Posted on 27 November 2012 by
In the last few years we have seen mortgage lenders introduce a raft of restrictive criteria under the catch all term of “responsible lending”. Everything from LTV’s and income multiples to interest only and lending into retirement has come under scrutiny from the FSA, yet despite the final draft only being published last week, many of the “proposals for discussion” have already become policy for many lenders.
However, the one massively important area of property ownership that seems to have missed the regulators attention is protection. It would appear that the FSA feels that interest only borrowers must have either a risk based repayment vehicle, or the money already sitting in stock and shares, so woe betide the intelligent borrower who wants to wait until the end of the term and then downsize, or make lump sum payments throughout.
Strangely though, the regulator doesn’t take the same view when it comes to protecting a borrower and their family against the potentially devastating financial hardship that is caused by loss of income through unemployment, accident, illness or death. Why is this vital area so neglected ? It’s a good question. Insurance companies have called for mortgage protection to be made compulsory, and it’s difficult not to see their point. If the FSA says that lenders should assess each case on a pure affordability basis, why do they not insist that at the very least a formal discussion regarding borrowers protection arrangements is also carried out for every application. They take a tough stance on lenders stress testing an application against future rate rises, yet do not apply the same theory over whether the borrower could continue to pay the mortgage if they are unable to work through injury, illness or death.
It is well known that protection is a difficult subject to raise with borrowers, as discussing someone’s mortality is never easy, but it is a necessity, as none of us are immortal. It has become too simple for protection to be dismissed as “too expensive” or “we’ll sell the house if something happens”, but how many borrowers have weighed the cost of Income Protection against the heartache of having to sell their home and uproot the family at a time of immense personal stress?
Rather than bringing in compulsory protection as has been suggested, perhaps the more sensible answer would be for the new regulator to introduce that lenders or brokers conduct a separate protection interview, after which if the borrower decides that they don’t wish to take out any policies to protect their loan or income, a formal disclaimer can be signed to indemnify the lender / broker. Many borrowers feel that as the mortgage is their top priority, protection often get’s bolted on at the end of the interview, and is rarely satisfactorily explained. A completely separate interview would ensure that the most pressing matter of obtaining a mortgage can be dealt with up front, and then the protection of the mortgage, and the borrowers family and / or income can then be given the calm and serious attention it deserves.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.