MortgagesNov 26 2014

Living on the edge

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There has been plenty of hype around interest rate rises, and debate on whether borrowers have the means to pay increased mortgage repayments in the future. Lenders are no doubt confident that by including a question about rate rises in their mortgage market review stress tests, arrears are likely to be low.

Findings from recent surveys however, suggest otherwise.

The NS&I quarterly savings survey reports Brits are saving an average of £101.66 a month. Twenty per cent have under £1,000 in savings, while 16 per cent have nothing put aside. GoCompare says the figure of those without savings is higher – it believes 25 per cent of people have nothing and a third will rely on credit cards in an emergency.

Those who set aside funds for a rainy day now consider shopping, high bills, rent and mortgages justifiable reasons for dipping into their savings pots. Years ago the pot would only have been raided for unexpected household repairs.

Borrowers have long been advised to set aside at least three months’ worth of mortgage payments as a financial cushion, yet the comparison website states average savings pots currently total around £1,000 – just enough to cover one month’s average mortgage payment.

Cautious individuals among us will wonder why those with financial commitments appear keen to ‘live on the edge’ and forego saving. But do they have any choice? VocaLink, the company processing salary payments for more than 90 per cent of my company’s workforce, recently announced that in the three months leading up to September this year, workers’ wages increased by just 8 pence more than in the same period last year.

Working with the Centre for Economics and Business Research, it found employees working for Britain’s biggest 350 firms took home an average monthly wage of just under £1,534 in September. Workers in the services sector lost an average of £1.43 from their monthly pay packet, receiving £1,509 a month, and public sector employees are down £11.12 a month, taking home £1,586.

With an average mortgage of approximately £153,000, and monthly repayments between £850 and £1,000, it is not surprising so few borrowers are able to save. Sluggish salaries and increased household expenditure do not encourage a savings culture.

Lenders may counter that by offering competitive mortgage deals. Borrowers can enjoy a prolonged period of low monthly repayments, so could easily set aside some funds during this time. A housing shortage has set property prices rocketing, and even the lowest monthly repayment is the maximum many first time buyers can afford. Any savings are likely to have been depleted due to the up-front payments demanded by the LTV ratio.

It is widely acknowledged a rate rise will indeed trigger mortgage payment difficulties, but is this not the tip of the iceberg? There are other triggers which frustratingly, lenders appear keen to overlook.

Ill health or a job loss can have a devastating effect on a person’s ability to pay bills. We are all aware of this, otherwise PPI would never have been developed. While in essence, PPI is a great product, unfortunately lenders became over-zealous with their sales techniques – and we know the rest.

As a consequence, lenders now go out of their way to ignore mortgage arrears triggers such as accident, sickness and unemployment. In October, the CML reported nearly a third of its respondents to its YouGov survey expect their finances to worsen when rates rise. The CML identified such triggers for mortgage payment difficulties as higher cost of living, minimal savings, low or falling income, other debts and ill health.

It appeared optimistic after stating “people are willing to take action and consider their options”. These options or ‘coping strategies’ include cutting back on non-essentials (the survey findings which show ‘rainy day’ money is now being used for essentials is slightly contradictory), cancelling major spending plans, remortgaging to a cheaper deal and working more hours.

Why is the onus on the borrower to find the solution? What debt prevention options do lenders have to offer, and are they shared with mortgage brokers, IFAs and, more importantly, customers?

Where are the insurance solutions to prevent borrowers having to go to such extremes? Working longer hours smacks of Victorian Britain. It is time those within the financial services sector, particularly mortgage providers and brokers, worked with insurers to develop a range of solutions, based upon the PPI principles, to prevent people spiralling into debt when their circumstances change or when rates rise.

If they do not, we will continue in a downward spiral. Group Risk Development research suggests up to 50 per cent of workplace absence is due to stress and mental health issues. Working longer hours to cope with a rate rise will do little to reduce this figure.

Redundancy is at least as big a debt trigger as a rate rise, yet it is not given consideration within the MMR. A snapshot of job losses between 27 October and 5 November illustrate why it should have a higher priority; Monckton coke plant, near Barnsley: 120 facing redundancy; Lloyds bank: 9,000 job losses and 150 branch closures; Surcouf & Sons, Channel Island food wholesaler: 50 roles to go; Monarch Airlines, Luton: 700 redundancies and 30 per cent pay cuts; Essex Care: 100 redundancies; in Northern Ireland, the Democratic Unionist Party recommends cutting 14,000 public sector jobs; Rolls Royce: 2,600 redundancies and Micro Oil Refinery, Pembrokeshire, reducing workforce from 600 to 50 or 60.

I make no apologies for detailing this information – these are real people with real money issues which are unlikely to be resolved by financial services solutions. People facing similar issues in the future must have access to options that provide them with a financial safety net. So why not include mortgage interest rate protection combined with accident, sickness and unemployment cover in the mortgage offer?

Suitability for cover could be determined by means of the MMR questionnaire, paying out when rates rise, funding the difference between old and new mortgage repayments, or when a salary goes due to illness or redundancy. Include the premium within the monthly mortgage repayment – it will be far less than that of a rate rise.

To those who balk at this solution, I hope it encourages you to move customer financial protection and debt prevention measures higher up your boardroom agenda, because currently innovation is lacking. The issues are not being adequately addressed, and borrowers are being let down.

There is a glimmer of hope for innovation. The CML recently announced the winner of its Rising Stars competition, in which it invited entrants to develop the theme: “If I could change the mortgage market I would…” The winner proposed a new style of tax-incentivised saving scheme for parents and grandparents to help children with the deposit for a future home. This is to be applauded – a clear case of identifying an issue and finding a solution.

Debt charity StepChange reports nearly one in seven have difficulty sleeping due to money worries – the top three concerns being lack of savings, meeting the costs of essential household bills and debt problems.

“If I could change the mortgage market I would provide options to prevent debt escalation and where required, automatically include them within the mortgage offer.” This would go some way to providing the financial safety nets borrowers suffering sleepless nights so desperately need.

Alexander Burgess is a director of British Money

Key Points

Borrowers have long been advised to set aside at least three months’ worth of mortgage payments as a financial cushion

Redundancy is as at least big a debt trigger as a rate rise, yet it is not given consideration within the MMR

Suitability for cover could be determined by means of the MMR questionnaire, paying out when rates rise