Keeping the wolves from your front door
NEWCASTLE JOURNAL - 14TH MAY 2002
Despite thousands having lost their homes in the 1990s few insure against sickness or unemployment
So long as house prices keep racing ahead, homebuyers can’t wait to bet their financial dreams on bricks and mortar.
But beneath the record total - £16.6bn of home loans granted in March – is an alarming statistic.
In February, first-time buyers borrowed an average £71,500. One month later, that figure had risen to £80,200 a 14% surge when annual wage inflation is 2-3% per year and many companies particularly in manufacturing, telecoms and financial services – are in financial distress.
The personal finances of young homebuyers are an elastic band stretched to the limit, and it isn’t only pessimists who await a painful snap.
If jobs were to go as interest rates start to climb, how could overstretched borrowers maintain monthly mortgage repayments?
Gary Styles, head of group economics at Halifax says: “The housing market has been very strong in recent months and the latest figures for April show further significant gains.
“Our economic assessment, however, is that house price inflation will ease over the course of this year as weaker income growth and higher unemployment reduces consumer confidence.”
Despite that chilling fact, many homebuyers today appear to be sleepwalking towards the abyss once again. During the depths of the recession a decade ago, mortgage lenders repossessed an average of 1,500 homes each week.
Yet while thousands of redundancies are being announced almost daily, most homebuyers have little protection against the risk of hard times.
Simon Burgess, of independent broker 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, it soon to be redundant workers with mortgages almost certainly lost the chance to arrange cover.
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.
Simon say: “If they have no savings, or no second income to buy valuable time, there is a serious risk of repossession.”
According to joint figures released by the Council of Mortgage Lenders and the Association of British Insurers only 22.5% of all home loans in the UK, or 2,534,000 borrowers, are protected by mortgage payment protection insurance – far short of the Government’s stated target of 55% by 2004.
As its name suggests mortgage payment protection insurance can meet home loan cost is and accident, sickness or unemployment prevents you from earning a living.
Since 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 – it’s never been more vital for borrowers to protect their home.
The Government has extended from two months to 39 weeks the waiting period for entitlement to benefit help with mortgage interest payments. In doing so, it as slashed the annual cost of state help with mortgage interest payments from more than 1.2bn in 1993 to £490 million 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 be events.
Sales of mortgage payment protection insurance have grown steadily since 1998 but the CML says the take up has occurred largely because of better products, pricing and awareness, rather than because of benefit cutbacks.
Mary Francis, the director general of the ABI says: “a house purchase is the single biggest investment most people are ever going to make and we are concerned that too few people are taking appropriate steps to protect the roof over their head.”
“It is normal for people to consider protecting their loved ones and their homes if they die but less common that people consider the consequences of not being able to work.”
The CML/ABI survey says competition between suppliers is cutting the average 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.
Thereafter it cost £4.99 per £100 of mortgage for 12 months with a 30 day excess period.
Cover for two years cost £5.99 per £100 with a 60 day excess period. But it is only available to Nationwide borrowers.
At the same time, The Market Place at Bradford and Bingley launched payment protection. Costing £4.90 per £100 of mortgage covered, it guards against accident, sickness and unemployment and even provides skilled advisers to help claimants find a new job.
Yorkshire Building Society offers six months free accident, sickness and unemployment cover on all new mortgages. Its mortgage payment protection insurance product comes in at £4.83 per £100 of cover.
A spokeswoman says YBS decided to a low rate of support the CML/ABI Government backed Sustainable Home Ownership Policy to raise the awareness of the need for mortgage payment protection insurance and as a result the organisation has a take up rate of almost 60%.
Simon Burgess says: “Every single person who is employed should seriously consider unemployment cover, because he or she has no real control over future income stream.
“Everybody is jumping on the bandwagon of low interest rates, failing to realise that we have a 40 year low in rates and that the economy is drastically overheating.”
“Even when people eventually qualify for state help, benefits only cover interest payments on the first £100,000 of the loan. Many buyers in southern England borrow much more than that.”
Gareth Riding is the marketing director for Southport based Paymentshield, the country’s largest provider of mortgage payment protection insurance which is sold mainly through independent financial advisers,
He confirms that on 22% of home owners have mortgage payment protection insurance but says the uptake among new borrowers has risen to 40%, still way below the Government 55% target but ‘getting better’.
