Saving your home if you lose your job

While travel insurance is now seen as mandatory for trips outside Europe, just a quarter of homeowners have their mortgage payments - most people's biggest monthly outgoing - covered.

This has contributed to the alarming statistic that 50% of homeowners would be unable to meet their housing costs if they lost their job. Research from the Association of British Insurers shows that most people do not realise how limited state assistance is if they do fall into arrears.

The ABI found that a "worrying proportion" of consumers - one in five - believe they could rely on the government to provide them with financial assistance if they were unable to find work.

In fact, state benefits to support mortgage repayments are means tested and even people who are eligible generally have to wait for up to nine months before they receive their first benefit payment. Also payments only cover mortgage interest and not the outstanding capital debt.

Around a third of those questioned who do not have mortgage payment protection insurance (MPPI) say they would rely on their savings if their income were to drop significantly. However, the average household has just £750 in liquid assets.

With chancellor Gordon Brown insisting that Britain will not return to boom and bust - a major feature of which was repossessions - it is understandable that the majority of people do not rate losing their job, and the effect that would have on their ability to pay their mortgage, as a major consideration. But these findings may add to the pressure on the government to make MPPI compulsory.

Mary Francis, director-general of the Association of British Insurers, says: "This report certainly gave us food for thought. One key concern is the lack of awareness of just how limited government help is for mortgage holders who become unemployed.

"Mortgage payment protection insurance has recently been given a facelift by insurers, lenders and the government through their sustainable home ownership project. Policies must now meet or exceed minimum standards in terms of the cover offered."

In 1999 an MPPIs standard was introduced in an attempt to encourage more people to take out policies. These minimum standards required all policies to pay out after 60 days - some had previously forced claimants to wait for four months.

The ABI findings also showed that a large majority of people who have taken out MPPIs, and have made a claim, have found their policy to be effective.

But a report from a mortgage industry magazine, Mortgage Finance Gazette, questions the value of payment-protection products. It shows that 41% of mortgage lenders think the products have no, or very little, impact on the arrears situation, although they do help the indebted individual.

Almost half of the companies questioned said they would press on with court action even if a borrower had MPPI cover.

John Collins, a Swansea-based lawyer and joint author of the report, says: "There are any number of reasons for a company taking such a line - the level of cover might be inadequate or the payments under the policy might go to the borrower rather than the lender, so leading to underpayment or non-payment of the mortgage."

And insurer Goodfellows says its research shows that, where MPPI payments are made, they are insufficient and fail to pay for the basic needs of food, clothing and travel. This week it has launched a protection plan which is, it says, a cover for basic living expenses, not just mortgage protection. Shelter replaces up to 75% of lost gross earnings for up to two years. To provide cover of £1,000 a month, in the event of unemployment, costs £25 a month for a year's cover or £30 to be covered for two years.

Goodfellows' managing director, Simon Burgess, says: "The Mortgage Finance Gazette's findings contrast with ours. When we questioned lenders, all of them said they would not proceed with repossession provided the borrower had adequate income protection cover."

Halifax this week launched a product that rolls ASU (accident, sickness and unemployment), critical illness and life cover into one, called the Total Mortgage Protection Plan. The policy pays out for two years, as opposed to the usual one, and payments are backdated to the day you lost your job or fell ill. The product is also flexible, so, if you already have life cover, you can just buy the other components. For all three parts of the cover, a 29-year-old non-smoking male with a £100,000 mortgage would pay £64 a month.

Keith Abercromby, managing director of Halifax Life, says: "It's never been more vital that mortgage customers have good quality mortgage protection in place, but all too often they remain under insured. This one product covers everything and can easily be purchased along with the mortgage. We believe it will become an industry standard."