Protect your ability to meet repayments

The last thing new mortgage-holders like to think about when standing at the threshold of their new home is how they would afford the repayments if something went wrong.

It doesn't have to be a big thing - it could be as simple as a self-employed person being laid-up with a broken leg, or a leak in the roof that requires a more costly repair than expected.

Short-term blips such as these in income or outgoings could be expected to cause slight financial headaches for most people. But what about situations where the headache lasts or develops into something more serious - a financial state that threatens the very ownership of the property?

Research published in the UK (a market bearing considerable similarity to the Republic) in May found that 40 per cent of homeowners have no insurance that would cover an inability to meet mortgage repayments.

On first sight, this looks like a rather worrying statistic, suggesting as it does that the home ownership of thousands of people could be threatened by an unexpected financial event.

Slightly deeper analysis of the situation is more comforting however, with insurance not necessarily the only way to maintain continuity of mortgage repayments in tough times.

Sarah Wellband of mortgage broker REA generally recommends savings as an alternative to insurance that protects mortgage repayments.

"We prefer to advise borrowers to maintain savings in an interest-bearing account equal to three or six months mortgage payments so if the worst comes to the worst borrowers can fall back on these," she says. In general, Ms Wellband says she is rarely confronted, in these days of full employment and high wages, by buyers' concerns about what would happen if their income dried up.

Thus it is "very, very rarely" that she sees a client seeking out or signing up to a policy that will cover their mortgage repayments amid financial difficulties. She attributes this in part to perceptions, justified or not, that they represent bad value for money.

Despite this bad image, all lenders continue to offer mortgage repayment protection policies that will cover either all or a portion of the repayment if the borrower can not cover it due to accident, illness or redundancy.

"There is typically an initial 30 days waiting period after the "event" takes place and then the policy will pay for up to 12 months or until the borrower returns to work," says Ms Wellband. She notes however that there are numerous exclusions where payments will not be covered. An example of this is a redundancy which is a "normal occurrence in the occupation of the borrower".

Borrowers who are attracted by the degree of comfort these policies can offer can expect to pay a relatively high price for their choice. Based on today's mortgage rates, for example, a mortgage of €200,000 over 30 years would imply a premium of €41 per month for a payment protection policy or €492 per year.

Cost is just one of a number of disadvantages attached to this type of policy, according to Ms Wellband. "It's a high commission product, which is why the lenders push it to direct clients.

"And it has to be taken out with the mortgage so you can't take it part way through the term. The exclusions are numerous and the redundancy element is excluded for the self-employed," she says.