The importance of protecting your income with a mortgage
Why is protecting your income so important?
It’s really very simple,
no income, no mortgage.
So it is no surprise that once the mortgage is attained, any financial advisor with any competence will then turn to protecting your hard earned income.
This is where this area is filled with cheesy metaphors but they are all valid, here are some of my favourites:
- If you had a machine that paid you £5k a month, would you insure it in case it broke down?
- So you insure your home, car, phone and pet, but not your most valuable asset – you and your income?
- “I don’t want to waste money on insuring my income”. “OK, but what is the real cost if you have to give up your home, health etc? what is more expensive then?”
- While looking at your client’s bank statements with them “OK so here are your direct debits. Tell me which ones you bounce, and which do you pay? And how long until they all bounce?”
You get the idea.
No income, no mortgage
In fact a lovely image I like to share is a play on Maslow’s hierarchy of needs. The foundation of the pyramid is income in this example.
If you don’t have income coming in, you have nothing.
You could genuinely stop there, but sadly the story doesn’t stop there. There is still an alarming amount of people who have either little or no savings, and little or no cover if they can’t work due to illness. I do completely understand why. Who wants to think about being so sick that you can’t work for months on end.
“It’s never going to happen to me” is the usual mindset and some very interesting research from Legal & General was published a few years back where they asked their customers “what do you think the risk is of being off work for 6 months or more?”, once they averaged the responses, it came in at there being a 1 in 30 chance of ‘it happening to me’, but in reality that is 1 in 10 (that goes up to 1 in 6 for being off work for 3 months).
L&G have also commissioned a great piece of work in recent years called ‘Deadline To Breadline’ where they work out how long the average household could live purely on their savings. In 2019, that was 24 days. So less than a month from when your income stops, you are in that place of living off credit and or making some serious life adjustments. That is quite a scary thought.
Why do you need to protect your income
The other issue with protecting your income is that the cover can get extremely complicated. How much do you cover? How long for? When does it start to pay out? Do you index or not? How will it be paid? You can get really stuck in the weeds in this, but I have always taken quite a simple view:
- We recommend you cover 50% of your current income, and link to RPI, so it always keeps its value.
- As no tax is deduced, 50% of your net works out to be around 75% of your net pay, which is normally enough to cover your share of the bills.
- This is to start by at least the month after your sick pay stops.
- As touched on above, most people rarely have more than a month’s savings anyway, and even if you do, why waste it on this when you can simply protect your income! See above graph for reference.
It really can be as simple as that. I am a big believer in just getting your head around the key principles, then deferring to an expert you trust to work out the nuts and bolts stuff so you can focus your energies on more productive areas. If you want to get into the finer detail, then please do and we can bore you to tears with stats, options and variables, but that is rarely an enjoyable exercise. I feel it is best to focus on WHY you need cover, then addressing that immediate need.
Protecting your income is straightforward
You have worked so hard to be in a position to buy a property, or you may even own one now, so why would you want to jeopardise that, get into debt or be a burden on your family? I know that is harsh but it is true.
Sadly we see the downside where people don’t protect themselves or their mortgages correctly and the financial pain that causes, on top of the physical, emotional or mental issues they are dealing with. We care too much about our clients to let that happen without challenging them on this point.
So if you haven’t addressed this area yet, maybe it is time to pick up with us and resolve that? We have access to the best providers in the market and we can ensure you get the most relevant cover. Surely the pain of facing and few realties now, and parting with a very small amount of money each month is more prudent than facing much larger issues down the track.
Speak to one of our expert team for a no obligation discussion on the importance of protecting your income.
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Rose Capital Partners Limited is an appointed representative of PRIMIS Mortgage Network, a trading name of Advance Mortgage Funding Limited which is authorised and regulated by the Financial Conduct Authority.