Family Building Society Family Mortgage
Ever since the (virtual) demise of PPI (payment protection insurance) there has been a need to offer simple protection cover to borrowers to help them protect their financial situation if they can’t work.
Long term insurance has failed to plug the gap, but the lending industry has been quietly developing alternatives to PPI and one such is mortgage waiver (or loan waiver). Here, instead of having a separate insurance policy, the lender simply waives mortgage payments for a period of time if the borrower cannot work for a specified reason. The first such product to be launched in the UK mortgage market is from the new Family Building Society (a new brand launched in July by National Counties Building Society) and it kicks in if the borrower involuntarily loses their job and it waives payments for up to six months. In theory, similar products could also cover illness or disability and include most benefits that a conventional insurance policy (such as income protection) could offer.
This product is most significant therefore not so much for what it does but for representing a new potential option for lenders and borrowers. Which also makes it of great interest to protection advisers too.
To illustrate how the waiver works, a Family borrower might say lose their job a few months after taking out their mortgage. Assuming they qualify under the waiver terms, Family will waive its monthly mortgage payments until the borrower gets a new job or until six months’ payments have been waived.
There is no separate charge for the waiver, the costs of which are included in the lender’s interest rate effectively. That also means that if claims are higher or lower than expected, the lender could vary its mortgage rates accordingly. Not having an insurance policy also avoids Insurance Premium Tax (IPT) as there are no premiums to pay. There may also be other advantages (including for some State benefits), as the borrower is not being given money - instead their outgoings are simply reduced.
There are disadvantages – only the monthly mortgage cost is covered; the self-employed are unlikely to be able to benefit; and the benefit could be discontinued by the lender or the lending rate increased (especially as switching mortgages can be very costly).
Although Family is the first UK mortgage lender to offer a product with built-in waiver, Peugeot and Citroen in the motor market, Hitachi Capital and some credit unions also offer loan waiver products on loans.
Comment: Mortgage waiver has a lot in its favour as a concept, and we can expect to see other lenders following Family’s lead, probably also extending the adverse events the waiver covers.
However, from a regulatory and consumer viewpoint there are issues. The Government loses IPT income, products are not covered by insurance regulation and borrowers may even forget they have the benefit. Lenders could play regulatory arbitrage if they judge mortgage regulation to be lighter than insurance regulation.
One of the biggest dangers though is that some lenders – just as they did with PPI – could increase their interest rates disproportionately in order to improve their profits. Whilst the regulator could stop that happening, it is worth remembering that both the FSA and FCA attacked PPI more for how it was sold than for the fact that some landers made almost obscene profits selling it (when over 80p in every £1 of premium goes to the lender that is not too strong a word to use).
That said, if a client qualifies for a Family Mortgage, they could benefit from the waiver and the deal is judged to be competitively priced and remains so, we can only applaud Family for being different and perhaps for starting a trend. Borrowers and intermediaries need to recognise though that such cover is only partial – a typical borrower not only also needs illness and disability cover but also needs it for all their expenditure – not just their mortgage payments. The average first time buyer spends just 19.3% of their income on mortgage capital and interest payments (CML data, for June 2014), which could leave over 80% of income uninsured.
Plus points: Simple to understand and with no separate buying process; Automatic; ‘Free’ (no extra charge): Cost is included in APR calculations; Waives mortgage payments for up to six months; Avoids IPT.
Not so plus points: Lenders could raise their rates if claims turn out to be greater than expected or just to increase profits; Only covers unemployment and only then if involuntary; Subject to terms and conditions that we could not find detailed on the website; Only pays for up to six months.
Website: http://www.familybusildingsociety.co.uk.
Rating (max 10): Innovation: 9. Overall: 7.
Tags: Family Building Society, Other