Last month, one of our newest building societies launched the UK’s first ever mortgage waiver product, offering built-in unemployment protection for borrowers.
This means that the borrower is guaranteed up to six months’ redundancy protection in case of job loss through no fault of their own and as the waiver is provided through a combined liability insurance policy to the building society, the liability is taken off the lender’s books once the firm has verified the circumstances of the redundancy.
It’s a neat marketing message for a lender looking to drum up new business to would-be borrowers: we promise to cancel mortgage payments if an event such as unemployment occurs. The borrower doesn’t face the worry of missed payments or getting into arrears and ultimately damaging their credit rating.
Waivers are already in use in the UK with credit agreements, particularly in the car financing arena. Hmmm, wasn’t that a sector involved in the murky waters of payment protection insurance on personal loans?
And is this mortgage payment protection in a different guise and therefore subject to the new rules of selling short-term protection? Well it seems as if the building society has found a nice way of side-stepping the rules. As it is a contingent liability policy, the beneficiary of the actual insurance policy is the lender rather than the policyholder as is the case in traditional PPI.
However, as a contingent liability policy with the pecuniary benefit lying with the lender, what’s to stop them making a claim and charging the customer? Having reviewed the material that is publicly available on this product, I’m not clear but that’s a question that I would be asking on my client’s behalf if I were the broker.
Playing the devil’s advocate, there are a few other questions worth posing.
I know the building society says there is no cost to the customer as it is built in to the overall product offering, but by definition there must be a cost and is it fair that those who do not qualify for the cover – so the self employed perhaps (that’s another question to ask!) – carry the cost as well?
And what happens if the period of involuntary unemployment stretches beyond the six month timeframe? Crunching a few numbers, it seems as though around 15% are unemployed between 15 and 26 weeks and almost a third for 27+ weeks. Does the lender in this case offer additional cover or should the broker recommend that despite the built-in protection, clients interested in this product should still look at alternative ways to protect their mortgage payments should the worse happen?
Don’t get me wrong, I’m all for innovation – particularly when it comes to mortgage protection products which took a battering and are still widely viewed with distrust by consumers. And it is that distrust the market has to keep top of mind in introducing new propositions. It simply has to get it right. There is no margin for error either in the eyes of the consumer or the regulator.
The proof, as they say, will be in the pudding. It’ll be interesting to see what happens when push comes to shove and borrowers availing themselves of this particular mortgage actually have to use the protection element. If they encounter any difficulties and complaints start to mount, then I would imagine the regulator won’t hesitate to take action regardless of whether it is or isn’t PPI.
While it’s good to see a lender taking the initiative, I’ll be interested to see how long this particular product survives. In the meantime, I would encourage intermediaries to continue to discuss all the protection options available to their clients –it’s not a one size fits all product after all!
Kevin Paterson is managing director of Source Insurance
