Money: Mortgage update: How to hold on to your home

A drive to encourage many more people to take out insurance cover for their mortgage payments will be launched by the Government and the financial services industry later this month.

They will announce new minimum standards for mortgage payment protection insurance (MPPI) to try to improve its image. Many view this type of insurance as poor value-for-money and it is often criticised for being riddled with exclusions and get-out clauses.

Just one in five borrowers has mortgage payment protection insurance, which covers the monthly payments if you become unemployed or cannot work due to illness or an accident.

Research has suggested that several million people could be in serious danger of sliding into debt with their mortgage payments if misfortune strikes. They have no private insurance and may hope the state will come to the rescue. But they will have to wait up to nine months for DSS help with their mortgage interest payments - by which time they could be in really severe financial difficulty.

With an increasingly gloomy economic outlook, there are fears that many more people will lose their incomes.

However, ministers could have a job convincing a sceptical public of the merits of MPPI. Forking out on yet another (non-compulsory) insurance policy is hardly going to be a top priority for cash-strapped home-buyers.

The best-known type of payment protection insurance, Accident, Sickness and Unemployment cover (ASU), will usually cover your monthly mortgage payments for 12 months if one of these three occurs. Typically it costs ?5- ?6 per ?100 of monthly mortgage repayment; if you pay ?500 a month, expect to be charged ?25- ?30 a month.

ASU policies differ enormously in their terms and conditions, and it can be difficult to work out exactly what is and isn't covered. "In many cases, people don't really know what it is they are covered for until they come to claim," says Gareth Hoskin, director of housing markets at insurer Legal & General.

The Government wants to make this sort of insurance more attractive to the public so it has teamed up with the Council of Mortgage Lenders and the Association of British Insurers to produce a set of minimum standards for MPPI. There are pledges on a whole range of issues, including the risks covered, how long you must wait before benefiting and treatment of the self-employed and contract workers.

One problem is that ASU will not cover you for pre-existing medical conditions (for example, asthma or a back problem). Therefore, some will be disappointed that one of the exclusions featured in the minimum standards proposals is "any pre-existing medical condition for which treatment had been given or diagnosis had been made or investigations had commenced during the 12-month period before cover commences". Others include alcohol and drug abuse and pregnancy.

Other minimum standards concern:

The "excess period". The proposals seem to suggest that no policy should require more than 60 days' waiting time between the redundancy/illness/accident and payments starting;

The benefit period - up to 12 months for any one claim.

The payout you will receive. This should be "not less than the full monthly commitment to the lender at the start of the mortgage".

The self-employed. They will be covered as long as they have involuntarily ceased trading and registered for Jobseekers Allowance.

Many people are unaware of the restrictions on state help with mortgage interest payments that were introduced in 1995. If your mortgage was completed after October 1 that year, you will have to wait nine months before you are entitled to receive income support for mortgage interest payments (ISMI). If your mortgage went through before that date, you will only have to wait a few weeks before you get help. You will receive no ISMI for the first two months, then 50 per cent of the interest will be paid for the next four months, and then you will receive the full rate.

There's bad news for people currently remortgaging - they will be treated the same as new borrowers.

The state will pay only the interest on loans up to ?100,000, and ISMI is a means-tested benefit, so you have got to be virtually on the breadline before you get the full whack. If you have got savings of above ?8,000 you don't receive it. If you have savings of between ?3,000 and ?8,000, the benefit is restricted. You will get full income support for your mortgage interest payments only when your savings have fallen below ?3,000.

One way to achieve the Government's aim of much greater take-up of payment protection insurance is for lenders to give customers free cover for a time, says Independent Mortgage Collection, a 250-strong group of mortgage brokers. IMC is one of the lenders that gives all its customers free ASU cover for six months. This "gives the borrower time to understand the benefits of the cover", says a spokesman. IMC has found that around 80 per cent of customers renew the insurance when the six months are up.