Protection advisers are struggling to arrange life cover for borrowers who have bought through Help to Buy 1.
Under the first phase of Help to Buy, which launched in April 2013, borrowers with a 5 per cent deposit hoping to buy a new-build property can secure a Government loan worth up to 20 per cent of the property value. The loan is interest-free for five years and repayable on sale, with borrowers paying back 20 per cent of the sale price.
Last month, the Government extended Help to Buy 1 until 2020.
Plan Money director Peter Chadborn says: “On a regular repayment mortgage, we would arrange either a level term or a decreasing term policy. Obviously, as a borrower repays capital, the outstanding obligation is going down.
“But with the Help to Buy equity loan, there is a rising obligation attached to the mortgage. The 20 per cent that must be repaid to the Government will almost certainly be worth more at the point of sale than it was at the time of purchasing the property, so what do we do for that?”
Chadborn says advisers will be reluctant to “over-insure” clients for fear of a regulatory backlash in the future.
London & Country sales director Michael Aldridge says: “The Government should not be waiting for advisers to ask questions on this. There should definitely have been some guidance on this a year ago when the scheme was launched.”
He adds that the extension of Help to Buy 1 means the creation of a tailored life cover product for the scheme “makes more sense than ever”.
PruProtect head of account development Phil Jeynes says: “We always try to design protection products which meet specific client needs. But creating a product based on a particular Government initiative could prove difficult given that there are no guarantees on how long the initiative might remain in place.”
There is no clear answer as to how to arrange life cover against a Help to Buy 1 mortgage other than to arrange a plan based on the worst-case scenario and the highest amount that would realistically have to be paid back at the end of the term.
Advisers may over-insure clients in some cases but that is why we have strict affordability letters to outline what you are arranging and why. It is always going to be preferable to err on the side of caution but sadly, regulatory pressures often get in the way of common-sense advice.
Alan Lakey is partner at Highclere Financial Services