Rising interest rates and a cost-of-living crisis: What’s next for mortgage protection?

With homeowners facing the prospect of mortgage rate rises amid the ongoing cost-of-living crisis, there’s arguably never been a more important time for advisers to be discussing protection with their clients, writes Vitality Adviser Editor Rob Harvey.

The last few months have been a tumultuous time for the UK mortgage market, with accelerated rate rises amid the ongoing economic uncertainty and cost-of-living crisis. As many homeowners continue to feel the squeeze from rising living costs, increased borrowing costs are likely to add to the financial pressure facing many households. 

What though does the current state of the UK mortgage market mean for protection conversations and how can advisers keep protection on the agenda? 

Even for clients that already have some protection in place, changing financial circumstances may lead to a change in protection needs, which can be reviewed alongside any mortgage review. Emma Thomson, Head of Protection and GI Propositions at Sesame Bankhall Group, found for example during a recent conversation with one of the network’s advisers that their income protection sales had increased over recent months.

“This adviser told me that he’s now finding it easier to have protection conversations with clients. A few years ago those clients might have told him they don’t need income protection, because if they’re a couple and one fell ill, the other could manage. Now though, given the rising mortgage costs, for a lot of clients that isn’t an option as they need both incomes to cover the mortgage. So, it’s a case of ‘can you afford to not be protected?’.”

This is a view shared by Matt Chapman, who says that the current turbulence in the mortgage market is an opportunity to talk about protection with clients, and that “coupled with tighter affordability criteria has only increased the need to have robust protection conversations with clients. To ensure that they have the necessary financial support in place to survive the ongoing rise in the cost of living – and this includes being able to not only secure but continue to pay for their mortgage.”

This is a view shared by Matt Chapman, who believes that despite more clients leaning towards longer fixed rate terms, engagement shouldn’t be limited to when their rate expires.

“With protection, particularly Income Protection, there is a legitimate need to contact the client annually to review and ensure the cover remains suitable and fit-for-purpose. This helps cement the relationship and keeps the broker at the forefront of the client’s mind, even during long fixed rate periods.”

Regular engagement with clients can also play a crucial role in retention. As household budgets tighten amid rising costs, there’s a concern that some clients may be tempted to cancel their policies to save money. Advisers can get on the front foot by proactively contacting clients, to ensure they understand the ongoing importance and value of their cover and why cancelling may be risky.

For Emma Thomson the current economic circumstances “enhance the importance of clients receiving advice, both in making sure they’re buying the right cover in the first place and that they’re not cancelling cover unnecessarily”.

Engagement with the client doesn’t just have to be between client and adviser. When the client has a reason to engage with their protection or health policy itself, this can be beneficial to all parties. Our own data highlights that clients who engage with the wellbeing benefits and rewards available through Vitality are less likely to cancel their cover¹ and that clients with an Optimiser policy are three times less likely to lapse their policy².

For example, products like short-term income protection and family income cover can provide clients with a lower cost option if their budget won’t stretch to full-term cover. This is a point highlighted by Emma Thomson, who says, “we really want to make sure that advisers are considering all the options, rather than just presenting something that the client says is too expensive and then them just walking away with nothing. Advising in the current climate will require a different approach with some consumers and so advisers should familiarise themselves with those lower cost solutions that they perhaps have historically not regularly recommended.”

With Vitality, advisers can also recommend Optimiser, allowing their clients to take full advantage of a lower upfront premium and giving them access to a range of benefits and rewards through the Vitality Programme.

“With Consumer Duty coming, I think that will definitely put a different spin on what advisers should be doing when it comes to protection. We may see more advisers have a separate protection arm within their own business or find a partner to refer it to. It’s certainly something we’ve been encouraging firms to do and have established referral panels to help our firms find a trusted protection specialist partner to refer their clients to.”

In the aftermath of the chancellors recent Autumn Statement we’ve begun to see some stabilisation in the mortgage market, but whilst rates are forecast to dip slightly in the coming months, the era of very low rates is arguably at an end. For Alex Beavis, Group Director – Mortgage & Protection at Sesame Bankhall Group, regardless of where rates are, advisers should be discussing protection with their clients. “Whichever direction rates go, ensuring clients are adequately protected remains a vital part of the mortgage conversation,” he says. “With more and more households now worried about their future financial security, now is the time for advisers to rise to the challenge to ensure clients receive holistic advice which prepares them not only for higher mortgage rates, but also for any future bumps in the road ahead.”

1 claims-benefits-report-2022.pdf (vitality.co.uk)

2 claims-benefits-report-2022.pdf (vitality.co.uk)