Review your clients’ mortgage contracts and protection plans now, ahead of likely rises in both interest rates and inflation
While most of the recent attention in the mortgage market has focused on interest rate rises, which seem certain to take place at some point this year, there is another danger on the horizon: inflation. Although it is languishing well behind the Bank of England’s 2 per cent target, nothing should be taken for granted.
Plenty of mortgage customers are happy to push their repayment budget to the maximum and risk difficult financial consequences should both inflation and interest rates rise. But while some clients may have plans in place for managing this eventuality, another crucial yet often neglected concern is what they would do if, due to illness or accident, they could no longer work and earn a salary. Even if they had savings to help them pay the mortgage, it is unlikely they would have enough left over to afford to live in the house.
Protection policies, in particular income protection, can rescue not just mortgage payments but lifestyles too, far beyond what the state can provide. Extra measures, such as inflation-proofing a policy by index-linking it, will mean the value rises with inflation.
Interest rate rises are on people’s minds, especially those of mortgage prisoners stuck on either interest-only deals with no savings or very unattractive variable rates with old sub-prime lenders. Reviewing their plans is vital.
Many commentators do not expect changes in interest rates until the second half of this year. However, now is the time to review not only mortgage contracts but protection arrangements too. If the monthly mortgage cost could be reduced, clients could then address any potential shortfall in their protection.
Zane Groves is director at LightBlue UK
Tip of the month
Financial protection for HIV-positive clients
Until recently it has been very difficult to offer a client who is HIV-positive a way of protecting their life through insurance. But the situation is changing. Recent research from specialist adviser Unusual Risks shows that around 70 per cent of insurers now offer some form of life cover for people who are HIV-positive.
However, the UK insurance industry still does not offer any form of income protection or critical illness cover to such clients.
British Friendly was the first insurer to publish its claims statistics for 2015, announcing it paid 97.8 per cent of income protection claims. This time last year it was also first with the data, which showed it paid 96.7 per cent of IP claims in 2014. The top-three reasons for claiming in 2015 were musculoskeletal conditions (36 per cent of paid claims), viral/ respiratory illness (18 per cent) and psychiatric conditions (11 per cent).
Worker cover varies
Moneysupermarket has cast further light on protection coverage in different sectors of the workforce. Its research found that 42 per cent of breadwinners employed in health and education had a life insurance policy, while 61 per cent in the major white-collar private-sector industries – professional and financial services – did so. Those working in manufacturing were most likely to have life insurance, with 69 per cent of breadwinners having a policy. Fifty-eight per cent of construction workers also had protection insurance, the research showed.
Scotwids on panel
Scottish Widows has joined Paradigm’s protection panel. It returned to the individual protection sector in October and members of Paradigm Protect, which is linked to Paradigm Mortgage Services and Paradigm Partners, will now have access to the insurer’s products.
Household debt rises
Household debt is on the rise again, with inevitable impli-cations for people’s financial security. Figures from the Trade Union Congress show household debt reached a record high of £319bn in Q3 2015. The figure includes consumer credit and student loans but excludes mortgages. Debt per household rose by £600 to £11,800 in Q3, while unsecured debt as a share of household income reached 26.5 per cent.