Feature

25 July 2005

Safety conscious

The Government is trying hard to get low earners on to the property ladder, but how can advisers protect them once homeownership is a reality?

We're a nation obsessed with home ownership. Currently, around 70% of households own their home and, in polls, around 90% of households say they would like to own their own home at some point.1

While we have seen some slimming down in the consumer's appetite to buy following the hike in interest rates last year, there is still a wealth of first-time buyers desperate to get on the ladder - including a whole raft of the population who, arguably 25 years ago, would have thought that owning their own home a dream, not a viable option.

The Government is clearly committed to making us a nation of homeowners. In its manifesto, it pledged that one million more people would own their own home by the end of this parliament. To support this pledge, it recently launched a further initiative to help first-time buyers get on to the property ladder - Open Market HomeBuy. This plan aims to help 100,000 families, allowing them to buy a share of between 50% and 75% in the value of a home with the remainder being funded by Government and the lender. The major difference between this and the existing Social HomeBuy scheme is that it also targets non "key workers" - in theory allowing any struggling would-be buyer an opportunity to enter the property market.

However, surely it isn't just a question of helping people get on to the property ladder. The success of this and any future initiative supporting first-time buyers and homeowners across the board depends, in large part, on homebuyers being able to maintain their mortgage repayments once they are in their homes ... and this is where the problem lies. The responsibilities that go hand-in hand with home ownership were largely ignored by the national press in its reporting of the Open Market HomeBuy scheme.

None of the reports looked at the actual costs of buying the home under a conventional mortgage. Nor did they discuss the financial responsibilities that home ownership entails. More disturbingly perhaps, none chose to highlight the fact that the homeowner has to wait nine months until they can seek Government assistance in times of financial difficulty. No mention was made of how much - or how little - support is available through Income Support for Mortgage Interest (ISMI) if the homebuyer is eligible to claim after the nine-month waiting period.

First-time buyers - particularly those on lower incomes - are arguably the most vulnerable to any downturn in the economy. They're likely to have stretched themselves to the max to get on the ladder in the first place. They will have heard and read the statement "your home is at risk if you do not keep up the repayments …" throughout the mortgage process, but how many of them think about what it really means?

According to the latest moving improving index published by Alliance & Leicester, six in ten prospective new buyers underestimate how much it will cost them to get on the property ladder by 25%, expecting their first home to cost less than the current stamp duty threshold. The typical first-time buyer property now averages close to £150,000 and homeowners are now spending more than £1 in every £6 they earn to repay their home loans - that equates to spending an average of 18.5% of their monthly income on mortgage repayments.

Many of the homes available under the existing HomeBuy scheme cost well above the £120,000 mark - particularly those in the South East. In its consultation document, the Government quotes a property valued at £200,000 in Camden with monthly mortgage costs under the existing scheme of £800 for 75% ownership versus between £746 and £825 under the new proposal for 50% ownership. Yet the average UK salary is just £26,000 … meaning that a consumer on this salary is committing over half their net monthly wage to their mortgage.

There are also the costs of moving itself - conveyancing, surveys, and stamp duty. Many housing associations operating HomeBuy schemes insist that would-be buyers have £3,000 in the bank to cover these costs … but do lenders place such stipulations on the "other" first-time buyers?

What happens when hit by large unexpected bills such as the car breaking down or a maintenance charge on the property? Even if the property is in a block of flats and costs are shared, a new roof can run into thousands and represent a severe hit on the homeowner's pocket. What if the worst does happen and the new homeowner has an accident, falls ill or is made redundant? Nine months is a long-time by anyone's standards. Given that the average household savings amount to only £750, there are very few who could cover that cost themselves.

Let's not kid ourselves that the risk of losing one's home isn't a real one. Despite the recent cool-off in consumer spending, the fact remains that UK consumers are in debt to the tune of £1 trillion - equivalent to £17,000 of debt for every man, woman and child. There are also signs of financial tension in the unsecured lending market, which can in turn impact the secured lending market.

High street lenders are seeing an increase in defaulting customers: Barclays, HBOS, Royal Bank of Scotland and Lloyds TSB have all reported that consumer bad debt provisions are rising. The DTI's Over Indebtedness Report last year revealed that nearly one in seven of households are in arrears on either consumer credit or household bill commitments, corroborated by the fact that the Citizens Advice Bureaux now deals with over a million consumer enquiries about debt issues a year. Perhaps of greater concern is the level of personal bankruptcies in England and Wales, which reached 13,229 in the first three months of the year - the highest for three decades. In April, the Department of Constitutional Affairs (DCA) reported that applications of repossession have hit a 10-year high; the number of court orders authorising lenders to seize people's homes surged to 14,048 in the first quarter of 2005 - a rise of almost 25% from the same period in 2004; and the number of court actions seeking repossession jumped to 25,869 - the highest quarterly total under Labour.

It is more important than ever before that first-time buyers understand the risks they're exposed to and the options available to cover them. It is equally important that the creditor insurance industry ensures that the insurance options available are flexible enough to meet the variable needs of today's first-time buyers, and that these options are affordable.

Given that close on 50% of all mortgage cases and associated insurances are sold through intermediaries, it could be argued that the options available from the mainstream lenders are failing both in terms of their flexibility and affordability.

The customer is increasingly reliant on the professional knowledge and advice of the intermediary to find the right solution for their own circumstances, but the intermediary may be limited in his or her ability to help the customer by virtue of the limited number of products available in the marketplace.

The FSA has made it clear that it intends to take a close look at payment protection insurance (PPI) - both at the way it is sold and whether customers are fully informed about the terms and conditions and, in particular, exclusions contained in their individual contracts of insurance. Notwithstanding the fact that consumers have a responsibility to read the terms and conditions associated with a given product offering, it is up to us - "the industry" - to address these fundamental weaknesses in product design. It is only by working in partnership with consumers, distributors, and insurance companies will we truly overcome the negativity associated with these products. Only through this partnership will we deliver the value for money products that consumers demand and deserve, thus achieving true sustainability not only for the insurance industry, but most importantly those would-be first-time buyers clambering on to the housing ladder. In my view, the 'one-size-fits-all' product that has been available for years deserves the criticisms it receives in the national press and is the reason that national news reports have ignored the responsibility issues, despairing of the lack of flexible options available in the marketplace.

If we are to support Government initiatives, if we are to help the distributors of PPI products sell the most appropriate option at an affordable price, then the creditor insurance industry must address its approach to product design. We must demonstrate to the regulator that our products match consumers' needs. Otherwise, we'll be failing to treat customers fairly, and we'll be failing to help keep first-time buyers in their homes

by Ian Moffatt, Sales & Marketing Director at Assurant Solutions

1The British Social Attitudes (BSA) Survey 2000/01