With specialist mortgage lending very much back on the agenda, some advisers are looking at the lessons learnt from sub-prime and asking themselves: does specialist lending need specialist protection?
The past few years have seen the market for those who are self-employed, contractors, buy-to-let landlords, or borrowers with adverse credit records grow exponentially as sub-prime rebuilds. While this is good news for those seeking a mortgage, the industry must also remember that these non-standard mortgage holders would suffer like anyone else in the event of any life-threatening illness or death of the breadwinner.
It is essential for all borrowers to have protection in place to cover themselves sufficiently in the event of a life-changing scenario, but this is especially important for this group. Buying a house is often the most expensive investment anyone will make, and so we should be taking seriously the need to protect that investment from an unfortunate event.
Specialist borrowers should therefore consider insurance policies that can help limit the financial impact of a life-changing illness or death. Self-employed people in particular could benefit from business protection policies in the event of a critical illness or death.
Business owners would also benefit from this type of protection. A business owner with a mortgage on their home would certainly suffer if a life-changing event left them unable to work. With their business operations suspended or severely impacted by their absence, the individual could face an immediate loss of their income. This would leave them having to deal with rising business debts and an inability to keep up with their mortgage repayments.
Research found that 40 per cent of small or medium businesses would cease trading within a year should a key individual become critically ill or die. Sole traders in particular would feel the greatest impact, with 63 per cent ceasing to trade immediately.
Business protection policies would provide the specialist protection needed for these business owners, supporting them with a lump sum which could be used not just to deal with company debts, but also help the individual to continue to pay their mortgage.
Despite their importance, some specialist borrowers are not aware of these products or the benefits they can provide in protecting against any unfortunate events in the future. In research, over half of businesses interviewed felt the loss of a key individual would have no impact on their creditors, while just under half thought it would not impact on cash flow.
The protection gap could be leaving many self-employed borrowers open to the damaging financial impacts a critical illness or death could bring. It is therefore more important than ever that advisers work to raise the issue of protection with their clients and point out the benefits. However, they do face a number of challenges in doing so.
One challenge for advisers was the introduction of the Mortgage Market Review (MMR) last year. In some cases, it can now take a substantial amount of time to complete only the face-to-face meeting for an application. This can take even longer for specialist mortgages, where advisers have to thoroughly analyse all the unique threats which could impact on the applicant’s ability to keep up with repayments. Ultimately, this is a draining process which can leave consumer and advisers lacking the motivation to discuss protection.
Nobody really wants to talk about becoming ill with a life-threatening disease or to consider ‘worst-case scenarios’ in the event of their death. However, it is an essential topic for brokers to discuss with their clients. Our research shows that last year just over a third of households had no strategy in place to cope with financial hardship.
A mortgage is the biggest loan a consumer will ever take out in their lifetime. By being prudent and taking the time to discuss the subject with their broker, consumers can secure the adequate protection they need to cover the potentially devastating threats to their wellbeing that a sudden loss of income could cause.
What advisers need to do now, as with other areas of the mortgage market, is continue to raise the subject of protection with their clients. Despite the difficulties of discussing this topic, and the added impact the MMR has had on lengthening client meetings, brokers must seize any opportunity they can to outline the benefits of protection policies with their clients.
Brokers must also do more to share the facts about how these products operate if they are to repudiate any misconceptions about protection. They must start by establishing succinctly what a policy will and will not cover. By helping consumers to understand when they can claim successfully and pointing to the strong track record in payouts, advisers could make all the difference between a client taking out protection or refusing it.
Specialist mortgage underwriting can be a long and complicated process compared to standard mortgage lending, but it is still crucial for advisers to talk about specialist protection products as well as critical illness and life insurance protection. If anything, products like these will be the easiest part of the sale when borrowers apply for a specialist mortgage, as advisers are able to clearly illustrate the benefits.
Of course, the industry must also play its role. Technology and tools such as risk calculators can help brokers to demonstrate the real financial risks a client could face as a result of a critical illness or death.
Polls and surveys can also help consumers better understand the financial repercussions of a sudden critical illness or death.
Ultimately, regardless of what type of mortgage an individual chooses, it is essential that advisers work to raise awareness of the importance of protection with their clients. Highlighting the risks of critical illnesses – and advising clients on the benefits of insuring themselves against these risks – is the key to winning the protection battle.
Steve Bryan is director, intermediary, Legal & General
Some advisers are asking themselves: does specialist lending need specialist protection?
Forty per cent of small or medium businesses would cease trading within a year should a key individual become critically ill or die.
Brokers must also do more to share the facts about how these products operate.
