There is continued political focus on the level of house prices rising across the country and the impact this has on those who either want to get onto the ladder in the first place, or those who want to move on. Across the dispatch at Prime Minister’s Question Time, there has been a concerted focus from the Labour Party opposition on government plans for more affordable housing especially in London, and whether the country is anywhere close enough to reaching the numbers that are required going forward.
Of course, affordability has been a key word in the mortgage market for some time now, thrown into even greater prominence by the introduction of the Mortgage Market Review and the stricter criteria adopted by lenders. Looking forward however, are we working within sustainable margins when it comes to rising price values and the mortgages that are required to secure those properties? Much has been made about first-time buyers having to look at mortgage terms far in advance of 25 years and perhaps, in this sense, we will see a ‘new normal’ in the future with 30/35/40 year terms?
The point for mortgage advisers to grasp is that even with clients meeting the affordability requirements of lenders under the new regime, there is always a risk that a ‘one-off event’ will set them seriously off course in their ability to keep on paying that ‘affordable’ monthly amount. We often hear about the Bank of England wanting to have more borrowers on fixed-rate mortgages in order to cut down on any payment shock when rates do eventually go up, but what about those risks which will cause ‘mortgage grief’ regardless of whether the mortgage is a fixed, discount or tracker rate?
I’m talking of course about key life events such as unemployment, redundancy, illness, etc, which (at the time of the mortgage application) can’t be planned for or anticipated. No lender is going to stop a borrower securing a mortgage on the basis that some time in the future they might have a serious illness and not be able to work and earn. Instead, when these life events hit, for those who are unprotected they can hit spectacularly hard and we will all know of cases where such problems meant considerable monetary stress for all concerned.
In that sense, the adviser has an incredibly key role to play here in helping the client mitigate against such a risk. We are all too acutely aware that, at the time of the mortgage being arranged and a property being bought, the last thing on a client’s mind is the potential for their income to be taken away from them. However, this is a possibility and there should be no adviser shying away from pointing this out and helping the client put in place as much protection as possible in order to help them should the worst happen.
Often you will hear the argument – normally from advisers working in affluent areas – that their clients don’t need protecting because they are high-net worth and have plenty of cash in the bank to fund any lean times. I certainly don’t buy this – the need for protection cover is just as great, perhaps even more when you factor in the potential for very large mortgage debts that would need to be covered. Therefore, my view – and certainly the one we preach to our AR firms – is that mortgages and protection are two sides of the same coin. They go together like a horse and carriage, as the song goes, and there should be no dereliction or neglecting your protection-based advisory duties when we see clients.
Yes, the mortgage is the reason why they are speaking to you, however how will they view your service years down the line if the income protection or critical illness policy you recommended to them, eventually keeps them in their home? And how would you view that service as well? Compare it to those clients who walk away with no protection cover – I would suggest the feelings are completely different. Therefore, regardless of your resource or how busy you are taking care of the mortgage bread and butter, make sure you either take the time to give protection advice or introduce to those that can. The difference you can make with just a small amount of your time can be life-changing.
Richard Adams is managing director of Stonebridge Group
