First-time buyers are borrowing to the hilt as low interest rates fuel housing boom – but will they cope when the going gets tough?
MANCHESTER EVENING NEWS – 6TH MAY 2002 - 6TH MAY 2002
Just how far will the elastic-band finances of first-time home buyers stretch?
It’s a tough call to make, especially following the news that house-prices inflation last month hit a new high.
According to Nationwide, the biggest UK building society mortgage lender, house prices in April surged 3.4 per cent, the highest since its monthly records began in 1991 and well up on March’s modest 0.9 per cent rise.
Unfortunately, young people intent on leaving the nest and starting families of their own still have little option but to take a step on to the property ladder.
And sadly, it seems that there are far fewer safety nets to catch those same property virgins if their dreams collapse like a house of cards.
It doesn’t take a pessimist to point out the volatility of a market which only 10 years ago led thousands of families to lose their homes as they failed to keep up mortgage repayments on properties which slumped into negative equity.
Worse still, if jobs were to go as interest rates start to climb, how could overstretched borrowers maintain monthly mortgage repayments?
Simon Burgess, of independent payment protection insurance brokers Burgesses, which sells policies protecting homebuyers against accident, sickness and unemployment, says it is often too late to get cover when companies hit trouble.
When the Post Office announced it would be axing thousands of jobs, its soon-to-be-redundant workers with mortgages almost certainly lost the chance to arrange cover for repayments.
Employees of other firms in turmoil – Marconi, Arthur Andersen and dozens more in the financial sector – may have been in the same boat for months. Others will join them when their firms make the wrong sort of headlines.
Mr Burgess says: “If they have no savings, or no second income to buy valuable time, there is a serious risk of repossession.”
The Council of Mortgage Lenders confirms the government has weakened the safety net for homeowners who lose their jobs – thanks to reforms started by the Tories in 1995 and continued by Chancellor Gordon Brown.
The government extended from two months to 39 weeks the waiting period for entitlement to benefit help with mortgage interest payments.
In doing so, it has slashed the annual cost of state help with mortgage interest payments from more than £1.2billion in 1993 to £490million in 2000. The CML warns: “The full impact of the 1995 reforms have yet to be tested by significant economic downturn.
“But one of the key arguments for the reforms – the government’s belief that the former benefits system was preventing the development of private insurance to cover mortgage payments – is only partially borne out by events.”
Sales of mortgage payment protection insurance have grown steadily since 1998, but the CML says the take-up occurred largely because of better products, pricing and awareness, rather than because of benefit cutbacks.
Just 21 per cent of outstanding mortgages are protected by mortgage payment protection insurance – far short of the government’s target of 55 per cent by 2004.
But more than a third of mortgages (36 per cent) taken out in the last six months of 2001 were covered by mortgage payment protection insurance.
Recent borrowers are most likely to need mortgage payment protection insurance because lenders allow more time to homeowners in distress if they have a substantial amount of equity in their property.
The CML survey says competition between suppliers is cutting the cost of cover – from £7 per year for each £100 cover to £5.50 today.
In January, Nationwide building society announced that new borrowers taking mortgage payment protection insurance would get it free for the first 12 months. At the same time, The MarketPlace at Bradford & Bingley launched Payment Protection. Costing £4.90 for every £100 of mortgage covered, it guards against accident, sickness or unemployment – and even provides skilled advisers to help claimants find a new job.
But there are two problems which dent the charms of mortgage payment protection insurance. The first is policy small print, which enables many insurers to duck claims.
Mark Hayes-Newington, of The Research Department, the UK’s leading financial products research company, says: “If at the time of taking out cover, an employee had even the slightest knowledge that his or her company may be planning future redundancies, the insurer is likely to refuse payment on the policy.
“Even if the employee had no knowledge of possible redundancies, the insurer may refuse a claim if someone else in the office suspected redundancies or if there is evidence of an office rumour about downsizing.”
The other problem is price – mortgage payment protection insurance costs much more than it should do. Mr Burgess says some traditional mortgage lenders cream off 70-80 per cent of mortgage payment protection insurance premiums in commission. He fears homeowners waste more than £6billion a year on mortgage payment protection insurance by failing to find the cheapest deal.
