against loss of income. For impartial information about insurance, please visit the website at www.moneyadviceservice.org.uk.