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State benefits, mortgage protection and the importance of the ‘protection conversation’

Over recent weeks, there has been a significant increase in the number of stories in the press about the growth of the protection market. It makes sense; as the economy continues to recover, corresponding growth of the protection market would be expected as a consequence.

You may have noticed that in July’s Summer Budget, the Chancellor announced plans to reintroduce the 39-week waiting period for help from the Government’s ‘Support for Mortgage Interest’ scheme. Funded by the state, this initiative kicks in in cases where mortgage payments cannot be made because of illness or unemployment, and the individual is in receipt of income related welfare benefits. Those with longer memories will remember that SMI with a 39-week waiting period was in place before being reduced to 13 weeks in 2008 as a result of the financial crisis. The reintroduction was discussed in papers published by the Coalition in early 2013, but not implemented at that time. This change will take effect from 1 April 2016.

In addition, from April 2018 the nature of this help will change. Rather than being a non-refundable benefit, the sums paid by the state will become a loan, and interest will need to be paid on the debt as well as the outstanding capital amount. This gives claimants two options; firstly to repay the debt when they return to work, or alternatively to sell their home to repay the debt.

Currently those who qualify for SMI will get help paying the interest on up to £200,000 of their loan or mortgage. If they are in receipt of Pension Credit, the figure is £100,000, and the benefit is limited to two years for those who started to get SMI after 5 January 2009.

But what does this mean for borrowers? Those who are likely to be affected will have high loan to income ratios, and have purchased properties in recent years.

This also re-ignites the need to protect ongoing mortgage repayments, either by accumulating savings to cover any loss of income (self-insuring), or using the protection products available such as accident, sickness and unemployment cover, options on mortgage protection products or income protection (STIP or full cover). This is not a conversation from which advisers can shy away; the lessons learned from the problems associated with the sale of PPI must be taken on-board. Policies need to be sourced carefully and the client’s need and eligibility for that cover clearly ascertained at outset and for the foreseeable future. Clients must also be made aware that if their circumstances change, for example they change jobs or become self-employed, that there will be the need to re-visit the appropriateness of their cover (hopefully with their adviser). The majority of clients will not have the resources to self-insure; therefore the second option is likely to be preferable. Advisers should ensure that protection premiums are factored into the ‘budget’ conversation on loan repayments and the amount the clients can afford to borrow.

Published by Financial Reporter | Author Liz Coyle

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“Mortgage Tree showed me how to improve my credit rating as I had a few issues with my credit previously. As a result of their excellent advice I have now secured a mortgage at a great interest rate. They also helped me sort out life & critical illness cover which offers great protection for myself and my family. Mortgage Tree offers a fantastic service and I recommend them wholeheartedly.”

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Mortgage Tree - Mortgage Advisors York - Services & Standards

Mortgage Tree offers a nationwide mortgage broking service from our base near York, North Yorkshire. We specialise in mortgages and insurance. Whether you are a first time buyer or you are a buy to let investor with multiple properties, Mortgage Tree will ensure that you get the best products available.

We are a Whole Of Market broker which means that we will choose the best, most suitable mortgage for you from the hundreds available on the UK mortgage market. Our network also gets special discounted deals from lenders available only to our network.

We also provide insurance cover that will give you & your loved ones a blanket of protection that is so vital. We will endeavour to give you the best service that we can at all times.

Mortgage Tree is an appointed representative of Julian Harris Mortgages ltd which is authorised and regulated by the Financial Conduct Authority. Our FCA no. 304155

The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details of the FOS can be found on its website at www.financial-ombudsman.org.uk



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