Johnny Timpson's Blog
COVID-19, FINANCIAL AND MORTGAGE RESILIENCE, AND THE NEED FOR A PROTECTION 'PLAN-B'
The Covid-19 pandemic has shown how the unexpected can happen and highlighted the need for financial resilience for UK households. We’ve seen unprecedented government support made available, along with nearly 2 million households applying for a mortgage payment break*.
I’ve been talking about welfare safety-net reform for a number of years now, but why do I think this continues to be so important for our industry? We know that a significant number of people and mortgaged households in the UK are under-protected with, as highlighted by the Money And Pension Service’s recently launched Financial Capability Strategy, many lacking the savings in place to cope with the impact of serious illness or death. It’s also the case that many clients don’t know, or over-estimate, what state benefits they would be entitled to, so it’s clear that educating your clients on these reforms, and their financial health and lifestyle impacts, can be used to reinforce their need for a ‘Plan B’, in the form of appropriate financial protection.
Here’s a reminder of what has happened in recent years and what this means for your protection conversations.
Mortgage safety-net change – the shift from a benefit to a DWP loan and property charge
A mortgage welfare safety-net has been a feature of the UK benefit system for almost a century, since the start of the growth in private home ownership. The key Support for Mortgage Interest Benefit that we know today was first introduced in 1948. However, in April 2018 the benefit model changed radically to become a DWP loan scheme, known as the Support For Mortgage Interest Loan Scheme (SMILS), with a charge being taken on the claimant’s property and state support provided having to be repaid on any subsequent change of title. The scheme is means-tested and conditional, with support available paying the mortgage interest, but not the capital, for the first £200,000 of an outstanding mortgage (£100,000 if the mortgagor is in receipt of Pension Credit). For working age mortgagors, this could mean in many cases SMILS may not even cover all of the interest payable on a mortgage, when you consider the average house price paid by first-time buyers in London is a whopping £415,000*.
This has implications for clients and their families who make up the 10.9 million mortgagors in the UK*. Those who claim under the welfare mortgage safety-net scheme effectively end up with a second loan to pay the interest payments on their mortgage loan.
SMILS also forms part of Universal Credit and is subject to a new “no earnings” rule. So if there are other parties to the mortgage and a spouse/partner is still working and earning, there will be no welfare mortgage support available.
What does this mean for your protection conversations?
UK mortgage holders represent a key segment for the advised market, with 49% of those with a mortgage aged between 35 and 55 years. Our research shows that UK mortgage holders are significantly under protected – 47% don’t have life cover and 81% don’t have critical illness cover. With such a high number lacking appropriate financial protection, this reform to the mortgage welfare safety-net gives all advisers good reason to discuss mortgage protection needs with both current and new mortgage clients.
1 in 6 take Covid-19 related mortgage payment break
Following the Covid-19 outbreak, statistics published in June 2020 showed initially 1 in 6 homeowners, nearly 2 million households have asked their lender for a payment holiday of up to 6 months*. With the average mortgage payment in the UK at £755*, this can be a massive help to those who have been unable to work or have a reduced income following the Covid-19 impacts.
It’s worth remembering that most lenders will facilitate a break, but a payment holiday will usually still incur interest, which will be calculated over the period of the payment holiday and then added to the loan, along with the repayment element.
This means the monthly repayment figure will be increased to cover the amount added once customers resume their payments.
The need and take-up for mortgage payment holidays highlights that many homeowners are not financially resilient when it comes to changes in income, and the need for customers to have a Plan B is as vital as ever. In these uncertain times, and given the backdrop of mortgage welfare safety-net reform, it’s essential that we discuss financial protection needs with clients and aid them to make informed decisions regarding their mortgage and financial resilience.
Yourmoney.com June 2020
Homes and Property, February 2020
finder.com, May 2019