Mortgage insurance that may not be just the job

Mortgage borrowers are facing higher charges to cover themselves against the risk of not being able to repay their loans, adding to the misery of likely interest rate rises.

One major lender this week increased its charges for accident sickness and unemployment (ASU) policies by between 25% and 48%.

And while others deny they have immediate plans to push up premiums, all say costs are "under review". These plans pay the mortgage when borrowers are out of work or off sick.

The increases follow pressure from insurers, who see mounting losses as dole queue fears increase. Some are listing occupations that will be turned down, includ ing the Post Office, the City of London and aviation.

Standard Life Bank chief executive Ann Gunther has just written to existing policyholders to state that: "From July 10 2002, the company underwriting your cover will change." But it reassures customers that "once again we have been able to secure a deal that offers excellent value and service".

It then goes on to say that: "our most popular option would cost you just £4.70 a month per £100 of cover".

But this ignores the fact that the previous cover had cost an average £3.71.

Customers moving to the £4.70 level are paying nearly 25% more, while those moving to a superior policy which pays out after just 30 days off work and without pay, as opposed to the nor mal 60 days will see premiums soar 48%.

The Edinburgh-based bank says policyholders will have to re-apply, but no one will be rejected on their occupation.

"This is not a cherry-picking operation," says bank finance director John Gill.

Recipients of the letter are given one month in which to make up their minds. Virtually all these policies can be changed with 30 days notice.

Gill concedes that pricing policies are driven by unemployment levels - some sickness is job-loss related.

Axa had provided the bank's cover. But it was losing money and wanted more. The bank says: "It was our decision to move and not Axa's. We obtained other quotes." Around 10% of Standard Life's 75,000 mortgage holders have the plan.

Standard Life claims its £4.70 per £100 of cover per month - equal to £23.50 a month for a £500-a-month mortgage payment - compares with an industry average £5.50. Although cheaper than some, there are better deals. Abbey National charges £6.06 a month - £4.31 for unemployment alone - for a plan which pays after 28 days for up to 12 months. Alliance & Leicester charges £5.25 for the same cover on which Standard Life imposes £5.50.

Halifax charges £6.06 but will pay out for up to 24 months. The Nationwide gives the first year's cover free to new borrowers.

It then charges £4.99 for a 12-month maximum plan requiring 30 days waiting period, or £5.99 for a scheme which needs 60 days before a claim, but which continues to pay out for up to 24 months. And Skipton charges £4.70.

Cheltenham & Gloucester has a different premium structure - 50p for each £1,000 borrowed equal to £30 a month on a £60,000 loan. That is more expensive than others especially when mortgage payments are low. But it also has an additional £3 per month for each £1,000 of loan cash benefit.

The best deal comes from Market Harborough building society where rates are £1.75 per £100 per month for new borrowers - less than a third of some major rivals.

It says: "We offer cover at cost, rather than create a profit centre." This plan is limited to Market Harborough borrowers.

Insurer Goodfellows, run by controversial Simon Burgess who once sold cover against alien abduction and impregnation, charges £3.95. There is a 30-day waiting period but then the claim reverts to day one.

Burgess, who says he takes on 96% of applicants, believes that other insurers are planning to get tougher with refusing certain occupations "even if they don't admit it".

Website mortgagearrangers.co.uk will cover unemployment only for £2.25 for a 60-day waiting period, £2.50 for 30 days and £2.75 for a back-to-day-one plan. Mortgagearranger's Alan Reynolds says: "There are low ASU prices online but very few bother to shop around. Lenders push their own plans heavily as they can produce big profits."

Insuring against disability as well as job loss costs £3.45 with 60 days waiting, £3.95 on 30 days and £4.45 with back to day one cover. These plans can last for 12 months.

Mortgage lenders have been trying to persuade more to buy this cover, pointing out that income support is of scant help to most people. Market leader Halifax says nearly one in four new customers now signs up for ASU.