Government unveils new mortgage protection rules

New rules governing the insurance you can take out to protect your monthly mortgage payments were announced this week.

Mortgage payment protection insurance (MPPI) policies will now have to meet Government-backed minimum standards designed to give homeowners a better deal. But some campaigners reckon the initiative does not go far enough.

MPPI covers the monthly mortgage payments if you become unemployed or are unable to work due to accident or sickness. It is also known as Accident, Sickness and Unemployment cover (ASU). The Government wants to increase the take-up of this insurance, which is regarded by many borrowers as an unnecessary extra expense. Just 20-25 per cent have it.

The welfare reform Green Paper published last March said the problem with MPPI policies is that they "provide too narrow a range of cover, for too short a period, and are taken out by too few people".

The lending and insurance industries were told to devise better products and the first fruits of this are the new standards. The aim is that, from now on, all policies will provide a basic minimum level of cover for accident, sickness and unemployment. All new policies will include the new terms and conditions from July 1, while existing policies will have to be amended by July 1, 2001.

But because some existing contracts will be exposed to potentially higher payouts, premium levels could rise. Currently, MPPI policies cost around ?5-6 per ?100 of monthly mortgage payments.

The new rules mean that:

? All policies will pay out after a maximum of 60 days - in the past some had excess periods of up to 120 days. This means borrowers need to meet only two months' worth of mortgage payments from their savings before their insurance kicks in.

? All policies will provide payment cover for a minimum of 12 months after the excess period.

? There will be fewer automatic exclusions for medical conditions such as pregnancy complications and back problems. These will now be individually assessed.

? There must be a minimum of six months between any changes to policies - previously, changes could be made to some policies with 60 days' notice. This will ensure policyholders do not face a series of unexpected amendments to their cover.

? Self-employed and contract workers will be able to claim for unemployment provided they have worked for the same employer for at least a year.

Welcoming the initiative, Housing Minister Hilary Armstrong said home-buyers need to think seriously about how to meet their mortgage payments if they lost their income.

Homeless charity Shelter was supportive but warned: "Some people may still be left without a safety net." It wants state benefits improved.

One aspect of the initiative that sticks in the throat is that while the Government is encouraging everyone to take out this insurance, it is making a "commission" on the sale of every policy in the form of insurance premium tax levied at 4 per cent. There were calls this week for the Government to drop this tax.