Your guide to insurance for mortgages

Most mortgage lenders will require you to simultaneously take out an insurance policy to safeguard your (and their) investment. But, what do you need?

When you take out a mortgage, most lenders will require you to simultaneously take out an insurance policy to safeguard your (and their) investment. This is normally known as Building Insurance and will ensure that you’re covered for the rebuild cost of your property in the case of fire or flood or other damage. You may also insure the buildings for accidental damage, usually at extra cost.

However, along with Building Insurance, there are a number of other policies which are a good idea to look into once you become a homeowner. This guide is designed to help you to understand your various insurance options so you can make an informed decision about what’s right for you. So, whether you’re in the planning stages of buying a new property or you’re just looking for help to safeguard your current home, this insurance guide from our expert team at Mortgage Matters Direct will help you to get started.

For a little free advice that’s tailored to your own situation, be sure to get in touch with our advisors. We’ll even be able to set up your insurance policies for you so you can get on with enjoying your new home.

What is Building Insurance?

As its name suggests, Building Insurance is a policy which safeguards the actual bricks and mortar of your home, as well as any permanent fixtures and fittings (e.g. your bath or kitchen cabinets). So, if the worst should happen, your insurance company will pay you a sum to either help with rebuilding or fixing your property. 

What does it include?

Ultimately, Building Insurance saves you from having to shell out for damage from:

  • Fire – from human or electrical fault or bad weather.
  • Flood – from leaking pipes, taps or bad weather.
  • Frost – i.e. frozen pipes.
  • Theft or attempted break ins.
  • Vandalism.
  • Accidental breakage.

This could include your garden and any outbuildings that you have but do check the small print beforehand since every policy is different.

Typical things Building Insurance covers:

  • Alternative accommodation while your home is being fixed.
  • Leaking pipes from water or heating systems.
  • Subsidence or landslides.
  • Falling trees on your property.
  • Broken windows – either through accident or theft and vandalism.

Common exclusions:

It’s unlikely that your provider will provide remuneration for any of the following:

  • Wear and tear.
  • Damage to outside pipes from frost.
  • Storm damage to your garden gates, fences and plants.
  • Deliberate damage caused by you or anyone living in your home.
  • Damage caused by animals – including pets, birds and insects.

Bear in mind that you can easily invalidate your policy by renting out your home without seeking your insurer’s permission or by leaving the property vacant for longer than 60 days. So, if you’re planning on taking a long holiday or letting your home out while you’re away, check with your provider beforehand.

Do I need it?

Yes. We can’t think of any mortgage provider that doesn’t insist that you take out a policy before you complete on your new home.

guide to mortgages for insurance

What is Contents Insurance?

Just as Building Insurance is a policy to protect the building itself, Contents Insurance covers what’s inside it – that is, your furniture and possessions.

There’s often some confusion over what is covered by Building Insurance, and what Contents Insurance is liable for. Grey areas, like what exactly do fixtures and fittings come under (more on that later), can make for an unwelcome surprise when you come to claim. Some providers offer products which include both. Taking out both policies at once with the same provider will usually be far cheaper than arranging each separately.

What does this include? Damage from fire, flood, theft, accidental breakage and vandalism to your contents – including non-permanent fittings such as carpets – are usually covered under your policy.

Do I need it? Mortgage providers seldom insist upon Contents Insurance but it’s probably a good idea. Non-permanent fixtures and fittings, such as carpets, laminate flooring, tiles and curtains (including expensive shutters, if you have them) aren’t covered under Building Insurance alone. So, if the worst should happen, your provider won’t pay out to replace these unless you have this in place too.

What is Life Insurance?

A Life Insurance policy will pay out an agreed sum if you die before the end of the agreement. Mortgage providers like you to have some form of Life Insurance in place to ensure that your next-of-kin will be able to keep up with repayments if the worst should happen.

Ultimately, there are two types of policy you can opt for:

  • Level Term, which pays a fixed sum that’s agreed with your insurance provider.
  • Decreasing Term, which pays out a decreasing amount until your policy ends. This is commonly used to cover your mortgage balance which will, of course, decrease as the years go by. It stands to reason that this type of policy is considerably cheaper than the Level Term since the pay-out figure is steadily going down.

What does it include? Sudden death by natural causes, murder, manslaughter or accident should be covered by your policy, some higher quality policies will even include suicide after an initial period.

Is it mandatory? No – but in most cases you absolutely need it, especially if dependents share your home. No one likes to think about what will happen after we die, but it’s important to make the necessary provisions to ensure that your mortgage will be paid if the worst should happen.

What is Critical Illness Insurance?

As its name suggests, Critical Illness Insurance pays out a lump sum – that’s entirely tax-free – if you’re diagnosed with one of the specified life-threatening diseases on your policy. This payment will be made as soon as you’re diagnosed – and so, unlike Life Insurance, this will pay out even if you make a full recovery.

The help that this money can provide is two-fold. Not only will your mortgage be covered during your convalescence, but it’ll also help towards paying for any necessary alterations to your home – such as the addition of a stairlift or downstairs facilities.

Bear in mind that if this is combined with Life Insurance, only one of these policies will pay out. So, if you received a lump sum from a Critical Illness policy following a cancer diagnosis, your next of kin wouldn’t be able to then claim your Life Insurance if you pass away.

Which illnesses are covered?

Many conditions are covered, typically including:

  • Certain cancers
  • Strokes
  • Heart Attacks
  • Parkinson’s Disease
  • Major organ transplant
  • Head injury
  • Paralysis
  • Loss of sight or hearing

More comprehensive policies can include much more besides.

Common exclusions:

Critical Illness Insurance will pay out, even if you don’t die and make a full recovery. However, insurers usually have exclusions on any pre-existing conditions – and may not provide cover if you’ve ever suffered from a particular disease before.

Bear in mind that certain diseases will not be covered by your policy. Check which conditions are included before you decide whether this is for you.

Is it mandatory? As with Life Insurance, Critical Illness provides an extra safeguard if the worst should happen. Not only will your mortgage repayments be covered while you recover, but you’ll also have a tidy, tax-free lump sum (often within the tens of thousands) to put towards your living costs while you’re unable to work.

Income Protection

Income Protection is designed to help protect you against the financial impact of being unable to work through accident or illness. The benefits can help with everyday living expenses or be tailored to specifically protect your mortgage and related expenses. Income Protection pays you a regular monthly sum for as long as you are unable to work whilst the cover is in place. You can reduce the cost of this protection by limiting the payout for a maximum of 2 years of a claim. There are a range of additional benefits that your mortgage advisor would be happy to discuss with you.

At a glance, what should all homeowners know about insurance?

  • You’ll need to have at least some kind of home insurance in place when you take out a mortgage – normally Building Insurance, which protects you and your mortgage provider if you need to rebuild your home.
  • Contents Insurance covers not only your personal possessions but things like carpets, curtains or shutters which could be expensive to replace in the event of a fire or flood.
  • Life Insurance is paid out upon your death while Critical Illness Insurance is paid after you’re diagnosed.
  • You may save money if you combine insurance policies such as Building and Contents Insurance or Life and Critical Illness Insurance.
  • Income Protection Insurance allows you to replace a large part of your income, if you cannot work through accident or illness, to help pay your mortgage and maintain your lifestyle.

For more advice about which insurance policies are right for you, get in touch.

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