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How do we increase borrower protection?

The Building Societies Association says a Government drive to increase take-up of protection to meet mortgage payments and other debts could help struggling borrowers.

The BSA first published a report in November 2010 examining safety nets for borrowers and published a follow-up report in February detailing the Government and industry’s response.

Last week, the BSA issued its final report which sets out a range of proposals.

One recommendation is for the Government to encourage take-up of insurance to cover mortgage payments, either through mortgage payment protection insurance or an income protection-style product.

Author of the report Colette Best argues that if every borrower had to have insurance, it would be perceived as “a tax on mortgages”. Instead, she would like to see the industry concentrate on increasing the number of people with cover.

She acknowledges it would be difficult to convince borrowers to take out insurance in the wake of the payment protection insurance misselling debacle. MPPI was included in the Competition Commission market order which requires that PPI can only be sold seven days after a mortgage is arranged. Best says this will make it much less likely that borrowers will take out a policy. She says: “The Government and the industry should continue to petition the Competition Commission for MPPI to be treated differently from other types of PPI. We would especially encourage the Office of Fair Trading to keep a watching brief on take-up rates of protection insurance once the Competition Commission order comes into force and consider revoking it if it is significantly and adversely affecting the take-up of protection insurance.”

Best also thinks there could be scope for a transparent income protection product to be developed as part of the Treasury’s work on simple financial products. She says this would have to be affordable and provide value without excessive conditions and exclusions.

Another option put forward is for lenders to insure against mortgage payments not being met. Best says although lender insurance could push up rates, this could still work out cheaper for the customer.

Finally, Best suggests that savings products could be developed for borrowers to draw on in the event of payment difficulties. Borrowers would be able to access these savings but with penalties for withdrawals. Lenders could either offer interest on the savings or allow them to be offset against the mortgage.

The Council of Mortgage Lenders agrees that policymakers ought to be focusing on protection to help borrowers avoid repossession.

A spokeswoman says: “The debate has tended to focus on whether there should be some element of compulsion for borrower protection. We are relatively anti-compulsion, because some people who do not need it would end up paying for it. But on the other hand, the level of voluntary take-up and the appetite to promote protection products is much lower than would be desirable in a market that is working well.”

Chartwell Funding managing director Robert Winfield says instead of an insurance policy, borrowers should have to overpay their mortgage each month to build up emergency funding.

He says: “The problem with insurance is if you do not make a claim, you do not get your money back. With this idea, people can see the money they are building up and if they do not claim they would receive their money back at the end of the mortgage term.”


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