Advisers believe conversations about getting protected have grown in importance with the return of 100% loan to value (LTV) mortgages that potentially bring higher risks for clients in a “volatile” housing market.
They also highlighted the importance of income protection particularly for first time buyers who are typically younger and may not recognise the need for life or critical illness cover.
The return of 100% LTV mortgages with Skipton Building Society’s launch of a no deposit deal earlier this month is another option for first time buyers taking their first step onto the property ladder.
However, mortgage advisers are being told to prioritise protection to ensure their clients do not put themselves at risk of financial complications down the line.
First time buyer advice barriers
David Hollingworth, associate director of communications at L&C Mortgages, told Health & Protection that Skipton’s launch was aimed squarely at first time buyers battling with the difficulties of raising a deposit.
“Other schemes are available that draw on help from family and friends as well, underlining the ongoing challenges for first time buyers,” Hollingworth continued.
“First time buyers may be a group that often feel they don’t need the assurance that protection products give them.
“Income protection has clear benefits for a first time buyer but they may not put the same weight on life and critical illness, believing it won’t be something that they will need.
“That can put up barriers for advisers no matter what the scenario but if there is to be an increase in very high LTV products it should give borrowers something else to think about.
“If house prices do wobble and fall back and something does happen the first time buyer could leave family with a debt that can’t be covered by the sale of the property.
“That could help advisers bring the benefits to life for customers who of course are likely to benefit from a lower premium as a younger customer.
“The focus should always be on protection but perhaps higher LTV borrowing will help to give an additional focus.”
Income protection ‘absolutely paramount’
Miles Robinson, founder and director of Home Group Financial, told Health & Protection consistency around protection processes should mean discussing the needs of maintaining a mortgage or clearing the mortgage in a serious event does not change regardless of the loan to value.
Though Robinson pointed out that in this instance the loan is a much higher risk for the borrower if customers find themselves unable to maintain payments such as through accident, illness or injury.
“If payments are unable to be maintained and the client plans to sell the property, they may be in a position where they can’t do this due to the higher risk of being in negative equity should house prices fall and once you factor in selling costs,” he said.
“There could be a shortfall between the mortgage, costs and the selling price which they can’t cover.
“The client therefore ultimately ends up a mortgage prisoner, unable sell the property and be in a circumstance where they need to maintain a mortgage payment or face repossession.
“Therefore the importance of income protection is absolutely paramount when taking a high loan to value mortgage even more important for 100% mortgages in a volatile housing market.”
Cover tailored to specific risks
Emma Thomson, head of protection development at Sesame Bankhall Group, (pictured) welcomed the return of no deposit mortgages as it created more home ownership opportunities for first-time buyers who have been struggling to get onto the property ladder.
“For many first-time buyers, this will probably be the first time they have an opportunity to discuss and consider their protection needs which is a hugely positive outcome, helping them to secure valuable protection at an earlier age,” Thomson explained.
“This is where the expert support and guidance of an adviser can make a real difference as they take customers through the protection process for perhaps the first time.
“It will also ensure that customers get protection cover that’s tailored to their specific risks and needs, which would naturally take into account the type of mortgage being arranged.
“The purpose and benefits of protection insurance should form part of every mortgage conversation, particularly in line with Consumer Duty obligations, to ensure borrowers can maintain their mortgage repayments or repay the loan in the event of illness, injury or death.”
Phil Nash, director of sales at UnderwriteMe, warned while these 100% loans would help renters buy their first property, a conversation about income protection and critical illness was “essential”.
He added that while the protection conversation should be a priority for any mortgage, it was even more crucial with 100% LTV products.
And following a year in which the housing market was rocked with a mini Budget advisers at the time dubbed “foolish” and the ongoing cost of living crisis, it appears advisers agree with Nash’s assessment of the situation.