Can you add Insurance and Protection Costs to Your Mortgage?

Mortgages can be expensive at the outset, as there are lots of set-up costs involved in buying a home, not to mention ongoing costs, such as monthly repayments and insurance. We look at whether adding insurance costs to your mortgage borrowing is a possibility.

What insurance costs are involved in taking out a mortgage?

There are not always insurance costs involved in taking out a mortgage, however, many lenders insist that at least home building insurance is in place when you take out a mortgage.

Other types of insurance cover that are often taken out alongside a mortgage include:

• Mortgage payment protection insurance (MPPI) - which covers your monthly mortgage repayments if you become unable to work or lose your income while repaying your mortgage

• Mortgage life insurance - which pays out a lump sum to cover your mortgage if you die while repaying your mortgage - however, this is only usually recommended for those buying jointly with a partner, as it would help them to keep up with repayments after you pass

• Critical illness cover - this is not mortgage specific, but can be used to cover your mortgage repayments if you become critically ill while repaying your mortgage loan

• Income protection insurance - again, this is not specifically aimed at those with a mortgage, but as it replaces income if you become ill or have an accident and are unable to work, or sometimes if you lose your job, it is often used to repay a mortgage

• Landlord's insurance - If you’re a buy-to-let property owner you may need this type of cover for when your rental property is vacant, or if your tenants refuse to pay

How do you pay for mortgage-related insurance and protection policies?

Most insurance providers offer you the option to pay monthly premiums, or 1 annual fee for insurance and protection policies. Some may even offer discounts if you pay the costs annually or for multiple years. It’s often also cheaper to group multiple insurance policies together with the same provider.

However, when considered alongside all of the other costs involved with getting a mortgage, such as conveyancing, stamp duty, valuation fees, insurance is often considered an unnecessary additional cost, leaving you or your home vulnerable to unfortunate circumstances in the future.

Can these costs be added to your mortgage?

Some insurance costs can be added to a mortgage, for example MPPI, and some lender-imposed policies, such as building or landlord’s insurance, can be added to your monthly mortgage repayments. This is assuming you are not already using your maximum allowed LTV for the mortgage loan, and that the insurance policy is provided by either the lender or an affiliated insurance partner.

Keep in mind that this will mean that you are paying interest on these costs at the same rate as you’d be paying on your mortgage loan. This will add to the overall cost of your insurance, so it may negate any discount you would get for paying the annual fee in one lump sum.

However, as it also splits the costs throughout your mortgage, it can mean that your monthly costs are slightly lower than if you paid for the premiums separately, especially if you take out multiple policies over several years. This can make the costs of taking out mortgage protection policies less cumbersome, and allow you to protect yourself, your home, and your family when you’d otherwise have chosen not to.

Pros and cons of adding insurance to your mortgage

If you are considering rolling your insurance premiums into your mortgage borrowing, it is important to weigh up the advantages and disadvantages before making a decision.

The Pros:

• More manageable upfront costs: Buying a home comes with hefty set-up fees. Adding your insurance to your mortgage frees up cash for other immediate expenses, such as conveyancing, stamp duty, or valuation fees.

• Easier budgeting: Consolidating your insurance premiums and your mortgage into one single monthly repayment can make it easier to track and manage your household outgoings.

• Immediate peace of mind: It allows you to protect yourself, your family, and your home immediately, even if you wouldn't otherwise have the spare cash to pay an annual lump sum upfront.

The Cons:

• More expensive overall: Because you are adding the cost to your mortgage balance, you will pay interest on the insurance premiums for the entire term of the loan. This can significantly increase the total amount you repay over time and easily negate any discounts you received for paying an annual fee.

• Restricted choice of providers: You will usually be limited to policies provided directly by your lender or their affiliated insurance partners. This means you might miss out on more competitive rates or better coverage options found elsewhere on the open market.

• Impact on your LTV: Adding these costs increases your total borrowing. If you are already close to your maximum allowed Loan-to-Value (LTV), adding insurance costs might not be permitted by the lender, or it could push you into a higher interest rate bracket.

Ultimately, while adding these costs to your mortgage can make taking out protection policies less cumbersome in the short term, you should carefully consider the long-term financial impact.