Current conditions in the housing market suggest it is the perfect time for borrowers to take out mortgage protection, yet sales remain slow. Edward Murray looks at the reasons for this malaise
Like an aeroplane coming in to a stormy airport, the housing market briefly touched down last year, before aborting the landing and heading back to the skies to try again.
Many felt the market would be able to stabilise, but the latent momentum still held in the market has seen it outperform any of the forecasts made at the beginning of the year and given rise to murmuring concerns for the future. Sales of mortgage payment protection insurance (MPPI) have also been through turbulent times, and there is much debate on how the protection and mortgage markets can continue to combine.
Looking at figures from the Halifax House Price Index, the annual rate of inflation stood at 9.1% in May of this year. This was the highest figure since March 2005 and, although the rate of inflation over the month of May was only 0.1%, the cumulative effect of rises throughout the first half of 2006 has defied all expectations.
At the beginning of the year it would have been difficult to find anyone prepared to bet on an annual rise in house prices of more than 4%. The Council of Mortgage Lenders (CML) forecast a 2% rise as recently as February and has since revised this to 7%. The trade association has also bumped its forecast for 2007 up from 2% to 3%, giving some idea of the momentum it feels the market has now gathered.
However, it is not only house prices that are on the move, but also the amounts being lent and the volumes of transactions going through the market. The CML had predicted there would be 970,000 property sales during 2006, but this figure has been revised to 1.2m. Looking at how this will impact the gross lending figures for the year, the CML has boosted its initial prediction of £285bn up to £310bn - although it still maintains that its estimate of £285bn for 2007 is sound. In terms of net lending - figures after remortgaging and equity release have been taken out - the CML believes the market will hit £100bn this year, up from the £80bn forecast, and then hit £85bn next year, up from the £75bn forecast.
The housing market may not yet be out of control, but it certainly merits the closest possible monitoring from all quarters. A careful eye also needs to be kept on the rising arrears and repossessions that are beginning to become a feature of the current and, indeed, future market - though these are a long way off from the highs of the early 1990s.
The CML now believes there will be 130,000 rather than 120,000 mortgages in arrears of more than three months by the end of 2007 and that repossessions for both this year and next year will hit 15,000 rather than the 12,000 previously predicted in each year. If this is coupled with the fact that unemployment has also begun to creep up and interest rates are more likely to move in the same direction, then it is easy to see the beginnings of problems for many homeowners in the market.
As far as protection providers are concerned, this increasing risk typifies the need for the insurance products they are selling. Diminishing sales of MPPI suggest a failing in the market that is deterring borrowers from taking on the protection they are more likely to need in the coming months. Figures produced by the Post Office in its independent review of the payment protection insurance market show that sales of MPPI have dropped dramatically since 2003. In that year, 926,100 new policies were sold, accounting for 33% of new mortgages. The following year 708,000 policies were sold, covering 27% of new mortgages while in 2005 only 537,600 policies were put in place to cover 25% of new mortgages. Overall, there were 2.45m MPPI policies in place at the end of 2005 providing cover for a total of 21% of existing mortgages. Opinions vary on the blanket level of MPPI cover needed to really afford the type of protection that individual mortgage borrowers will need. However, when the Sustainable Home Ownership initiative was launched in 1999, the target figure for MPPI penetration was 55%, which shows the protection gap that exists.
The key question for MPPI providers and intermediaries is how they turn a falling appetite for the product around. The Association of British Insurers and the CML are currently working to revise the baseline standard that is in place for MPPI, which should help attract clients if sufficient move is made on the existing standard. At the moment, a 60-day exclusion is in place and serious thought needs to be given to ruling out exclusions altogether.
If clients are in the position to personally cover one or two months when they are out of work then they should be able to opt for exclusions, to tailor the protection for themselves. As a standard, policies that hold no exclusions would provide a much more effective level of cover for those in tight financial circumstances. It would ensure that having to bear the brunt of 60 days worth of mortgage payments did not push policyholders into arrears, as is currently happening in many instances, and make the policies more attractive to a wider market.
It is also important that accident, sickness and unemployment cover, which is normally sold together, is split-up to allow it to be tailored to specific circumstances and ensure that basic levels of cover can be introduced, to help as many homeowners as possible. Indeed, speaking earlier this year, CML director general Michael Coogan said: "Now would be a good time for borrowers to review their financial commitments. Cutting unnecessary spending, ensuring you have a suitable mortgage deal, and taking out suitable insurance such as MPPI could make the difference between coping and falling into trouble."
Providers and intermediaries need to make the products that are on offer as attractive as possible and try to remove the worst offenders from the market. To this end, removing single premium policies would have to be a start. Admittedly, they are very much in the minority of all policies sold and only really occur in the sub-prime market. But given that independent commentators and the likes of the British Insurance Brokers' Association have called for them to be abolished, it would seem an opportunity to send out a positive signal to clients that the market is really pushing hard to deliver across the board.
The mortgage market is one of the most competitive financial markets in the country, yet MPPI policies, which are the most common products sold alongside a mortgage, do not represent good value at the more expensive end of the market. If the MPPI market was truly competitive then the differential between the best and worst cover would be much smaller than it is at present. Numerous pieces of research have been done by the likes of Moneyfacts and Defaqto and it is not uncommon for policies offering the same level of cover to be two or three times more expensive than each other.
Rachel McKay, a mortgage analyst at Moneyfacts, believes too many clients take out MPPI with their mortgage provider as a matter of course and need to be educated to shop around. She says: "There is a mindset that needs to be broken, as while people are getting used to shopping around to save on car insurance, home insurance, utility providers and credit cards - they need to be made aware that there are alternative providers of MPPI offering equal levels of cover, but at a much reduced cost."
The real problem for the long-term future of the market is that the larger providers who currently control the lion's share of the distribution are loath to cut rates on products that are delivering them such healthy profits.
Although the fasten seatbelt sign may have come on for the MPPI market, both providers and intermediaries have the power to ensure that nothing more than light turbulence lies ahead. If, however, the status quo is maintained a crash landing looms on the horizon.
MPPI vs Income Protection
MPPI is not the only way to protect mortgage payments; many believe an income protection (IP) policy offers better cover. There is not a right or wrong way to do this, so advisers need to pay attention to their clients' needs to ensure they get what they need at the price they can afford.
An MPPI policy will typically pay out for 12 months and cover will not be determined on occupation or health records. However, it will have exclusions, often for the likes of backache and stress, which are common reasons for individuals to be off work.
Alternatively, an IP policy will provide cover in these situations and normally offers benefits until retirement age, though current age, health and occupation all play a factor in the premium. For young people in good health an IP policy can provide better value than its MPPI counterpart. For others it may be better to take out an MPPI policy alongside an IP policy with a 12-month deferral period. This should help keep the premium down but ensure that long-term cover is available if needed.
What is important is that advisers do not simply offer a single solution across their client base. Being aware of the different policies and how they can work together will create a better raft of options for borrowers and help close the growing protection gap.
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