Interest-only mortgages are strictly limited, self-certification of income has returned to original principles, lower income multiples apply and there are still restrictions on the availability to higher LTV mortgages.
These measures are great in proving responsible lending at the point the mortgage is taken out, but takes little account of how the borrower could repay the loan if their circumstances were to change.
Until a few years ago, life cover was a mandatory part of arranging a mortgage.
The trend for endowment mortgages, until the early 1990s for example, at least ensured that life cover was included in the repayment method and assigned to the lender. This meant that, if the borrower died before the end of the mortgage term, the mortgage could be paid off and his family could stay in the property.
Since then, there have been several developments in protection products.
Critical illness cover launched in the late 1980s and permanent health insurance shortly afterwards, providing financial support for mortgagors who suffer ill-health.
There is also accident, sickness and unemployment cover that can provide income for up to a year to cover periods of unemployment or shorter periods of illness.
However, ironically, as these products have been introduced, the requirement for borrowers to have protection seems to have receded.
Even life cover is no longer mandatory – and this at a time when state benefits are being reduced – placing the onus on borrowers to be more self-sufficient in the event of adversity.
The latest unintended impact of the PPI regulations will be that professional advisers will have further obstacles placed in the way of ensuring customers are fully protected by banning the sale of PPI at point of sale.
We have long recommended a fully protected mortgage to our customers. As well as protecting the borrower, a fully protected mortgage is a much better proposition for a lender.
There is a strong case for lenders to look more favourably on these loans because they offer less risk of the lender needing to repossess the property because the borrower cannot repay the mortgage.
After all, while many borrowers even now have basic term assurance, far fewer protect their incomes or take out critical illness cover.
Yet, the probability of suffering a critical illness before age 65 is almost four times that of dying.
It’s not just the borrower that is protected either.
If the borrower can afford to service his mortgage and maintain insurance premiums, the lender’s costs will be reduced and brokers’ commission will also be protected.
Ross Bowen, mortgage services director Connells
