Farmer’s Bank

When it comes to money, there is no room for error. You want to put your money somewhere you can trust and be sure that it is protected.

That’s why here at Farmers Bank, we provide a service that is professional, accessible, and something to recommend. We treat our customers like our family and want you to make the best decisions for your money.

Whether you are remortgaging a house, opening a savings account for further education, or just looking for a bank that looks after you – we are here to help. Our staff has the experience to advise you on making the best decision for you and your future.

What Is Mortgage Life Insurance And How Does It Work?

You may be somewhat familiar with mortgage life insurance, but you are not exactly sure what it is or the way that it works. Continue reading this guide to get the information you need so you can make an informed decision.

Mortgage life insurance is a cover for the mortgage for your house if you should pass away before it is completely paid off. In addition, this type of cover allows dependents and joint mortgage holders to stay on the property.

Understanding Mortgage Life Insurance

As mentioned above, mortgage life insurance is a form of life insurance that protects your spouse and any dependents by taking care of the mortgage in the event you pass away before the house is paid off. In other words, this cover will ensure that they will still have a roof over their heads if the worst happens.

Also referred to as mortgage protection, mortgage life insurance is not the same thing as MPPI (Mortgage Payment Protection Insurance). MPPI only covers your mortgage payment if something occurs that keeps you from working, such as redundancy or a long-term illness.

After a claim has been made by you or your dependents, the policy is no longer in effect. If you make payments into a mortgage life insurance plan and you pay off the mortgage whilst you are still alive, you will not receive any money back once the term ends.

How Does It Work?

There are two different types of mortgage life insurance and they differ slightly from each other. It is important to do your research no matter which plan you choose. You should do a price comparison before making a final decision.

Keep in mind, if your mortgage broker or lender recommends a particular mortgage life insurance cover for you, it will likely be more expensive than one you could find on your own. This is due to the fact that they make a commission for every referral.

Decreasing Mortgage Life Insurance (Term Insurance)

This type of cover takes care of debts that are decreasing in size. For example, if you currently have a mortgage where your monthly mortgage payments pay off a little of the capital and the interest. This is also known as a repayment mortgage. With this type of mortgage, the amount that you owe will decrease over a period of time.

The payout is a reflection of the liability reduction, and as that decreases, so do the monthly premiums. This is less expensive than level term insurance. However, it also means that at the end of the life of the policy, the estimated payout would be less than it was at the beginning. This means that the payout would pay off the mortgage, but it would not extend much after that.

Level Mortgage Life Insurance (Level Term)

With this type of mortgage life insurance cover, you are able to choose the amount of the payout. For example, if you chose 150,000 GBP, that would be the fixed amount for the life of the policy. The monthly payments (premiums) would also stay the same, and this is one reason why this may be a more expensive choice.

If you were to die before the mortgage is paid off, your spouse and/or dependents would get the lump sum and the policy would no longer be active. Your family could then use the payout to pay off the mortgage, and take care of other expenses if any money was left over.

This type of cover is a great option for those who have an interest-only mortgage. With these types of mortgages, the debt remains unchanged during the term’s duration.

What Is Critical Illness Mortgage Life Insurance Cover?

This is an add-on that is completely optional for most policies. The healthier and younger you are when you get the policy, the cheaper this add-on will be. As you become older, it can be very expensive to get this type of cover because you are at a higher risk of getting sick.

This is a cover that will pay out a lump sum of money if you have been diagnosed with a condition such as dementia or cancer, stroke or heart attack. However, it is important to note that the policyholder will only be entitled to a pay out if that specific illness is included in the policy.

This is why it is essential that you read the fine print included in your policy. Different providers offer different policies that cover different illnesses under the critical illness cover. If you are not sure what is included in the critical illness cover, ask.

An insurance provider may also refuse to pay out on the critical illness cover if you fail to disclose an illness or a family history of certain illnesses. You will need to be completely honest when discussing your health history with the insurer.

If you die before your mortgage is paid off, the debt is transferred to your estate or next of kin. However, with mortgage life insurance cover, the debt is paid off and they can remain in the property if they choose to.

How To Get The Best Mortgage

Picking the right mortgage is a difficult decision that will impact your financial health for years to come. It is easy to get overwhelmed and not decide based on facts or rush into the wrong choice.

You need to be certain on your budget and unwilling to budge. Try and aim for lower than your top limit as you never know when you might need extra money fast.

Here at Farmers Bank, we have compiled a list of all the necessary criteria to help you make the right decision.

How Much Can You Borrow?

There is no absolute rule, but lenders usually will give 4 to 5 times around an individual income or 3 to 4 times your joint income if you are borrowing with someone else. Every lender has different criteria and they will consider a variety of factors.

If you already have a lot of debt, multiple credit card loans, or monetary factors like these, your mortgage may be capped lower because of it.

You also need to consider how much you are willing to pay per month as large payments will get you the house you love – but also keep you trapped in it. This will eat up all your funds and stop you from other purchases like holidays or cars.

The bigger the deposit, the less the fee, and the better rate you are entitled to. You need to consider the loan-to-value rate that will let you see the percentage yours will be.

Repayment or Interest Only?

A repayment mortgage allows you to pay interest and the loan itself every month. You will pay more interest at the start, but it will work away at the loan until the whole thing is paid off.

This is the preference for many people as you only must budget the one payment instead of interest and debt. However, you can choose to just pay off the interest if you have other funds.

Lenders are happy to let you choose this loan if you have savings, investments, or assets and they are unlikely to allow a first term lender to take one out. If you are looking to rent the property out, then you will find many buy-to-let options available.

Fixed or Variable Rate?

Fixed rate mortgages allow you to keep the same monthly payment for the duration of the deal. Regardless of interest rates falling or rising, you will pay the same.

A variable rate will allow it to go up and down – either to your benefit or detriment. Seeing as they do have the potential of falling, they remain a popular choice.