Despite moves by the Council of Mortgage Lenders and the ABI to promote mortgage payment protection insurance take-up in the last year, there is still debate over the benefit of this protection.
Latest figures from the CML show there is an increasing trend of people taking out cover to protect themselves. In the first six months of last year, 32 per cent of mortgages advanced in that period were protected by insurance compared with 29 per cent in the pre-vious six months.
The vast majority of these policies were provided by lenders. However, nearly 69,000 policies (over 26 per cent of all those sold) were provided through intermediaries.
What these figures illustrate is that there is clearly a role for IFAs when it comes to advising borrowers about protection for their mortgage payments. What this advice will be varies from from those in full-time employ-ment to the self-employed or those with a poor credit record.
The Government's Green Paper, Quality and Choice, a Decent Home for All, clearly encourages the take-up of MPPI. Adequate protection from the state can no longer be guaranteed for the long term in the event of borrowers being unable to repay their mortgage.
The ABI, the CML and the Government highlight key reasons why borrowers should be considering MPPI, such as borrowers not having enough alternative cover such as permanent health insurance or life insurance.
Statistics indicate just how many people may be at risk from failing to meet mortgage payments. Nearly 700 people a day are made redundant in the UK, according to the Department of Social Security. Of the total unemployed, 60 per cent have been out of work for six months and 38 per cent for more than a year.
Not all these people will have mortgages and not all will have difficulties meeting payments. But MPPI can provide security for property owners who are concerned about payments in the event of any of the above occurring.
There are a variety of MPPI policies and advisers can help clients who may be confused by the variety of plans. The mortgage code also makes it a necessity for advisers to explain mortgage protection cover.
However, borrowers need to be wary of taking policies that are not necessary. Exclusion clauses in policies can include unemployment cover for those on short-term contracts or little sickness cover for progressive disabilities.
Much of the past bad press about MPPI or Asu policies has come as a result of historically poor deals for borrowers, including the overpricing of products and excessive exclusion clauses such as those listed above.
How does the issue of MPPI fit into the sub-prime or non-conforming market? Borrowers with non-standard lenders will generally have impaired credit records. This can result from a number of reasons, including losing their job, bankruptcy, divorce, having joint debts with a partner who is credit impaired or simply having difficulties managing debts in the past.
Non-conforming borrowers may have an impaired credit record as a result of many of the events that MPPI sets out to cover. If these borrowers have no other source of income, they may find themselves in financial difficulties and unable to meet commitments and damage their credit record.
When a borrower arrives at this point, the realistic option for house purchase is a non-conforming lender which offers the skills and experience to manage this type of loan. But how does MPPI fit into the picture?
Brokers need to bear in mind that MPPI is an insurance, not a guarantee, and brokers need to make this clear to clients.
For non-conforming borrowers, MPPI can be an appealing option in that it goes some way to ensuring that an unforeseen incident will not prevent them from paying their mortgage in the future and incurring further debts.
However, an MPPI policy does not mean the borrower is able to abdicate responsibility.
It is still a non-conforming lender's under writing policy that assesses the borrower's ability to repay a loan and having MPPI will not affect this decision. Bearing in mind this type of borrower's credit history, it would be sensible to assume cover may well cost more.
However, this is not the case and MPPI policies should cost the same for sub-prime borrowers as for prime borrowers.
What does determine the premium is how much commission the seller of the product decides to add on or, if sold direct from the product provider, how much commission they will add.
Sub-prime borrowers are not treated differently from prime borrowers for MPPI because the insurance covers very specific things such as losing income mainly through accident, sickness and unemployment – mainly redundancy.
These are things that can affect any borrower, regardless of their credit record. The only instance that MPPI providers would be slightly concerned about paying out would be in the case of self-employed borrowers who became bankrupt. Providers would want to ensure that MPPI was taken out long before the borrower was aware of the possibility of becoming bankrupt.
Sub-prime borrowers should do all they can to protect themselves against future financial difficulties and MPPI can give them this type of security. Some non-conforming lenders already offer the facility free to borrowers.Brokers need to research the market thoroughly to ensure they are giving best advice.