It is easy to talk about rising rates and the impact they are having on mortgage repayments, but lenders and brokers often seem to be doing little to tackle the problem and ensure their clients can afford to meet their monthly payments.
According to the Halifax House Price Index for January, the average price of a property in the UK now stands at £188,623. If we assume that the mortgage on such a property carries a loan-to-value (LTV) of 10 per cent then we are looking at an average mortgage of £169,760.
Since the Summer of last year, rates have risen from 4.50 per cent to 5.25 per cent, with a further rate increase widely expected in the coming months. If we take our average mortgage and apply a rate of 4.50 per cent, then the borrower is looking at monthly repayments of £943.58 on a capital and interest repayment basis.
Rejigging the figures to take account of the recent rises, the same borrower is now paying £1,017.28 per month and will need to find £1,042.47 if rates move up to 5.50 per cent.
The bottom line is that for the average borrower in this scenario, over £73 a month is needed to meet their mortgage, representing an increase of almost 8 per cent. Salaries have not risen by anything like 8 per cent since Summer 2006 and the money simply has to come out of existing, and stretched, budgets.
Struggling with the burden
There is little doubt that as a country the UK is struggling under the burden of personal debt, of which mortgages are the major contributor. There may be little we can do about rising house prices, but there is a huge amount of work that can be done to ensure borrowers can afford the mortgages they take on both now and in the future.
At the moment this is clearly not the case and figures from the Council of Mortgage Lenders (CML) revealed that repossessions rose by 65 per cent in the last year. The body believes this figure will rise again during 2007 and that there are difficult times ahead for many borrowers.
Against this backdrop, it would seem logical that protection insurance should be at the top of the agenda for both lenders and intermediaries. Indeed the payment protection insurance (PPI) market is at the top of the agenda, but for all of the wrong reasons. Problems within the PPI market have been well documented and ongoing work by the Financial Services Authority and the recent referral of the market to the Competition Commission are set to deliver some much needed changes. However what is surprising is that providers and distributors have been so slow to grasp the opportunities available and make the kind of changes their clients are looking for.
Clearly mortgage payment protection insurance (MPPI) is not going to prevent borrowers having to meet the rising cost their loan, and some would argue that in many circumstances borrowers who are already stretching to meet payments simply cannot afford to take out the extra cover.
However for those without cover, the rise in monthly payments means what savings they have will be quickly eroded in the event of accident, sickness or unemployment.
There is also an argument to suggest borrowers should not be spreading themselves so thin as to make MPPI unaffordable, if it is the only possible safety net they will have in the event of a problem.
A two-pronged attack
To improve the situation, a two-pronged attack is needed. Providers need to look at the insurance they are selling and ask, as both the regulator and Office of Fair Trading have done, whether it really amounts to good value and is designed to facilitate rather than inhibit a claim.
Thereafter lenders and intermediaries need to take the time to really investigate the ability of their clients to pay the mortgage should something happen. If there are financial reserves in place or cover is available through policies held elsewhere, then all well and good. However in too many instances the focus is on making the mortgage sale, rather then ensuring its long-term viability.
MPPI is not a purchase borrowers make with enthusiasm and some feel the extra cost simply takes away from the amount they can spend on their mortgage. However if mortgage payments cannot be met when things go wrong, the distress caused by running into arrears and possibly a repossession order will pale these considerations into insignificance.
Improved products and education are things the MPPI market has craved for a long time, and the reputation of the market and the consumer appetite for the product has dwindled, creating a downward cycle.
It’s this cycle we must look to break and accept that while MPPI is not needed in every case, it does have an important role to play. By making the policies available cheaper and more accommodating, it is possible to keep them profitable and make them more effective and, at last, begin to restore consumer confidence.
Rates are set to increase further, which will increase the burden on those struggling to pay their mortgage in the face of accident, sickness or unemployment. We should be doing everything we can to prevent the CML reporting another rise in repossessions for this year.
