The market for mortgage payment protection insurance (MPPI) is a conundrum. On one hand, most people including the Government acknowledge the importance of safeguarding the biggest financial commitment homeowners will ever make – their mortgage. On the other, the majority of borrowers do not have appropriate insurance cover in place to protect it.
Research undertaken this year by Scottish Provident entitled ‘High Wire Britain’ confirms that at least 60% of homeowners believe that owning their home is either ‘critical’ or ‘very important’ to their standard of living and only 4% would be willing to give up their home if their income were significantly reduced for any reason. The same study went on to confirm that two thirds of respondents were less optimistic about the future and accepted that taking on substantial debt is a necessary part of getting on the housing ladder.
No big surprises so far, but what this research is confirming is that the British still want to be king of their castle and acknowledge that a big mortgage is a necessary evil if they want achieve this goal. It also confirms that, if the financial going should get tough, which many think it will, few would be willing to sacrifice their homes in order to make ends meet.
What is surprising is the results of the rest of the research. Only two in five said they had taken any steps to ensure they could maintain their standard of living if they were taken ill. The research also showed a reduction in the numbers of people with adequate life cover in place, primarily because more borrowers are moving away from endowments to repayment mortgages, where life cover is not automatically included in the deal.
So, despite loving their homes the majority of borrowers appear unwilling to do much in terms of protecting their prized asset, should the worst happen. It seems very strange, when you consider that very few people would buy a brand new car, which is probably worth a tenth of the value of their house, and then not insure it.
Unfortunately, both Government and industry statistics support these findings. The Government, Council of Mortgage Lenders (CML) and Association of British Insurers (ABI) have in the past, all suggested that roughly 55% of all homeowners should have MPPI cover in place, but despite pushing hard for the industry to achieve this goal, the figure has struggled to rise above 22%, leaving a large number of people potentially at risk.
More recently the goalposts were shifted, when the CML announced a revised target or, to be more precise, a completely new one. In January this year the CML’s new initiative was to keep repossessions below 30,000 a year, compared to an average of 35,000 over the past ten years. Unfortunately, the CML does not specify how this objective should be met.
So what is happening? Why is the take up of MPPI insurance so poor, when everyone appears to recognise the importance of protecting a mortgage? There are a number of probable answers including: consumer awareness, product choice and cost and broker willingness to actively promote the product.
As far as consumer awareness is concerned, MPPI is no different to many insurance products, in that consumers need to have the need for such cover spelt out to them. Many consumers accept the importance of building and contents insurance (the equivalent of insuring the car), but view MPPI as the equivalent of extended warranty insurance when they buy a new domestic appliance. It is seen as an additional cost they can live without. Consumers are also blissfully ignorant of their vulnerable position should they happen to fall on hard times financially.
For borrowers with mortgages arranged after 2 October 1995, the support provided by the State is negligible. No income support will be paid for the first nine months and thereafter, if they qualify for support, they will only receive help with interest payments, (for large loans only the first £100,000 of borrowings are covered). The State will not cover any additional regular contributions associated with endowment policies taken out to pay back the capital.To make matters worse, all claimants are means tested. Figures from the Department of Work and Pensions reveal that 70% of those who apply for assistance will not qualify for support because they have savings of over £8,000 (lump sum redundancy payments above the statutory limits often exceed this amount) and the income of partners will also be taken into account.
There is no doubt that the Government could do more to raise consumer awareness. It is interesting to note that you can now pick up a brochure in your local doctor’s surgery about the issues relating to endowment policies, but you would be hard-pressed as a consumer to get hold of information about the need to protect mortgage payments. However, do not hold your breath, as it is unlikely that the State will contribute to raising consumer awareness, unless they smell an imminent problem.
Consumer education will therefore be down to lenders and brokers. Brokers account for more than 50% of all new mortgage applications and they therefore have a great opportunity to inform consumers about MPPI and to benefit from additional fee income. But at the moment only 26% of all MPPI policies are sold via intermediaries – lenders are doing a better job than brokers at promoting the product.
