Protection cover should be part of mortgage affordability tests
Mark Graves is head of Pink network
We have just concluded our Q1 road shows and the main focus was on MMR. It always fascinates me how we can all read the same rules and words but interpret their meaning differently. Then again Formula 1 has been run like that for years; let’s see if Red Bull come up with the right answers again this year.
Back to our world, the main topic for me at our road shows has been around the affordability issue now that stress testing from a lender’s point of view is clear. The only problem is when lenders interpret the ‘clearness’ of it differently, so financial advisers could be in the situation of recording the cost of school blazers with one lender while another might be interested in bus fares. I do wonder where it may end. I’m not sure anyone would ever start a family if they had to fill out a budget planner first. How many however, will measure the client’s ability to pay for the protection they need to guarantee their mortgage payments as part of their stress test?
The fact is, we sacrifice non-essentials for our desire to own a home, but how do you put that on a Fact Find? No system is fool proof but I wonder what would happen if we fixed the interest rate not as we do at the moment for two or five years, but by the length of time you live in the house? That way we do know that as long as you don’t lose your job you can afford the payments (forget the family planning for a moment) so if you stay put for six years the rate is no greater than that used in the stress testing formula. That way lenders can focus on new clients without competing in a merry-go-round of re-mortgages. It also means the budget planner is based on the stress test rate currently on offer without having to second guess what they might be in three years’ time.
From an adviser’s point of view we can help ensure the client has income protection, critical illness cover and whatever other protection they need, sufficient to cover the mortgage payments and general day to day living costs. If their personal circumstances change we need to make sure their lifestyle (within reason) is maintained, as if a customer cannot afford the mortgage as well as the financial safety net of protection policies how do they pass stress testing and affordability?
In my opinion they don’t and should not be allowed to take out a new loan if they can’t afford the protection. This is different to saying they ‘have’ to take it out; I am saying they have to be able to ‘afford’ to take it out. It puts the onus on the adviser to explain the benefits of protection clearly, while giving the client an opportunity to write down why they do not want the products advised. If nothing else we can indentify clear training needs for advisers if a trend starts coming through.
The purpose has to be to see a reduction in re-possessions and customers making financial decisions using their head not the heart, when buying a house. Sacrificing protection cover by increasing the loan size should never be an option the client can make.