Alexander Burgess is a director of British Money
2014 will be a good year for lenders. There appears to be an increasing consumer appetite for mortgages – buoyed up by the fastest growing economy since 2007 and the Government’s Help to Buy Scheme. But as mortgage lending grows, so too will the ever-widening protection gap.
According to non-partisan UK think-tank ResPublica, around 96% of people with loans from UK lenders are without a financial support mechanism to meet their financial commitments in the event of a lost income due to an accident, sickness or unemployment. The authors of its Green Paper on Risk Waiver also estimate one in five who become unemployed will be in severe financial difficulties within a month and over half will spiral into debt within three months.
This comes as no surprise. Householders have used what surplus they may have on higher everyday living costs, depleting their much-needed ‘savings pots’. The Report suggests in real terms, workers are earning no more than they were 10 years ago and those on low incomes will not see a return to their 2008 income levels until 2018.
Worryingly, many believe state benefits will provide them with a financial prop; however in the future only a small proportion of borrowers are likely to receive any payouts, and those that do will have to pay them back.
In the spring of 2015, the Government is changing its Support for Mortgage Interest Scheme from a benefit into a loan. Not only will it claw back any payments made to claimants, with interest, when they sell their home or die, but the DWP intends to increase the waiting period from 13 weeks to 39 and reduce the capital limit from £200,000 to £100,000.
This will have severe repercussions for borrowers who rely on the £400m or so of benefits they already receive to help meet their mortgage repayments. With no credible products readily available to bridge their protection gap an increase in arrears and repossessions is inevitable.
Lenders and borrowers are suffering from a general malaise; lenders fearful of financial repercussions are losing a huge percentage of what was a lucrative income stream and borrowers remain sceptical about whether any protection product will pay out.
There is, however, an opportunity to be a catalyst for change and offer mortgage insurance that will indeed pay claims. Given there’s a clear correlation between the profitability of loans and mortgage insurance - one respondent when submitting evidence to the Competition Commission investigation into PPI mis-selling suggested ‘personal loans would be unprofitable without the income from PPI’ – can you afford not to consider my newly-developed product?
It’s a win, win scenario; we will be seen to be supporting an increasing number of borrowers left without State support, it will revitalise consumers’ appetite for what is essential cover, restore their confidence in this much-maligned area and as the ‘white label’ provider, enhance your reputation. It also answers the FCA’s calls for greater customer focus.
