ProtectionSep 9 2021

Mortgage protection gap fuelled by stamp duty rush

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Mortgage protection gap fuelled by stamp duty rush
Image by walkerud97 from Pixabay

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.

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.”

McLoughlin acknowledged with the pressure of the stamp duty holiday, “one would hope the conversation [of protection] was postponed rather than cancelled” altogether.

“The point is - that’s excusable as long as the clients are recontacted at the earliest opportunity,” he explained. 

“Brokers know they should be doing this. And if they haven’t had time, they need to go back and do it. Or if they don’t have time now, they can signpost.”

The industry pledged to do more signposting back in January 2020 in a bid to better serve UK consumers.

Further to this, the Income Protection Task Force is set to host an awareness week for advisers on the product later this month, but Bath is skeptical of how far the conversation has moved on in the last decade.

“These [IP awareness sessions] have been happening for over ten years, but almost every year you always hear the same script, because it's still not quite sinking in,” said Bath.

“Advisers still revert back to the easiest, quicker sell which is the transaction sale, despite the fact protection earns them more revenue over time.”

Platforms like iPlace Global’s Moveable, which claims to reach 30,000 of the UK’s house movers every month, was built in the last two years and goes direct to the consumer.

It also offers a white label solution to mortgage brokers, digitising the protection conversation.

But whilst there is a gap for digital solutions to fill, McLoughlin stressed the fact that protection products - particularly income protection - need advice, which makes automated digital solutions alone unsuitable to bridge this gap.

“It’s too dangerous without [advice]. It’s practically impossible to give direct-to-consumer transactions without advisers.”

Can’t paint all with same brush

Aaron Strutt, product and communications director at Trinity Financial, told FTAdviser one of the risks of waiting until after the mortgage sale to talk about protection was that the client may no longer have the budget for it.

He added: “Firms have moved on and got specific protection brokers. We’ve got two of our own protection-only brokers,” said Strutt.

“We work on an appointment basis. And one of our protection brokers is fully booked until mid-September.”

He continued: “There is a process in place, which takes into account a client’s budget.”

Strutt also highlighted how having in-house protection advisers had made it easier to spot gaps in clients’ current protection policies. 

“One of our clients was paying a policy which wouldn’t have paid out due to them not declaring something. Our adviser then rebroked it to another insurer.”

Strutt said a lot of borrowers simply don’t want income protection - or any protection

“You get a lot of people saying they are covered through work, but leaving work could end that cover or it might be too limited in the first place."

Ultimately, Strutt reckons people “are aware of the need for protection” and are “more willing to pay than in the past”. He put this down to a rise in awareness of the likelihood of illnesses such as cancer.

Nicola McKenzie, a senior adviser at Dunham McCarthy, added IP paid out more than people think. “If it’s advised on properly, then the policy will hold more quality and is more likely to pay out.”

In many cases, she said people simply “don’t know it exists”, or confuse it with payment protection insurance - a product which saw a host of banks mis-sell to consumers for years.

ruby.hinchliffe@ft.com