I am a protection and mortgage IFA with a few clients looking at Help to Buy. How can I arrange protection insurance for them such as life cover? I understand there have been difficulties in putting cover in place - is this the case, and what do I need to know about Help to Buy?
Dean Mason, Masons Financial Planning
Brokers have had mixed experiences with Help to Buy, and it certainly doesn’t seem to be a perfect fit with the Mortgage Market Review now that it is upon us.
Arranging protection for HTB2 (a mortgage guarantee scheme) is not a problem as, from the client’s perspective, it is simply a 95% mortgage with the government going to the bank behind the scenes, so straightforward protection advice can be given.
I don’t deal with a lot of new builds, but I can see some issues with ascertaining the correct sum assured on the ‘Help to Buy 1’ scheme for new builds.
This is because the government provides a 20% equity loan to the borrower, which is interest free until year six when an annual charge of 1.75% is charged on a scale rising with the Retail Price Index each year thereafter.
In the ideal world it requires a specific protection product, such as Gift Inter Vivos for Capital Gains Tax, but Help to Buy will be short-lived, albeit with a high volume of uptake thus far, and this is probably not financially viable.
The advice for now must centre around how long the client intends to live in the property and what the total debt might be at that time. Maybe you could implement level or even increasing term assurance (rather than the traditional decreasing term) covering the mortgage amount and the equity loan, but you are always going to be shooting in the dark for the perfect cover amount.
Peter Hamilton, Zurich
Help to Buy means potential purchasers can get up to 20% as a government loan on new-build properties costing up to £600,000. It’s interest free for five years.
Subsequently the buyer can purchase the remaining 20% of the property from the government, and the equity loan must be repaid after 25 years or earlier if the buyer sells the home.
The key challenge from a protection perspective is tying the sum assured to the outstanding debt, and the fact that the debt potentially rises with increases in the value of the property.
Commonly, mortgage cover would be taken out on a level or decreasing basis. It’s not easy to tailor the exact cover where the ultimate liability is dependent on the future rise (or fall) in house prices. In practice, it makes sense to plan for the worst that might happen with the debt – there may be a danger of providing for more than the mortgage. The vast majority of customers will need protection beyond the mortgage.
It provides a good opportunity to have a discussion about protection that goes beyond simply ensuring the mortgage will be paid off and into the benefits of broader cover. It will be important to explain and document the rationale for clients.
Additionally, MMR highlights the need for clients to consider future affordability, not just if interest rates rise but also if they are unable to work long term due to illness or injury. Good protection advice has never been more important.
Mike Allison, Paradigm Protect
When you get changes to any kind of regime or system, there are going to be teething issues. In general terms, even if it takes from two to three months to get a mortgage through Help to Buy, that is an adequate time for advisers to make sure they are covering any liabilities.
Brokers should make clients aware of the risks of going into a mortgage for the first time, looking carefully at life cover, critical illness and income protection. If any of those eventualities occur, there is potential for the property to be repossessed.
Those taking out Help to Buy are going to be first‑time buyers at the younger end of the scale and, in theory, should get life cover accepted quickly.
A number of advisers in the Paradigm Group are employing just protection specialists in their business now, so they can concentrate on mortgages and pass the protection cases to them. These opportunities will grow a protection market that has been pretty flat in recent years.
Any positive move in the mortgage market, such as Help to Buy, should always be a way for firms to look at protection for clients – there should be a consummate increase.
A broker should be sitting down and looking at individual liabilities for each client. If it’s a short-term issue, help them ease into buying protection by looking at low-start premiums that rise gently over the term of the mortgage and keep the initial cost low at the most expensive time to take it out.