How much life cover do I need?
The amount of cover you buy depends on your personal circumstances. You might, for example, want enough life insurance simply to pay off your mortgage in the event of your death. Or you might need a bigger amount to clear other debts and pay for family expenses such as school fees.
The cash sum will also vary according to the number of dependents and their ages.
Are there different types of life cover?
There are basically two types of cover. Term assurance pays out if you die within the term, which can be anything from a few years to a number of decades. If you buy whole of life cover, the policy runs until your death. In other words, it is guaranteed to pay out; although there are a couple of common exclusions such as suicide to be mindful of.
You can customise your life cover to suit your needs. For example, you might want the sum insured to increase each year in line with inflation. Or, you might prefer a decreasing sum, perhaps if you have a repayment mortgage where the debt gradually gets smaller.
How does life insurance work?
Life insurance usually pays out a lump sum to your family on your death which could be used to pay off a mortgage or meet financial commitments, so you can provide for your dependents even when you are gone. Some policies pay a regular income rather than a lump sum.
You can also arrange for the cover to pay out on the diagnosis of a terminal illness.
Why do I need life insurance?
What would happen to your loved ones if you were to die tomorrow, or even next year? Would they be able to pay the mortgage and the household bills, or would they struggle to get by without your salary? If you are worried how your partner or your family would cope financially in the event of your unexpected death, you should consider life insurance
Buildings & Contents
What should I include in my contents cover?
a rule of thumb, anything you’d take with you if you moved house should be included on your contents policy – including items like curtains and carpets.
It’s worth taking the time to go around your house from room to room and putting a reasonable value on everything.
It’s easy to underestimate the value of your contents, but it’s important to make sure you’re not underinsured.
Buildings & Contents
What is accidental damage cover and do I need it?
Most insurers define accidental damage as an unintentional one-off incident that harms your property or its contents.
Most standard policies cover key items like home entertainment, but there may be varying exclusions depending on your insurer.
Your need depends on your circumstances – many accidental damage claims come from people with young children.
It’s also important to know what’s covered under your standard policy. Checking the small print is the best way to make sure you’ve got adequate cover.
Buildings & Contents
Is it essential to have home insurance?
If you’re a homeowner, most mortgage lenders insist you have buildings cover in place to protect their investment.
You don’t usually need buildings cover if you’re renting, but you may want contents insurance to help cover the cost of replacing your things if you suffer a loss.
Buildings & Contents
What is home insurance?
Home insurance cover comes in two parts – buildings insurance and contents insurance. You can choose either one or both of these based on your needs.
Buildings cover insures your bricks and mortar for events like fire and weather damage, while contents cover could protect your belongings against problems like theft, damage and loss.
Buying a combined policy from the same insurer can often be cheaper than getting two separate policies.
Why does a normal home insurance policy not cover my rented property?
A traditional home insurance policy may not pay when the property is being used to make an income (for example when you are renting your property to tenants). Equally, Landlords Insurance provides additional cover such as Landlords Liability and Loss of Rent, which are not offered through normal home insurance policies. To ensure you are fully protected, it is recommended that you purchase a Landlord’s Insurance policy which is specifically designed for these circumstances.
Likewise it is always best to get Home Insurance if you move into your rented property yourself, as Landlords Insurance doesn’t cover you for this.
What is an offset mortgage?
Rather than trying to help people with their money needs, banks, building societies and other firms spend their time trying to sell you products. There’s often little thought put into what other products you may already have – the salesmen’s job is simply to pile another one on top.
Offset mortgages are a worthy attempt to address one consequence of that – the fact that people who have both cash savings and a large mortgage are not planning their finances in the most efficient way.
Savings rates compared to mortgage rates
This isn’t a difficult concept. Traditionally, most savings accounts have paid lower rates of interest than tended to be payable on mortgage borrowing (not surprisingly, since lenders use savings to lend to customers who need a mortgage). But if you’re earning less money on your savings than you’re paying out to service your mortgage interest costs, your overall wealth is effectively going backwards.
The simplest solution is to use your savings to pay a chunk off your mortgage – and to use all future surplus cash to pay down your home loan debt as quickly as possible. But that’s an option that doesn’t suit most people. They may have particular uses in mind for their savings – or, very sensibly, feel more comfortable with a rainy day fund on which to fall back in the event of an emergency.
Offset mortgages attempt to square that circle. They require you to pool your savings in one account with your mortgage debt. You can still draw down on the money when you need to, but in the meantime every penny of savings you have is used to reduce the total value of your outstanding mortgage – the sum on which your interest payments are calculated.
Over time, thanks to the benefits of compound interest, that can have substantial benefits, enabling you to pay off your mortgage in full much earlier than expected – and at a much lower total cost of borrowing than originally envisaged.
Offset mortgages are out of favour
Still, this approach doesn’t suit everyone. For one thing, it can prove complicated keeping track of your finances. While offset mortgage providers will ensure you get information on which pool of money is savings and which is mortgage debt, many people feel happier keeping them separate.
Also, in the current low interest rate environment, with base rates at all-time loans, the argument for the offset approach is not so clear cut. The difference between mortgage and savings rates is barely discernible.
There are also other things to consider when looking for the best mortgage deal. When thinking about which mortgage type would suit you the best you may find you would prefer a tracker, discount or fixed rate mortgage deal.
What is a standard variable rate mortgage?
