One of the broadest market trends is the continued increase in house prices across the UK. This has helped to fuel people’s appetite to spend money on property, either as a home or as an investment through buy to let. This trend has reinforced property as a reliable and steady place to invest.
Perhaps the most pivotal change has been the introduction of the Mortgage Market Review (MMR), which has seen more stress testing around lending, with a greater focus on affordability and sustainability. This puts more pressure on borrowers to come up with higher deposits and have a clearer understanding of their income and outgoings. It also presents intermediaries with an opportunity to develop a more detailed knowledge of their clients’ finances to help them better manage their expenditure.
The bank of mum and dad
My estimate is that around 45% of first-time buyers are relying on the so-called ‘Bank of Mum and Dad’, as they seek ever-bigger deposits to buy property. In London, for example, average house prices top £500,000, while across the UK they are £270,000, so a healthy deposit is needed. The opportunity lies in working closely with clients to work out how they can better manage their money to maintain their lifestyle, while at the same time ensuring that they are protected against any eventuality that might put their mortgage commitment at risk.
Rising interest rates
It is well documented that interest rates are expected to rise. Predictions are that we are unlikely to see an increase until later this year but rates are certainly expected to rise in 2016. This means a lot of homeowners are looking at fixed rates to lock in that certainty while rates are still low. I don’t expect rates to rise dramatically but fixed rate products offer peace of mind.
For advisers, any certainty as a result of a move to a fixed rate can be used to ensure customers are well protected. After all, buying property is the biggest purchase people are ever likely to make. It is healthy for advisers to challenge clients around the policies they have in place, ensuring they are adequately covered. For a single first-time buyer, for example, one of the most important things is income protection and this is the foundation of any financial planning advice process. People are 26 times more likely to be unable to work before the age of 65 than they are to die before the age of 65, so protecting that income is important. If people suffer long-term sickness they need that level of reassurance.
Another opportunity for clients to make savings is the remortgage market. As some fixed rates come to an end we are seeing people move to lower rates than they were on previously. This offers advisers an opportunity to go back to existing clients who are coming out of their fixed rate or simply looking to remortgage, and this is another area where protection sales can be made.
It is important for advisers to sit down with clients to re-examine their protection when remortgaging. That doesn’t mean replacing the cover they have in place, but instead checking that existing policies meet their changing needs. For example, if they are increasing their borrowing they might need further product advice, can they use their existing protection policy, or do they need to take out an additional one to top it up? Advisers need to point out how savings resulting from a remortgage can be used to fund new protection.
Having the conversation
A lot of clients are more aware than ever before of the different types of product on the market, particularly with the wealth of online information available. However, as the mortgage market changes and grows in complexity, there is no substitute for sitting down with a qualified adviser. It is about helping clients to maintain their existing lifestyle while meeting their mortgage commitment, as well as offering protection in the event of a multitude of eventualities, including death. If one adviser doesn’t offer this comprehensive level of advice, a competitor will. In a period of unprecedented change, only the strongest advisers will survive.
Buy to let – a neglected area?
The proportion of buy-to-let mortgages has almost doubled over the last 10 years, reaching 15% of the UK mortgage market. Part of the reason for this is the ease of obtaining a buy to let mortgage over a residential mortgage. People also enter this market as a way of getting onto the housing ladder, beating the interest rate on savings, and supplementing a pension. But this area is often overlooked in terms of protection.
What if a landlord falls ill? The first need isn’t around repaying a mortgage in the event of death because there is still income from rental, but there might be a need for serious illness cover. If the landlord is unable to work, there is definitely a requirement there. It is a market that is vastly undersold, yet it is a growing area.
At a glance
- UK house prices have continued to rise, reinforcing their attraction as an investment.
- The introduction of the Mortgage Market Review (MMR) last year has put greater pressure on consumers to ensure any borrowing is affordable and sustainable, creating opportunities for closer adviser/client relationships.
- Interest rates are expected to rise, making fixed-rate products more attractive to consumers.
- The remortgage market can free up client savings to fund better protection.
- Advisers must grasp the opportunity to forge closer relationships with clients and offer comprehensive advice in an increasingly complex market.