Do you really need first time buyer mortgage protection?
As the saying goes – with great power, comes great responsibility. So very much the statement should be – with great debt, comes great responsibility.
It is highly likely that a mortgage will be the largest debt you ever take out. So, while all your focus will be on your new home and all the freedoms that brings, as advisers, we need to look into the future and highlight things that may jeopardise your new status as a homeowner and protect you against that.
The area of protecting a mortgage is a very large one, so really as a bite sized entry, the key aspects you should consider are below. Any good adviser will talk you over these aspects in depth and what is specific to your needs, but the main areas of consideration are as follows:
Companies are waking up to the fact that if they look after their employees, they work harder and stay longer. A key way an employer can show this will be in the work related benefits they offer.
Large employers can really benefit from economies of scale and offer a lot to their employees. Other firms just hold these values as important and again, offer lots of employee benefits. However, the majority of companies either can’t or don’t. Or if you are self employed, it will be down to you alone to provide cover for yourself. So our first port of call is always your contract, employee handbook or benefits package. Once we can see what you have, we can then identify any gaps and act accordingly.
Protecting your income
To use an age old analogy – if you owned a machine that consistently provided you with all the income you need to support your life, you’d insure that machine in case it broke down, wouldn’t you? Well you are no different.
You are that machine, and you should protect your income. Income Protection is a relatively complex product, so in the interests of simplicity, here is what we consider. What we need to do is look at what level of sick pay you get (if any), then how long you can live on savings and how long you need protection for (typically until retirement, as even if you don’t have a mortgage, you need to eat and will have bills to pay etc). We’d then design a package to suit your needs. As I say, there are a lot of variables in this area, but conceptually that is how it works. This is why you should consider first time buyer mortgage protection. This is actually the greatest risk to you missing any mortgage payments or ultimately losing your home.
The Office for National Statistics states that.
“We estimate that 141.4 million working days were lost because of sickness or injury in the UK in 2018. This is equivalent to 4.4 days per worker.”
This is often triggered by major issues like Cancer, but what is referred to as ‘musculoskeletal’ issues are a major cause. Increasingly we are seeing people signed off from work due to Mental Health issues such as Depression, Anxiety, Stress etc. This is the only form of protection that will protect your income in those eventualities.
Critical Illness Cover (or as we like to say, Cancer Cover)
Yes, it is a harsh headline, but the simple fact is that 1 in 2 people will now contract a form of cancer before they die. You don’t have to look too hard to see, or even know someone, who has been affected by Cancer. (See Macmillan Cancer Support Statistics Fact Sheet.)
While we can’t change that, what we can do is take financial stress off the table by providing a lump sum of tax free cash should you get diagnosed with Cancer or any number of horrible diseases/illnesses (most insurers cover around 40 events). That means you can pay off your mortgage, get the best treatment in the world, or simply be able to take time off work to recover without having to worry about money. This is hugely valuable for obvious reasons. The amount and type of cover will vary from person to person, but is an uncomfortable truth that the majority of people will be affected by this time in their lifetime. Another key reason to consider first time buyer mortgage protection.
Why we have put this last, is that thankfully, this is the least likely thing to happen during a mortgage term (so there is some good news!). That is why it is so cheap to put in place.
Naturally we recommend everyone protect their lives as to suffer a bereavement, and then financial stress on top of that is simply horrible. And if given the choice of passing a debt or an asset to their family, everyone would choose the asset (property in this case).
As humans, we are literally wired to focus on staying alive (you can thank your Limbic system for that) and therefore dying is often the biggest fear for many people. But again as advisers we deal with the probability of events, so while protecting your life is extremely important, the aforementioned areas are more likely and therefore more important for us to protect.
One caveat would be if you have children. Would you want them to have a lump sum if you were to die? Would this be used to buy their own property or to be put toward their education. In that sense, this is extremely important and also very cost efficient. So again, worth a more detailed discussion should this be relevant to you.
That is an extremely simple overview. If you have more complex affairs, then more in depth advice will be needed. We also strongly advocate the use of both Wills and Trusts. As they are complex areas in their own right we will return to them at a later date.
So for now, be aware that protecting your income and your assets is vitally important, and ideally they will be backed by Wills and Trusts as that is the only way you can guarantee that once you buy a home, you then also get to stay in it whatever life throws at you.