The average UK house price rose by 8.5 per cent to £251,500 during 2020, according to the Office for National Statistics.
And while the pandemic has undoubtedly affected the mortgage market, it was not all bad news in 2020, with first-time buyers (FTB) accounting for half of all mortgages for home purchase.
Overall there are around 11m UK households with a mortgage, but research suggests at least 42 per cent of them have no life insurance, and 81 per cent have no form of income protection.
With the outstanding value of all residential mortgages at £1,527bn, that is a lot of risk borrowers are taking.
Many reasons are cited for this, in particular cost, which always amazes me, because if borrowers cannot afford life insurance as a minimum, how are they going to afford a mortgage on death or if they are off work with a prolonged illness?
Throughout these difficult times financial advice has been paramount, with more than 80 per cent of FTBs and 90 per cent of buy-to-let (BTL) business relying on intermediary advice.
So given the high percentage of borrowers taking advice and the public’s raised awareness for protection, there is a great opportunity to review their protection needs.
Typically, FTBs have a greater risk of prolonged illness than death so need income protection as well as life insurance.
Based on the average FTB being age 31 with a mortgage of £198,779, a 25-year joint-life decreasing term plan using a default eight per cent interest rate only costs £10.28pm.
If we add income protection of £2,055pm and £1,149pm for salaries of £40,000 and £20,000 with a 13-week deferred period and payable for up to two years, this would increase the total cost to £31.44pm.
To put this into perspective, a five-year fix at 2.51 per cent with no fees on that mortgage would cost around £890pm, so for 3.5 per cent of total mortgage costs, the borrowers would have cover that ensures they and their family could stay in the home if anything happened.
With many BTL five-year fixed rate mortgages arranged in the run-up to the three per cent stamp duty surcharge in April 2016 expiring, this year provides a good opportunity to review these arrangements.
Most landlords only need life insurance to avoid the property being sold on their death to repay interest-only mortgages.
So for example a 20-year level term plan for £150,000 for a landlord aged 50, would cost £31.62pm.
Given the average five-year fix in Q1 2016 for individual landlords was 3.84 per cent, they would have been paying around £480pm on that £150,000 mortgage.
Using the same five-year 2.51 per cent deal, even with life insurance, an adviser can still save them £135pm. The same approach should be used for remortgages and product transfers.
So, as well as reviewing customers’ mortgage needs, 2021 could be the year to better protect your clients, their families and your business.