The recession is really starting to bite, and doom-mongers are predicting a tough second half to the year. Almost every day, it seems, there is more bad news about companies folding or laying off staff and unemployment is expected to hit a peak of around 3 million – similar to levels seen in the early 1990s. Confidence is at rock bottom.
Even in good times, there’s no such thing as a job for life any more, both employers and employees have little respect for loyalty and flexibility is now considered the key. More and more people are working on short-term contracts or are self-employed, which can cause much greater fluctuation in incomes.
And even without the uncertain employment market, an injury or ill-health can have a serious impact on employment. And if you think state support is the answer, think again.
Until very recently, if you lost your job through no fault of your own, you would be eligible for benefit relatively quickly. But these benefits do not include having your mortgage paid – for the first nine months of signing on, you receive nothing. And after that you’ll only get a limited amount of help – it will only pay the interest, up to a certain amount (usually £200,000), and will not help with paying back the capital, any investment policies associated with your mortgage, or any insurance.
You’re also unlikely to receive any help if you have more than £16,000 in savings, or if your partner works.
In the light of the recent fall in house prices and expected growth in unemployment, the Government has also introduced the Homeowner Support Scheme (HMS). This initiative will allow some borrowers who experience a fall in their income defer some of their repayments for up to two years.
While a good idea in theory, the HMS is not going to help everyone. Indeed it may end up helping almost no-one – several months after its launch, only one household had benefitted from the scheme.
Firstly, the scheme is a partnership between the Government and seven of the UK’s largest lenders, who are sharing the risk of any losses. If you’re mortgage isn’t with one of those lenders – Abbey, Barclays, HSBC, Lloyds Group, Nationwide, Northern Rock and the RBS Group – then no matter how desperate your situation, you’re not going to get any help. Many of the lenders not involved in HMS have their own schemes available, though, so all may not be lost.
Then there’s fitting the criteria, which are relatively woolly. The scheme is open to those borrowers who have suffered a significant drop in income, which affect their ability to make their mortgage payments. This doesn’t have to mean losing a job – it could just be a reduction in hours, a pay cut or even the end of overtime.
But the key issue is that the applicant will have to demonstrate that their income will return to levels high enough to sustain the mortgage debt – and how do you do that? Knowing what the future holds in calm times is nigh on impossible, but if you’ve just lost your job in the middle of the worst downturn in over a decade, any ‘proof’ you can provide will just be fantasy proof.
And finally, this scheme doesn’t pay your mortgage for you – it just defers those payments. You will have to pay the debt eventually.
MPPI
There is a way of preparing for a fall in income, however.
Mortgage payment protection insurance (MPPI), also known as accident, sickness and unemployment (ASU) benefit, is one of the cheapest and simplest insurance products on the market. It is also one of the most vital.
With MPPI, if you lose your job due to redundancy or illness, your mortgage will be paid, normally for up to a year – hopefully long enough for you to get back on your feet.
Of course, if you do think you are going to get into difficulties with repaying your debts, the first thing you must do is contact your lender who will try and help you. And while it’s going to be sympathetic to your plight, it’s going to want paying eventually – nine months without a repayment is going to be pushing it.
Payment Protection Insurance (PPI), of which MPPI is a part, has been in the headlines recently, usually in very negative headlines. But that doesn’t mean you should discount the product. Most of the criticisms of PPI don’t apply to MPPI (such as large single premiums, which just don’t exist in the mortgage market) and those that do – such as the insurance usually being sold by the same organisation that provided the loan – are changing, as newer, leaner companies enter the market, educating consumers and cutting costs.
COST
MPPI is generally a very simple product in terms of its charging structure. The vast majority of products are charged at X per £100 of monthly repayment. So if your mortgage was £600 a month and the policy charged £5 per £100, you’d be paying £30 a month. It normally costs between £4 and £6 per £100.
When you apply for a mortgage, your lender will almost certainly offer you it’s policy lenders in general make massive commissions from their products, so they are likely to be more expensive than you’d find if you shopped around independent providers.
One notable exception to this is the Market Harborough Building Society, which has decided that as it benefits both the borrower and the lender for MPPI to be in place, it will not make a profit on any policies it sells. So you can get cover for a staggeringly low £1.75 per £100 of repayment – about half the cost of the next cheapest lender. Sadly though, it’s only available to borrowers with a mortgage from the society.
Increased competition in the market and the emergence of specialist providers like British Insurance, have driven down the cost of MPPI, while maintaining – or even improving – service levels. You can now get cover for just a couple of pounds per £100 of cover. And, because it’s completely separate from the mortgage, when you come to remortgage or move house, your cover continues.
In a time when more and more people are getting into difficulties paying their mortgages, and the number of repossessions is expected to hit 75,000, the take-up of PPI is falling. Only 17 per cent of homeowners have MPPI, says Sara-Ann Burgess, managing director of Burgesses, a leading independent provider of MPPI: "A survey late last year showed that one in five people would cancel an MPPI policy to save money but unemployment claims are rising, leaving consumers more reliant on these policies than ever."
Why MPPI?
* 70 per cent of people losing their jobs will never be able to claim housing benefit to assist with paying their mortgage
* Only 5.5 per cent of claimants for housing benefit are successful
* 60 per cent of homeowners accrue mortgage arrears at some point because of illness, job loss, a dip in earnings or unsuccessful self-employment
* One in four homeowners will be affected by unemployment at some point in the career
* From 1991 to 1995 three out of 10 heads of household with a mortgage had at least one change of employment status
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