Mortgage protection gap fuelled by stamp duty rush

Mortgage protection gap fuelled by stamp duty rush

The stamp duty holiday sparked a rush in property transactions but this meant advisers were spending even less time on addressing protection.

The gap between mortgages sold and protection policies taken out is particularly pertinent when it comes to income protection.

And some are concerned the government’s recent stamp duty holiday, designed to drive volume in the mortgage market, has undone some of the progress made in narrowing this gap, as it gave busy brokers less time to talk about protection.

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A survey from Royal London done in 2019 showed 81 per cent of mortgage holders did not take out income protection insurance to protect against loss of income if they fall into ill health.

But since 2019, there has been a change in appetite. Data published by LV in March found 8.3m (48 per cent) of 25-44 year olds with no IP cover were interested in taking it out to safeguard their earnings.

The same goes for life assurance, with 40 per cent more of this age bracket now considering it.

“The stamp duty period sparked such a surge in property transactions, but as a result protection got sold even less,” Simon Bath, chief executive of comparison site operator for home movers iPlace Global, told FTAdviser.

With buyers chasing a rising market, Bath said the lack of those with a mortgage also engaging in a conversation about life or mortgage insurance - which can include IP - has “almost definitely worsened”.

“The protection conversation was hard before, but this is an issue which has inflated now,” said Bath.

He added awareness of IP was more important than ever before, due to the amount of “over-stretching” borrowers have done this last year as house prices continued to rise.

“What the stamp duty holiday did in certain areas - especially in London - is cause inflated prices in excess of what the savings the holiday was designed to get. So, it's almost a false dawn,” Bath explained.

On July 1, the government's tax-free rate fell from no stamp duty on the first £500,000 of a property, to no stamp duty on the first £250,000. For almost a year, house buyers were avoiding stamp duty on the majority - or all - of their house transaction.

But with house prices on the up since July 2020, many have been paying over the odds for houses on the market.

Bath argued the missing protection conversation then had a “knock on effect” for entire families, particularly as the job market cools. “You're going to find people at risk of very tricky situations.”

He continued: “What happens if you lose your job? What happens if you get a serious illness or die? Coming out of that with no protection on the properties will see families kicked out.”

Re-contacting clients

Roy McLoughlin, associate director at Cavendish Ware, agreed with the majority of Bath’s comments. He said: “Any mortgage adviser which doesn’t bring the subject of protection up isn’t doing their job properly.”