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Protection advisers struggle to arrange Help to Buy life cover

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.”

ADVISER VIEW

Alan Lakey

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

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. A mortgage brokerage I know offers only Level Term cover for its life and CI cover for all mortgage sales (I have massive concerns with this and I am sure many will agree there are TCF and regulatory issues at large here – but I am not sure this is the forum to discuss this!) – however they would continue to argue that this would be an answer to the points raised here in that the level cover ‘could’ cover the shortfall by any potential rise in value.

    My personal thought is that the brokerage is wrong on both counts in that offering only level term cover (and also from just 1 provider) is not offering the correct solution to the client in a large amount of cases.

    I wondered what others think of this practice and if they felt it was a viable solution?

  2. The life cover is needed to cover the debt, the mortgage is cover by level or DTA, so when the client dies the mortgage is paid off. The second debt, the government loan, needs to be repaid on sale of the property and only increases if the value of the property increases. If the property value increases then there is more equity to repay this debt, why do you need life cover to protect this increase when it will be repaid from equity? By all means cover the potential interest payments with income benefit plan but why would you need to cover the increase?

  3. This is similar to what we have experienced with shared equity mortgages where you can’t be sure how much needs to be paid back. The best solution we have is to have normal decreasing term for the mortgage amount with a level term either index linked or with a reasonable % applied to cope with equity increases over a medium term.But its always going to be a compormise.For most customers, life only cover is cheap so if you have to estimate then the costs aren’t usually that great.

  4. Philip Roberts 4th April 2014 at 2:16 pm

    If the mortgage balance increases as a result of the scheme, couldn’t this be simply addressed by using the Guaranteed Insurability Option available on many Protection Policies?

  5. We're all doomed!!!!! 4th April 2014 at 2:45 pm

    Simple – DTA for the Mortgage, and level term with increasing benefit for the 20% HTB amount.

    As long as you clearly document why you are doing this, and the risks involved (property price inflation may exceed RPI, and therefore not cover the increase in the HTB liability – in which case you may consider advising a higher sum assured), then you have done a good job.

    With regards to the firm that only ever advises on LTA, the FCA will catch up with them soon enough – there is no way they can justify a blanket approach to this.

  6. @Andy, the equity loan needs protecting if the homeowner wants their family to continue living in the house. If there’s no family then there may not be a need for either debt to be protected (on death sell house, 20% extinquishes the equity loan, 80% to redeem the mortgage, hopefully with change to spare for a funeral.)

  7. One problem ….. so many solutions. Is that not why we have mortgage and protection “advisers”

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