In the rush to get onto the housing ladder, Ian Moffatt warns brokers not to let their customers forget the financial risks that come with homeownership
We’re a nation obsessed with homeownership. Around 70 per cent of households own their home and in the most recent British Social Attitudes survey almost 90 per cent of households said they would like to own their own home at some point.
The Labour government has clearly taken this on board. In its manifesto, it pledged that one million more people would own their own home by the end of this parliament.
Its latest initiative announced last month – Open Market HomeBuy – aims to help 100,000 families get onto the property ladder, allowing them to buy a share of between 50 and 75 per cent in the value of a home.
The major difference between this and the existing Social HomeBuy scheme is that it will also target non-‘keyworkers’ – in theory allowing any struggling would-be buyer an opportunity to enter the property market.
While the fine detail is being finalised in consultation with the industry, any initiative that brings new buyers into the market should be welcomed. However, it isn’t just a question of helping people get onto the property ladder.
The success of this and any future initiative supporting first-time buyers and homeowners across the board depends on homebuyers being able to maintain their mortgage repayments once they are in their homes – and this is where the problem lies.
None of the news reports in the national press – print or broadcast – have talked about the responsibilities that go hand-in-hand with homeownership.
Pitfalls of homeownership
The only pitfalls discussed are the potential restrictions in shared-ownership agreements concerning maintenance of the home and what happens when the shared homeowner wants to sell.
None of the reports look at the actual costs of buying the home under a conventional mortgage. Neither do they discuss the financial responsibilities that homeownership entails nor the fact that the homeowner has to wait nine months until they can seek government assistance in times of financial difficulty.
First-time buyers – particularly those on lower incomes – are arguably the most vulnerable to any downturn in the economy. They’re likely to have stretched themselves to the hilt to get onto the ladder in the first place.
They will have heard and read the statement ‘your home is at risk if you do not keep up the repayments’ throughout the mortgage process but how many of them think about what it really means?
What happens when they are hit by large unexpected bills such as the car breaking down or a maintenance charge on the property? Even if the property is in a block of flats and costs are shared, a new roof can run into thousands and represents a severe hit on the homeowner’s pocket.
What if the worse does happen and the new homeowner has an accident, falls ill or is made redundant? Nine months is a long time by anyone’s standards but given that the average household savings amount to only £750, there are very few who could cover that cost themselves. And let’s not kid ourselves that the risk of losing the home isn’t a real one.
Increasing consumer debt
UK consumers are in debt to the tune of £1 trillion – equivalent to £17,000 of debt for every man, woman and child – and there are signs of financial tension in the unsecured lending market which can in turn impact the secured lending sector.
The DTI’s Over Indebtedness Report last year revealed that 13 per cent of households are in arrears on either consumer credit or household bill commitments, corroborated by the fact that the Citizens Advice Bureau now deals with over a million consumer enquiries about debt issues each year.
Perhaps of greater concern is the level of personal bankruptcies in England and Wales which reached 13,229 in the first three months of 2005 – the highest for three decades.
In April, the Department of Constitutional Affairs (DCA) reported that applications for repossession have hit a ten-year high. The number of court orders authorising lenders to seize people’s homes surged to 14,048 in the first quarter of 2005 – a rise of almost 25 per cent compared to the same period in 2004 – and the number of court actions seeking repossession jumped to 25,869, the highest quarterly total under Labour.
Unemployment threat
The curb on the consumer’s appetite to spend is having a knock-on effect on retailers, putting thousands of jobs in this sector at risk, which in turn could impact the manufacturing industry. Job losses in these sectors could well hit the very people that the government is trying to assist the most.
It is more important than ever that first-time buyers understand the risks they’re exposed to and the options available to cover them. As the national news channels seem to ignore the issue until a major crisis hits, and given that close to 50 per cent of all mortgage cases are sold through intermediaries, the burden of consumer education is increasingly falling on the broker’s shoulders.
It is their responsibility to ensure that wherever possible the customer not only protects their mortgage repayments but also related expenses such as home insurance and the rental payment that must be paid to the lender.
Yet, they can’t do it alone. It is equally up to insurers to provide income and payment protection products that are flexible and affordable so that they meet individual circumstances and provide real value for money. Unless we provide the tools so that the intermediary can arrange the right safety net for each individual then we’re definitely doing too little.
Ian Moffatt is sales and marketing director at Assurant Solutions
