Get yourself protected

It's vital to insure your mortgage repayments. But can you afford it?

Despite falling interest rates and a stable housing market, the long lines of weary home owners queuing at Shelter offices for advice on avoiding repossession show little signs of diminishing. Quite the reverse. Most of us can expect to fall ill or lose our jobs at some stage during our working lives and, without adequate savings or insurance, thereby make it impossible to meet mortgage repayments.

Government support to home owners has been cut back sharply since the beginning of the decade to a point where only a minority will be in a position to qualify for state support to pay their monthly mortgage bill. Most lenders begin repossession procedures after missing just two monthly payments.

During the last recession, private mortgage insurance providers became charred by a reputation for wriggling through every loophole and clause to avoid meeting claims. However, this week mortgage lenders and insurance companies, backed by the Government, have launched a new initiative which is aimed at removing the potential for grief from home ownership. They have produced a new-style insurance policy that is designed to iron out many of the flaws of the old contracts and to provide most home owners with a basic level of security.

However, critics maintain that for all its good intentions, those on the margin of owner occupation remain as vulnerable as ever. Worse still, these new policies could provide a Government determined to shrink the welfare bill, with a springboard to cut state support yet further.

Changes to income support have meant that since October 1995, anyone who bought or re-mortgaged a property will not have the interest paid on their mortgage for the first nine months if they have an accident, fall sick or become unemployed. Moreover mortgage interest is unlikely to be paid if you have a working partner or savings of more than pounds 3,000. And any mortgage above pounds 100,000, not an immodest amount in the South East, is excluded.

All of which explains why mortgage repossessions are still running at 33,000 a year, and are almost guaranteed to soar well beyond the 1991 peak of 75,000 if the economy does head into a serious recession.

To avert a potential crisis, therefore, mortgage lenders are eager to encourage as many people as possible to protect themselves by buying insurance against sickness and unemployment. Currently only one in five borrowers opts for protection which the Government estimates at least 55 per cent of all home buyers need.

To make the policies more attractive the Council of Mortgage Lenders has produced a quasi-code, guaranteeing minimum standards. All policies, for example, must pay out after 60 days, and cover repayments for a year. There should be fewer automatic exclusions for pre-existing medical conditions. Furthermore contract workers can be covered if they have worked for the same employer for at least a year. Similarly, the self-employed can claim, provided they actually wind up their business.

Such basic cover will be mandatory for all policies sold after July, although lenders have until July 2001 to bring existing contracts into line. This could be described as an unreasonably generous timetable, given that four of our major lenders - the Halifax, Abbey National, Nationwide and Woolwich - admitted that some of their existing policies would need to be altered.

Despite these reforms Shelter says the new contracts still do too little to help those in most need. A spokesman explains: "The people who need this are still less likely to buy it than those in secure jobs with surplus income who probably don't need it at all.

"The low-paid, contract workers, and those who rely on overtime, commission and bonuses, always existed in the housing market only at the margins. There is no decline in the numbers of desperate people visiting our offices pleading for help to keep the roof over their heads.

"More worryingly we are seeing a new category of people desperate for help, who never thought their home might be at risk. These are the middle- aged, middle-class, often small business owners, who due to ill health, unemployment or recession are suddenly unable to meet their repayments and find themselves facing the prospect of losing the family home. If you lose your job or your business at 55, you will not recover.

"There is quite a bit of anecdotal evidence suggesting that lenders are moving more quickly to repossess than ever, because the relatively buoyant housing market allows them to minimise their loss by selling quickly."

Shelter is also very concerned that the position will be exacerbated by the new breed of flexible mortgages that allow home owners to borrow up to the hilt using their houses as security. Furthermore some, even within the industry, fear extending the cover for 12 months could trigger a further clawback of state support.

A spokesman for the Council of Mortgage Lenders says: "There has been some speculation that they could extend to a year the period during which they will not pay income support, but we are not aware of any imminent changes planned."

Finally the new policy does nothing to address the high cost of cover, which desirable though it may be, is often beyond the already stretched budgets of most home buyers. Although the majority of lenders say they will improve their cover to at least match that of the new basic prototype without any additional charges, the existing cost is expensive at around pounds 5.75 per pounds 100 of monthly mortgage repayment.

Even at today's very low interest rates this adds pounds 25 to the monthly bill of a pounds 60,000 mortgage. Worse still, this doubles if you want to insure two incomes, increasingly vital to protecting a modern mortgage.

And there's no looking to the Government for help on that front. More likely it will move to stem mortgage interest tax relief further in the next budget, in itself adding pounds 17.33 to most people's home-loan bill. As the song says: the only way - for home-ownership bills at least - is up.