A protective layer

Buying a new home is a stressful experience, whether you are a first-time buyer or not. Having found a property and taken out a suitable mortgage to fund the purchase, most people turn their attention to what is seen as essential insurance, for example buildings and contents insurance. Alarmingly, many homeowners are unaware that should they fail to keep up their mortgage repayments ' whatever the reason ' the lender will want its money back.

First-time buyers are often overwhelmed with the hidden expenses when setting up home. The costs seem never ending and make working within the constraints of a tight budget a difficult task. This usually means something somewhere has to give. With mortgage payment protection insurance (MPPI) costing anything between £4.00 to £6.50 for every £100 of benefit, an average £400 a month mortgage could cost up to £26 a month to protect. This may appear to be an expensive accessory, but when you look at the following statistics, it becomes harder to dismiss:

• In the north west of England, 90% of repossessions involve first-time buyers.

• The average mortgage on a repossessed property is £50,000.

• The owner of a property in repossession is generally under 25 years of age.

There are many other issues first-time buyers should consider. For starters, first-time buyers are usually young and tend to be further down the career ladder. Consequently they usually have lower incomes and are less likely to receive loyalty incentives such as sickness benefit, or generous redundancy packages ' the latter usually rewarded to people who have given long service to an organisation. Also, many first-time buyers are couples who think they can manage on one income ' but is this realistic? First-time buyers will be unable to sell the property and downsize in order to reduce outgoings, plus few will have had time to build up substantial savings.

A recipe for disaster

In addition to this, even though house prices have risen sharply in the past few years because interest rates have fallen, people are encouraged to borrow as much as they can with lenders often willing to lend up to four or five times the borrower's salary. Many first-time buyers, with no equity from a previous property, have loans approaching the full value of the home and we are even seeing mortgages of 120% being offered.

Given these scenarios, absence due to unemployment, accident or sickness coupled with stretching mortgage repayments is a recipe for disaster, unless there is some form of protection in place. This is all the more crucial as the State gives no direct assistance for mortgage repayments for the first nine months of unemployment.

Despite these obvious risks and the fact there are 900,000 UK redundancies per year, only about 20% of homebuyers hold mortgage payment protection insurance (MPPI). As first-time buyers represent 44% of homebuyers, this statistic is even more of a concern.

Mortgage payment protection products supplied by mortgage lenders tend to have standardised cover and price. Some providers offer accident and sickness only, or unemployment only options and the length of time customers have to wait before qualifying for a claim may also vary.

Alternative protection

Other ways to protect the repayments in the event of the very worst happening include life insurance and critical illness cover.

Take, as an example, a couple in their late 20s with two young children. The man is a househusband, and the woman is an assistant bank manager. They have a mortgage of £125,000. If one of them were to die, how would the surviving partner continue to pay the mortgage?

It is easy to see that the main breadwinner should have life insurance in place for at least the amount of their mortgage. If she were to die, her husband would be happy in the knowledge that the family home is safe.

In certain circumstances, the State may provide some assistance, but more often that not, this is minimal. For example, income support may be available by applying to the DSS and there are allowances for lone parents with dependent children. In the example given, the remaining partner may receive around £100 per week, depending on their circumstances. That would clearly not pay the mortgage and other bills.

However, if the situation was reversed, even though the main breadwinner could possibly continue to pay the mortgage, there is still a significant but 'unseen' amount the househusband contributes to the family finances. For example, who would pay for childcare, not to mention domestic duties such as cleaning and ironing?

It is relatively cheap and easy to take out life insurance for the purpose of mortgage protection and this can be done either on a single or joint life basis. Joint life policies pay out the sum assured on the first death of either one of the couple. Because rates have fallen this type of cover is now more affordable. The policy can be arranged on a decreasing basis, so the sum assured reduces to coincide with the outstanding mortgage amount at all times.

Alternatively, cover could be taken out on a level basis whereby the sum assured remains the same throughout the term. This could be useful for someone who requires additional life insurance throughout the term of the policy which could allow for extensions to the original mortgage, or when moving house. So even though life cover is a simple product, IFAs play a vital part in ensuring the product matches the borrower's needs.

Whether the cover is on a decreasing or level basis, premiums remain the same throughout the term, so homeowners know exactly what to budget for.

Bundling benefits

A valuable additional option could be to include critical illness (CI) cover in the mortgage protection package. Some providers market products that encompass life and CI cover in one package, while others may provide them separately. For mortgage protection purposes it may be wise to consider a 'package', where the CI benefit is an advancement of the life cover, so only one lump sum is paid out. This may work out cheaper than two separate products, but clients should remember that separate policies could result in two payments ' one for the critical illness and another for the death.

In some ways it could be argued CI cover should be bought ahead of life insurance, as statistics show that the chances of suffering one of the standard named critical illnesses during our working life are much greater than the chances of dying. For example:

• A male aged 30 has an average life expectancy of a further 45 years.

• He also has a one in 10 chance of having a heart attack before age 65.

• A female aged 25 has an average life expectancy of a further 55 years.

• She has a one in six chance of having breast cancer before age 65.

Most definitions of specific illnesses are covered by recommended Association of British Insurers' wordings to make them easier to understand, although they do need careful reading, because the sum assured is only payable if the precise definition of the illness is met.

Some critical illness products may also provide limited cover if a child of the life insured suffers a named illness within certain age ranges (typically between three and 18 years of age).

There are 'budget' products available, which cover fewer illnesses, so again these may be attractive to first-time buyers. However, in these instances, extra care should be taken to ensure that the correct level of cover is chosen. Clients must also be made aware that they are only covered for a few illnesses. It is also worth remembering these types of policies are pure protection; there is no investment element or surrender value.

Although on reading the list of illnesses and definitions it may seem as if insurers are exploiting 'small print', in reality this is to help ensure claims are genuine, therefore avoiding disputes over payment. By having precise definitions it means all claimants are treated equally and it will also help the insurer to keep the cost at a reasonable level.

When taking out a mortgage, first-time buyers must assess the range of financial risks they face and weigh up the protection options available to them. The message however is clear. A mortgage is a major financial commitment and statistics show first-time buyers are often more vulnerable than established and experienced homeowners.