Policy with a premium role

One of the beneficial side effects of competition between lenders is that the obligatory building insurance policy with a company chosen by and paying commission to the lender is no longer inescapable. Unless you accept an extra cheap mortgage deal where the insurance is chosen by the lender, you are now free to choose.

Competition has also led to falls in the cost of buildings and contents insurance averaging 5-15 per cent in the past year alone, according to the latest British Insurance Premium Index prepared by the AA.

However, homebuyers are increasingly having to consider taking on mortgage protection policies, designed to take over the payment of monthly premiums if the borrower falls ill, has an accident or loses his or her job.

Mortgage protection policies were considered optional extras until recently. When employment was more secure, jobs were easy to find, and employers were generous with sick pay, insurance was hardly necessary.

When property prices were rising strongly many people built up a cushion of value and if their financial circumstances worsened it was relatively easy to sell the house, trade down and release some capital. The Department of Social Security also paid the interest on mortgages for anyone who claimed unemployment benefit.

Jobs are no longer so secure, however, and employers are less generous with sick pay. Properties can take a long time to sell, and arrears can start to build up rapidly. Since last October the Government has also made existing borrowers wait three months before they can claim support, and anyone who took out a mortgage after that would have to wait nine months to get any help.

This has focused attention on mortgage protection policies, many of which have proved expensive, inadequate in cover and unsuitable especially for self-employed and contract workers. Since last summer things have started to improve. The cost of cover has come down from around pounds 7 a month for every pounds 100 of payments insured to around pounds 5. Some lenders, such as the Skipton Building Society, have made a virtue of including cover in their mortgages, and most policies now cover self-employed and contract workers who have a reasonable record of continuity of employment.

But most policies still only pay out after 30 days of unemployment and payments stop after a year (just a handful offer 18-month protection). This covers the period which the DHS no longer covers, but it leaves no room for complacency before finding another job or moving house.