Gareth believes the sign up rate is so low “Because it isn’t mandatory. People know they need to have both contents and buildings insurance and many will take out life assurance cover, but there is this feeling that mortgage payment protection insurance is unnecessary, that the worst will never happen and if it does that they will get help from elsewhere.”
“But we are betting between 15 and 20 calls a day from policyholders and are currently paying out on nearly 8,000 mortgages. Considering the relatively low uptake of mortgage payment protection insurance that is a considerable number of homeowners who have found themselves in trouble.”
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.
That’s the indication of Mark Hayes-Newington, of the Research Department, the UK’s leading financial products Research Company. He 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 in question had no knowledge whatsoever 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.
Simon burgess says some traditional mortgage lenders cream off 70-80% of mortgage payment protection insurance premiums in commission. He fears homeowners waste more than £6bn a year on mortgage payment protection insurance by failing to find the cheapest deal. Before you buy mortgage payment protection insurance, these are the key points to check.
• Go to an independent provider for a quote.
Burgesses charges £3.95 per £100 of the mortgage, while Nationwide charges £4.99, Abbey National £56.04 and Cheltenham & Gloucester 50[p per £1000 of your loan. This policy begins immediately if you are just claiming for sickness and accident but has a 60 day excess for unemployment. You will however, receive an additional 33 per £1,000 over and above the mortgage payment to help meet additional costs.
Other independent providers besides Burgesses, include Berkeley Alexander in Lewes and Paymentshield. The latter, which sells its policies through independent financial advisers, has various levels of cover starting at £3.45 per £100 of the mortgage with a 60 day excess period up to £3.95 per £100 which kicks in after 30 days.
But the firm also has a ‘back to day one’ option which costs £4.45 per £100 of cover and does as it says, backdates the payment to the day you lose your job after a waiting period of only 30 days.
• How much cover do you need?
Accident, sickness and unemployment can be insured against, but Simon burgess advises income and mortgage protection as employers with sick pay schemes may have disability dangers covered.
• Do you want cover for one or two years
The longer period costs an extra 50p per month per £100 of mortgage cover
• Study the policy small print before your buy:
Many policies have an initial exclusion period ranging from 16-120 days, but specialist brokers, like Paymentshield mentioned above, and Burgesses’, have policies to avoid this.
A small price to pay for family’s peace of mind
Paul and Elizabeth Gallagher moved to their new three bedroom house in Preston Grange, North Shields, a month ago.
Before the couple who have two children aged 10 and 14, lived in a two bedroom downstairs flat on Queen Alexandra Road, North Shields, But Paul 43 who drives lorries for a packaging company, says: “There just wasn’t enough room for all of us especially as our son is getting older and needed a room of his own.”
The move has more than doubled their mortgage, however, and while Elizabeth 42 works as a road safety officer for North Tyneside Council the couple were worried how they would stretch their finances should one of them lose their job.
The Gallagher’s have taken out a repayment mortgage with Yorkshire Building Society set at 5.72% for two years. The deal includes six months free accident, sickness and unemployment cover. But Paul says they would have taken out such a policy anyway and intends to carry on with the cover when the free period expires.
YBS’s mortgage payment protection insurance cost £4.83 per £100 of cover for the basic accident, sickness and unemployment package for 12 months. It is also flexible, allowing borrowers to mix and match their cover. For example, a borrower can have accident and sickness only, or they can have cover for 24 months and choose from payments to start after 30 days, 60 days and so on.
The Gallaghers have had five mortgages during their time together and this is the second time they have taken out mortgage payment protection insurance. Paul explains: “I have started out working on the buses and we never knew what was going to happen with the company. They kept saying there was the possibility of redundancies so I thought it was a good idea at that time to take out some sort of policy through our lender.
I never did get made redundant however. Then we moved house and took a mortgage out with a different company which didn’t offer mortgage payment protection insurance so we let it drop. Now we have bought this house and doubled our mortgage it seemed sensible to make sure we were covered again.
Both Elizabeth and myself are in our 40s and with two children to take care of we want to know we are going to be secure. The cover will cost us about £14 or £15 a month once the free period is over, but I think that is a small price to pay for security.”
