Liberal Democrats call for greater mortgage protection

Homebuyers should automatically be offered insurance to cover mortgage repayments, the Liberal Democrats said today.

The party is calling on lenders to offer payment protection insurance as standard because of uncertainty in the property market. It said that customers should be given the opportunity to "opt out" of payment cover only after receiving guidance from mortgage advisers on the risks of taking on a loan without insurance.

Payment protection insurance, also known as accident - sickness and unemployment (ASU) cover - is designed to cover borrowers who become too ill to work or become unemployed.

Vince Cable, Treasury spokesman for the Liberal Democrats, said: "Mortgage payment protection insurance should be a standard part of any new mortgage contract. It would be in the best interests of consumers in light of continuing uncertainty over the future of the housing market."

He added that many insurance policies on the market today are too expensive, contain too many exemptions in the small print and do not best serve consumers. Mr Cable said that this part of the insurance industry needed proper regulation and enforcement to honour necessary pay-outs to those in difficulty.

Mr Cable called for an industry-wide agreement aimed at helping those who fall into payment difficulties, offering flexible mortgage payment arrangements to prevent people from losing their homes.

He said lenders should considering offering borrowers in financial trouble the option to remortgage, without having to pay penalties, to more favourable rates. He added that it would be in the industry's interests to prevent a slump in the housing market.

Mr Cable said: "Interest rates are going up, and are expected to keep going up over the next year. There is uncertainty over house prices. Those with mortgages at four, five, six or even seven times their earnings could face payment difficulties.

"In this environment, it should be standard practice for mortgage lenders to offer high quality payment protection insurance to those taking out new mortgages, or indeed to existing customers who wish to take out insurance retrospectively.

But Ray Boulger, senior technical manager at mortgage adviser Charcol, warned that to encourage people to take out payment protection insurance as a blanket policy would be "naive." He cautioned that advisers should take into account each borrower's personal situation rather than making one product standard.

"For many people the product is unsuitable," he said. "You should always look at what protection people need on an individual basis. There are a number of things to consider when choosing this sort of cover and to have people tick a box to opt out could leave a huge number of people with inappropriate cover."