In reality MPPI should not be a difficult sale, if it is brought into the sales process at the right time. In most instances, brokers leave MPPI until the last moment, when it is an afterthought to the client. It is not difficult to see why consumers, having just signed on the dotted line for a mortgage, life cover and buildings and contents insurance, suddenly think that MPPI may be something that can wait until another day.
Ideally, MPPI should be introduced at the beginning of the conversation, so that clients correctly perceive it to be an essential – but not compulsory – part of the mortgage deal. This is not assumptive selling: it is simply giving MPPI the emphasis that the Government and others believe it should have.
The third reason that sales of MPPI have not lived up to expectation is because of the choice and price of products available, but the good news is that this is changing rapidly. In the past, products have often been expensive, restrictive in the level of cover they provide and inflexible to differing client needs.
Many policies sold by high street lenders had premiums of between £5 and £7 per £100 of monthly mortgage repayment and had exclusion periods of up to 90 days before cover began. To make matters worse, some organisations have been selling single premium cover, where cover is provided for up to five years and the cost is added to the mortgage. You would expect such cover to come at a reduced price in return for payment up-front, but not so – premiums are usually more expensive because the level of commission payments is significantly higher. Single premium products do not represent good value for money, whichever way you look at them, and there is a growing sentiment in the industry that they should be banned. The sooner, the better.
Monthly premium products are, however, becoming much more competitively priced and the cover is far more flexible and comprehensive. There is no need for borrowers to pay more than £5 per £100 of monthly mortgage repayment (which should include Insurance Premium Tax) and some products contain features such as back to day one cover, and cover for up to £2500 per month for all types of payments (not just mortgages, but utility bills, council tax, HP agreements etc). Historically cover has been for far less – typically £1500. Brokers can still earn good levels of commission – typically 27% on an annualised and indemnified basis – and now have access to products they can sell with confidence.
In January this year, CETA launched its new Safeguard MPPI product and we have seen MPPI sales rise by 96% – a staggering rate of growth but one which categorically proves that the market penetration of MPPI can be considerably increased.
As brokers move into a regulated market, they are going to have to reconsider the products they sell and the way in which they go about selling them, so now is the perfect time to push MPPI higher up the list of priorities. MPPI should be at the heart of ‘best advice’ when it comes to selling mortgages and brokers have a major part to play in ensuring that it is given the prominence it rightly deserves.
Consumer attitudes and State help on MPPI
Recent research carried out by NOP Financial on behalf of the Association of British Insurers looked at consumer attitudes to, and awareness of, all types of creditor insurance. In particular it focussed on mortgage payment protection insurance (MPPI), insurance covering other loan repayments and cover for credit and store cards, and produced a number of key findings:
1. Those who had made a claim on a payment protection policy were overwhelmingly satisfied with both the payout and the smooth running of the process. Almost three-quarters of those receiving claims payments felt it had been easy.
2. 20% of consumers believed they could rely on the Government if they were unable to work. For many, this would not be a realistic option. State benefits to support mortgage repayments, for example, are capped and means-tested and, even if borrowers are eligible, they have to wait up to nine months before receiving the first benefit payment.
3. Around a third of those without payment protection insurance said they would rely on savings and investments to pay regular bills if they were unable to work. This seemed relatively risky given the low level of savings in the UK (£750 per household, on average).
State benefit is unlikely to cover all a client’s needs should they stop receiving an income because of falling sick, being injured or becoming redundant.
A They will not qualify if they have a joint mortgage and only one person loses their income (even if their partner works as little as 16 hours a week) or
A If they have savings of more than £8,000.
A They will usually only start to receive help nine months after they became unemployed.
A They will only receive help to cover the payment of interest – capital repayments, investment premiums and insurance premiums are not included
A They will usually only receive help on the first £100,000 of their mortgage (mortgages taken out before 02/10/95 may qualify for more assistance).