It can be risky to stay on your lender’s standard variable rate mortgage
A standard variable rate mortgage (also known as an SVR or reversion rate mortgage) is a type of variable rate mortgage. The SVR is a lender’s ‘default’ rate – without any limited-term deals or discounts attached.
When a fixed, tracker or discount mortgage deal comes to an end, you will usually be transferred automatically onto your lender’s SVR.
A lender can raise or lower its SVR at any time – and as a borrower you have no control over what happens to it.
Who sets standard variable mortgage rates?
Standard variable rates tend to be influenced by changes in the level of the Bank of England’s base rate. However, a lender may also decide to change its SVR while the base rate remains unchanged.
Lenders’ standard variable rates typically range from around 2% above the base rate (currently set at 0.5%) to 5% above it or even more.
Standard variable rate mortgage benefits
For over two years, the Bank of England base rate has stood at an historic low of 0.5%. Most lenders have significantly cut their SVRs to reflect this.
So, if your previous mortgage deal has come to an end and you have been transferred onto a low SVR, you may be able to take advantage of that low rate by staying on it, and not looking for another deal.
Standard variable rate mortgage drawbacks
However, this is a very risky strategy – as a lender’s SVR offers no rate security. Several lenders hiked up their SVRs in the first few months of 2012, and more are expected to follow suit.
If you are on a tight budget and relying on your SVR to remain low, you’re in a very vulnerable position. In this case, it is very important you try to remortgage onto a fixed rate deal (which offers rate stability) before it’s too late.
What is a discount mortgage?
A discount mortgage is a type of variable rate mortgage. The term ‘discount’ is used because the interest rate is set at a certain ‘discount’ below the lender’s standard variable rate (SVR) for a set period of time. For example, if a lender has an SVR of 5% and the discount is 1%, the rate you’ll pay will be 4%. And if the SVR is raised to 6%, your discount rate will also rise – in this case to 5%.Discount mortgage deals typically last between two and five years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.
Discount mortgage benefits
Having a discount mortgage means you can be sure that your rate will always remain below your lender’s SVR, for the length of the deal.
In certain economic circumstances (for example, when SVRs are generally low as a result of a low base rate) this may mean your discount mortgage deal has a very low rate of interest.
Discount mortgage drawbacks
Because your discount rate tracks your lender’s SVR – and you have no control over what that SVR is – a discount mortgage does not offer much rate stability.
And borrowers with large discounts below their lenders’ SVR may be in a particularly vulnerable position when their discount mortgage deals come to an end. This is because they could face large and sudden rate hikes when they’re transferred onto their lenders’ SVRs.
So, if you’re on a tight budget and need your repayments to stay the same from month to month, it makes more sense to choose a fixed rate mortgage.
In addition, you may well face early repayment charges if you pull out of a discount mortgage deal before the end of the term.
What is a tracker rate mortgage?
A tracker mortgage is a type of variable rate mortgage. The interest rate tracks the Bank of England base rate at a set margin (for example, 1%) above or below it. Tracker mortgage deals can last for as little as one year, or as long as the total life of the loan. Once your tracker deal comes to an end, you’re likely to be automatically transferred on your lender’s standard variable rate (SVR). Typically, this will have a higher rate of interest.
Tracker mortgage benefits
In certain economic circumstances, borrowers can secure tracker mortgage deals with very low rates of interest. For example, with the current, historically low base rate of 0.5%, a +1% tracker mortgage would charge a rate of just 1.5% interest.
While your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it takes you to pay off your mortgage, and cutting the amount of interest you pay.
In addition, your rate is not dependent on the whim of your lender, it is not affected by changes in your lender’s SVR – just changes in the base rate.
Tracker mortgage drawbacks
On the other hand, as a variable deal, a tracker mortgage will not provide total rate security. If the base rate suddenly rises, so will the interest rate you pay.
This means that a tracker mortgage may not be suitable for someone on a tight budget, who needs to know exactly how much their monthly mortgage repayments will be. In these circumstances, it would make sense to choose a fixed rate mortgage instead.
If you want to leave a tracker mortgage deal before the end of the set term, you are also likely to be charged an early repayment fee.
What is a fixed rate mortgage?
A fixed rate mortgage can provide financial stability. With a fixed rate mortgage, the interest rate stays the same for a set period of time. This means that for every month during this set period, your mortgage repayments will remain the same. This is in contrast to a variable rate mortgage, which will go up or down in relation to the Bank of England base rate, or your lenders’ standard variable rate (SVR).The term of a fixed rate mortgage usually lasts between two to five years, but can be much longer. When this period comes to an end, your lender will typically transfer you automatically onto its SVR.
Fixed rate mortgage benefits
One of the main benefits of a fixed rate mortgage deal is the peace of mind it gives you. You know that during that set period your monthly mortgage repayments won’t rise, even if your lender’s SVR or the Bank of England base rate does.
This can help you to plan ahead and budget more easily for other household and day-to-day expenses, without being faced by nasty repayment surprises.
All this means that a fixed rate mortgage may be the right choice for you, if you’re on a tight budget and need the certainty and stability of a fixed monthly payment.
Fixed rate mortgage drawbacks
In the current low rate environment, where the next move in the Bank of England interest rate is expected to be upwards, fixed mortgages are a little more expensive than variable rate deals.
Furthermore, in the unlikely event that interest rates were to drop, customers on a fixed rate deal would not see any of the benefit.
The Financial Conduct Authority do not regulate some buy to let mortgages.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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