Mortgage protection: cover types, sales rules, property insurance and state help (SMI)

A mortgage is usually a household's largest debt, secured on its most important asset. ASEW Learning Outcome 5 asks why protection is needed, which cover addresses which risk, what rules govern its sale, and how far state help (mainly Support for Mortgage Interest) can be relied on. Protection used to be a separate CeMAP® unit. It is now tested inside these case studies, so expect at least one question per case on it.

1. Purpose and implications for consumers and lenders (AC5.1)

Risk	Effect on the borrower	Effect on the lender	Typical cover
Death	Survivors cannot pay; home at risk	Arrears and a possible sale	Term assurance (decreasing or level)
Serious illness	Income falls and costs rise	Arrears risk	Critical illness cover
Long-term inability to work	Income lost for months or years	Arrears risk	Income protection
Short-term accident, sickness or unemployment	Payments missed	Arrears risk	ASU / mortgage payment protection insurance
Damage to the property	Repair or rebuild costs	The security is reduced or destroyed	Buildings insurance
Loss of possessions	Replacement costs	None directly	Contents insurance

Why lenders care. The property is the lender's security, so lenders normally require buildings insurance. Under the MCD tying rules, a lender may require a relevant insurance policy, but must accept a policy from another supplier that gives an equivalent level of guarantee (MCOB 2A.2.5R). Lenders do not usually insist on life cover, but a borrower without it leaves dependants exposed.

Lender-only cover. A higher lending charge or mortgage indemnity policy protects the lender, not the borrower (see MRT2).