With the economy facing a tough period, brokers and borrowers should be examining the financial safety nets they have in place to cover outgoings in the case of changing circumstances.
The mortgage market is always hit hard when unemployment issues strike and this is something that every borrower needs be aware of and prepare for.
Borrowers need to assess how likely they are to lose their job and perhaps more importantly, how easy will it be to find a new one.
When the outlook is bleak, it is easy to become depressed about the future, but it is only at a time like this that borrowers think about how they might protect themselves should the unthinkable happen.
Unless they have adequate cover in place, meeting their financial obligations may become impossible should the worst happen.
Simple decisions
Mortgage payment protection insurance (MPPI) has been the subject of some negative press and there are ongoing investigations into the market which are likely to see significant changes brought to bear in 2008.
However, there are a number of simple decisions that need to be made. Do borrowers need cover? Much of this will depend on existing insurances, work benefits, employment status, medical history, potential state cover and their own financial position.
If the decision is made to take out MPPI, then the next decision is whether it should be a single or monthly premium policy. Single premium policies are often more expensive and borrowers have to pay interest on the premium they have paid upfront.
But on the plus side, cover is assured, and particularly in the case of borrowers who have a history of missing payments, a single premium creates a long-term financial safety net that they need not worry about.
However very often the cover will only last for five years and if bought alongside a mortgage will need to be renewed to ensure that insurance is in place throughout the loan’s entire term.
Monthly MPPI tends to be cheaper and a lot easier to cancel.
Discussing the options
MPPI should be taken seriously. Intermediaries need to be able to show they discussed the options available to the client and have a note of why protection was not organised.
If the client decided against it and felt it was not necessary then that is fine, but the intermediary must make this clear on the client file so there can be no dispute at a later date.
Payment protection insurance (PPI) is generally attracting compensation companies looking to help those who feel they have been mis-sold a policy.
While the incidence of mis-selling is lower for MPPI than other areas of the PPI market, dealing with complaints of this nature is both time consuming and expensive.
For intermediaries, the key is being able to clearly and swiftly set out their position, highlight the advice they gave and the reasoning behind it and so nip any complaints in the bud.
Good news, better value
The good news is that ongoing reviews into the MPPI market are likely to result in better value for money for consumers once the Competition Commission completes its research into the sector.
MPPI should become more affordable and better value and as such it will be a welcome safeguard that hopefully more consumers will be happy to consider and take out.
Criticisms of MPPI have forced the sector to take a long, hard look at itself.
Over the past year providers have been asking if they are developing and delivering products that actually meet marketplace demands. This desire to create more flexible products aimed at target audiences has seen the introduction of new-found innovation in the sector and some very competitive offerings.
Unfortunately, many of these products have remained a well-kept secret to many intermediaries who have stuck with the tried, and now not so trusted, method of linking the protection product with the originator of the loan or mortgage.
Following regulation, and the fact that the regulators have now put the PPI sector under close scrutiny, if you do decide to go with the lender’s products you must be able to demonstrate that this was the best decision for the individual customer. In many cases going down the road of the single premium product added to the loan will be difficult to justify.
The introduction of monthly rated, fully age-banded MPPI products has been a key development in this market. This has resulted in vastly reduced premiums for younger policy holders and these tend to be first-time buyers and therefore most at risk in the current economic climate.
Age-banded MPPI products can cut the cost of cover by nearly half for a 25-year-old in comparison with products sold by the lenders on the high street, and these should be first up for consideration before any other policy.
