Let the buyer beware
MORTGAGE SOLUTIONS - 18TH JUNE 2007
As borrowers come off fixed rates and interest rate increases bite, they should be encouraged to protect mortgage payments, says Simon Burgess.
So, the Bank of England base rate has been maintained at 5.5%. this will be welcome news for borrowers across the mortgage market, but there is no doubt that the 1% rise we have seen since last summer is beginning to hit home.
However, the truth of the matter is that incremental rises in interest rates have little impact in the short term. The majority of borrowers have fixed their mortgage on a two-year deal and have thus insulated themselves from the immediate effects any movement in rates might have. This is all very well while they remain under the umbrella of protection afforded by their mortgage deal, but once it comes to an end many borrowers are going to be in for a real shock.
Mortgage Advice Bureau believes that almost 180,000 borrowers who took out a mortgage in 2005 will face a combined uplift in their monthly mortgage payments of over £33m as their existing agreements come to an end and they are put on to standard variable rates.
There is little doubt that footing such a bill is going to bite hard into the wallets of these borrowers and it raises a number of questions. In the first instance, how likely is it that these borrowers will actually end up paying the standard variable rate (SVR)? Certainly, if their mortgage was arranged through a broker, one would hope these same brokers were getting back in touch, to alert them of the problems ahead and rearranging finance at a substantially better rate than the SVR they are heading towards.
If borrowers have organised their mortgaged directly, there is a bigger chance of them running into much steeper payments. One wonders if the banks and building societies will be as active in getting their borrowers onto new deals as the broking community, and if not, it would certainly seem to raise questions over the fair treatment of their customers.
Even if borrowers do steer clear of the SVR, they are still going to face a hike in their monthly mortgage payments, as the products they currently have are simply no longer available. As the future is likely to yield further rate rises, there is surely an increasing obligation on brokers and lenders to discuss protection insurance with their clients.
Stretched finances
According to the National Housing and Planning Advice Unit, average house prices were 7 x salary levels in 2006, and the news must make depressing reading for young buyers in the market.
In this environment, protection insurance is becoming increasingly central to the needs of borrowers, as they have to stretch their finances further. In light of this, it was surprising to hear Paul Dawson, head of Sesame Learning, cite research that claimed only 42% of mortgage advisers regularly sold protection insurance when advising on mortgages. One wonders what is holding them back.
There is no doubt that many view the main stream mortgage protection insurance policies on offer with little more than disdain, but there are alternatives, which are both more flexible and affordable. The same is true of income protection insurance, which provides a wider level of cover and depending on where it is sourced, can offer excellent value and attractive criteria.
Making sure that borrowers can cope with the extra pressure on their finances as they navigate their way over and around the hurdles that life throws at them has to be the responsibility of mortgage lenders and advisers across the market.
As such, not only should protection be high on the list of priorities when it comes to client interviews, but taking the time to seek out the best products in the market will allow clients to protect themselves at a price they can afford, helping us to close the protection gap which has developed over the years.
