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Mortgage medicine

Research by NOP for the ABI found that one person in five believe they can

rely on the Government for financial support with their mortgage if they

were unable to work. What they did not realise was how long they would have

to wait. Whether buying a new home or remortgaging, borrowers whose loans

completed on or after October 1, 1995 have to wait 39 weeks for any help

from the state.

For people whose loans started earlier, the rules are a little more

generous – mortgage interest benefit starts after eight weeks, with

borrowers having half their interest paid for the next 18 weeks and the

full amount after that.

The state will only meet the interest costs. It will not pay off any

capital or contribute to other expenses, such as insurance premiums.

There are two other important restrictions. Only the first £100,000

borrowed qualifies for support and there is no help for anyone with savings

of £8,000 or more.

The Government admits that some 70 per cent of all homebuyers will not

qualify for income support.

In 1999, with the number of all borrowers covered by accident, sickness

and unemployment policies standing at only about 20 per cent, the

Government introduced the sustainable home ownership initiative to

emphasise to – gage borrowers that the onus is on them – with guidance from

their financial advisers – to provide for themselves.

The industry, in the shape of the ABI and CML, took up the baton and

introduced “baseline” minimum standards for mortgage payment protection

insurance policies covering the risks of accident, sickness and

unemployment.

There were two main aims. – to provide a minimum level of protection and

to increase the percentage of borrowers covered to more than 55 per cent by

2004.

The Government encourages borrowers to apply for this cover – the consumer

leaflet Take Cover for a Rainy Day, produced by the CML and the ABI

includes a strong Government endorsement

Lenders and intermediaries who are members of the mortgage code are

required to discuss MPPI cover as part of the advice process during the

mortgage sale.

Two recent pieces of research show there is cause for optimism that the

Government target is attainable if the problem continues to be addressed

more effectively.

The first, in March by the ABI, shows borrowers are receptive to this

cover but are ignorant about what the state provides – 46 per cent of

non-purchasers would have bought MPPI cover if they had been offered it or

if it had been explained to them better.

The other piece of research by York University Centre for Housing Policy

showed a huge diversity in the emphasis placed on MPPI cover by

intermediaries when discussing the insurance.

Firms which present MPPI as part of a comprehensive mortgage protection

package and go to some lengths to explain the need and its benefits achieve

a conversion rate of up to 90 per cent whereas success rates can fall as

low as 5 per cent if due emphasis is not given to MPPI.

The problem is that even MPPI policies which meet the baseline standards

are very basic. Benefits are payable for a limited period only, typically

for no more than a total of 12 months. That is adequate for unemployment

cover but how can borrowers unable to work through long-term illness or

injury manage when benefit payments come to an end?

Some 30 per cent of them – this is likely to be smaller among typical

higher-net-worth clients of IFAs – will qualify for state support with

their interest payments but what about the others? Even those who do

qualify may struggle to avoid going into arrears before the nine months are

up.

There are other problems which advisers may come across for clients with

existing MPPI/Asu cover sold by a lender. The existing premiums may be

inflated, with the lender using the high mar-gins to subsidise cut-price

mortgage interest rates.

Clients may not have been offered any choice when their MPPI cover was

being discussed and benefits may not have been tailored to any sick pay

arrangements.

IFAs can offer a real choice for MPPI cover. In addition to different Asu

packages from different insurers, they can offer versions of income

protection tailored to mortgage requirements.

Accident and sickness cover payouts can be for the full mortgage term if

incapacity continues rather than being limited to 12 or 24 months with the

short-term accident and sickness cover typically found in MPPI sold by

lenders.

Cover can be written on a deferred period of one or two months to ensure

it falls within the baseline product criteria and, for many in nonmanual

jobs, income protection mortgage cover combined with unemployment cover can

be cheaper than traditional Asu policies, costing £25-£30 a month

for £500 monthly benefit.

Another major benefit that IFAs can offer is MPPI cover that is not tied

to the loan. With borrowers remortgaging more frequently, portability of

cover needs to be brought much more to the fore. On remortgages, there is

normally a 120-day period after MPPI policies are taken out during which

any notice of unemployment will render the cover invalid.

Where cover is bought from a lender, each time a new lender is used and a

new MPPI policy effected, this qualification period will recur. If MPPI

cover is separate from the loan then no such requalification period is

required.

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