Safety net filled with holes

Millions of homeowners could face the prospect of mortgage arrears and repossession because of cutbacks to Government benefits.

Lenders believe few mortgage borrowers are even aware they would have to wait nine months for benefit help with mortgage interest if they get into problems.

The first full study of the implications of the reforms in 1995, published by the Council of Mortgage Lenders (CML), paints a grim picture of an inadequate safety net whose holes will be instantly revealed by an increase in unemployment.

The report's authors and some lenders argue that mortgage payment protection insurance (MPPI) should be made compulsory. Fewer than one in four homeowners has cover, although figures out this week from the CML show a gradual increase in the number of policies sold up from 32% of mortgages in the first half of the year to 36%.

But MPPI can add more than £10,000 to the cost of a £100,000 mortgage over 25 years. Even the CML admits only half of us actually needs it. For those whose risk of unemployment is low, whose savings levels are high, whose employers provide good cover for accident and sickness, or who have a guaranteed income - from pensions, for example - MPPI is likely to be a waste of money.

Despite this, the House of Commons Social Security Committee has also called for MPPI to be made compulsory. Such a move, which would slash millions of pounds off the Government's benefits bill, would also earn insurers and lenders more than £1bn in extra business.

Critics argue that simply cutting the heavy premiums levied by lenders, who earn cosy commissions of up to 40% for selling the cover, would encourage more takers.

Philip Dearing of Market Harborough building society says low prices are crucial. Its policy costs just £1.75 for each £100 of monthly mortgage payments and Mr Dearing claims a take-up well in excess of 50%.

Over 25 years its policy, to cover £500-a-month mortgage payments, would cost £2,625 - compared to around £8,250 for other typical policies and nearly £11,000 for the most expensive. Mr Dearing is one of those who believes MPPI must be made compulsory. "Some people do not need the insurance now. But how do you know you won't need it in five years time?"

But compulsion, without serious price cuts, could simply mean fat profits for the mortgage industry.

Patrick Bunton, of Bath-based mortgage broker London & Country, says forcing all mortgage borrowers to take out the cover is crazy. "Compulsion may bring costs down, but only by forcing some people to take out insurance they don't need," he says. "Mortgage lenders bang on about the need to make sure everyone is covered, but that's because MPPI is a cash cow to most of them - cutting arrears and earning nice fat commissions."

Bernard Clarke of the CML admits prices need to come down. Its report found that "MPPI is taken out on the ba sis of whether it is 'affordable' in terms of borrowers' monthly income". Those most in need of cover - unskilled workers who are much more likely to be made redundant or to give up work due to poor health - were least able to afford it. And previous studies have shown that a 10% fall in premium costs tends to result in a 5% increase in take-up. On this basis, 10 successive 10% cuts to the average £5.50 per £100 premium, would take the premium to below £2 and take-up above the magic 50%.

Mr Clarke admits evidence seems to show that lower prices would encourage more borrowers to take out the insurance, but says a bigger concern is that many aren't even aware that state support has been cut back.

He is also worried about those home owners hit by "uninsurable risks", such as those unable to get cover because they know they are going to be made redundant, or who survive on temporary work. For these people, he argues, the Government should offer benefit help after two months rather than nine.

Another big concern is for people who are not entitled to benefits because they are still working more than 16 hours a week, but on low incomes. The CML report adds "owner-occupiers on a low wage are worse off than tenants whose circumstances, and housing expenditure are otherwise identical, simply because they are not eligible for housing benefit".

It argues the introduction of a housing tax credit is necessary to tackle the gap in the safety-net through which low-income households currently fall.

What to do in difficult times

If you get into difficulties with your mortgage payments you should tell your lender as soon as possible. Many will give you a few months grace or negotiate lower monthly payments.

If your home is repossessed you will be liable for the debt and any interest that builds up, until the property is sold. You will also be liable for the cost of selling the property and for any shortfall between the sale price and the outstanding debt.

If you qualify for income support or jobseekers allowance you should be able to get Income Support for Mortgage Interest (ISMI) which pays interest on the first £100,000 of your mortgage. It will not cover any capital repayments or premiums on any savings plan linked to the mortgage.

ISMI is calculated at a standard rate of interest, based on the average rate of the 20 largest building societies and currently 5.34%. You will get this rate regardless of how high, or low, the actual rate you are paying is.

If you took out your loan before October 2, 1995 or remortgaged with the same lender, you will get no ISMI for the first eight weeks of your claim, then 50% for the next 18 weeks and the full amount (within the £100,000 loan limit) thereafter.

People who bought their home or remortgaged with a different lender on or after October 2, 1995 will get nothing for the first 39 weeks of their claim and the full amount thereafter.

Over 60s will get the full amount from the first day of their claim.

MPPI policies provide short-term cover for loan payments in the event of accident, sickness or unemployment, and as a result are often called ASU policies. Standard policies, costing from under £2 to more than £7 per £100 of cover, pay out after one month of unemployment or sickness and cover payments for 12 months. Policies with longer waiting periods or longer payout times are also available.