Who will pay the mortgage if you can't?

Many homeowners worry more about the state of their decor than how they would cope if they could not afford the mortgage.

Research published last month by the Council of Mortgage Lenders showed that 40 per cent of homebuyers do not have any insurance to help if they cannot cover their mortgage.

They may assume that the state will provide. But there are gaps in the complex system of state support for homeowners. This will cover only the interest on your debt, not the capital repayment, and assistance is available only up to the value of £100,000 - even though the average house price is now more than £150,000. Only those working less than 16 hours a week, or who have a partner working less than a 24-hour week can claim the benefit, and if you have savings of over £8,000 you will not be eligible.

If you took out your mortgage after 2 October 1995, income support for mortgage interest (ISMI) does not kick in until nine months after you become unable to pay. Those who took out their mortgage before then may qualify for a more generous version of ISMI. This can start to be paid two months after you lose your job and pays 50 per cent of your mortgage interest for four months, then the full 100 per cent.

Housing charity Shelter says the rules about how much you get are complicated. If you are separated and it is possible for you to receive help with mortgage payment from your former partner, you may not get any help. Also, if your home is considered too expensive or too large for your needs, any payments you receive may be reduced to level of costs you would have in a cheaper home.

Before jumping to buy insurance, employees should find out what their employer offers if they cannot work because of accident or illness. The second point to bear in mind is that most financial advisers recommend building up an emergency cash fund of at least three months' salary to cover crisis situations.

If you still think you need insurance, the obvious type of policy is mortgage payment protection insurance (MPPI). The CML says that by the end of last year only 26 per cent of the UK's 11.5 million mortgages were covered by MPPI. Premiums are charged on the basis of every £100 of your monthly mortgage repayment.

The average cost of MPPI is now around £4.95 per £100 of mortgage payment, according to the CML. Most MPPI policies will not start to pay out until a month after you are unable to pay your mortgage and the payouts may only last for a year. Poli cies don't normally pay out for illness due to pre-existing medical conditions. You will also be denied cover if the insurer thinks you expected to lose your job.

Sean Gaught of insurer Pinnacle says: 'If there has been extensive press coverage about troubles at your company, if your colleagues have been made redundant, or if insurers are receiving a glut of applications from one set of employees you may be turned down for cover.'

If you are self-employed, you can get cover, but if you claim, you will need to demonstrate that you have ceased trading, either by stopping your National Insurance contributions, or by getting your accountant to write and say you have stopped.

Lenders sell MPPI - it is a useful source of commission - but this may not be the cheapest way to buy a policy.

Abbey National's accident, sickness and unemployment cover costs £6.04 per £100 covered, for example, compared with independent operator Pinnacle Insurance which offers the same cover from £1.90. Pinnacle Insurances 'helpupay' policy operates premium age banding, which can provide significant savings for younger policyholders. The £1.90 premium is based on a policyholder aged between 20-24, while policyholders aged between 55 and 59 can expect to pay £5.56 for the same cover.

Some experts argue it might be better to consider permanent health insurance (PHI) over MPPI, as it pays out indefinitely in the event of accident or sickness rather than for just 12 months. This can be costly, but you can reduce premiums by choosing a slightly longer deferment period - the length of time following a claim before the policy starts to pay out - but make sure you have enough savings to cover the interim.

Nick Bamford, managing director of independent financial adviser Informed Choice, says: 'This is definitely worth considering and could prove more cost-effective in the long-term as it pays out for longer than MPPI.'