When mortgage cover falls down on the job

Are payment protection policies a panacea? Jean Eaglesham has doubts and so do some insiders

MORTGAGE rates may be at their lowest level for 30 years but the feelgood factor is still proving elusive. The mood will not have been lightened by the recent Labour Party attack on Government housing policy, highlighting the fact that around 50,000 homes are still being repossessed each year.

Job insecurity, and the fear of mortgage arrears and repossessions, is a big factor in the housing market's failure to recover. But some borrowers may be inadvertently worsening the risks by switching lenders. Remortgages may save money but switching lenders reduces the already limited state help available if you lose your job (see right).

There is, however, a silver lining - at least for insurers. Last October's cuts in state support provided an ideal platform for them to sell mortgage payment protection policies, insurance that pays your mortgage if you become unemployed or (in most cases) cannot work because of illness or disability. Mortgage lenders have also responded by promoting their own policies more heavily; many discounted and fixed-rate deals now offer six to 12 months of free cover as part of the package. More generally the terms of many policies have been improved and premiums cut. "You get a lot more cover now for less money," according to Steve Devine of Pinnacle, which underwrites many of the lenders' policies. Some lenders, such as Birmingham Midshires and Britannia, are experimenting with selling the insurance to existing, as well as new, borrowers.

Skipton and Market Harborough societies have gone further by offering free, albeit fairly limited, unemployment cover. "We believe we are doing more for the housing market than simply reducing interest rates," says David Charlton, of Skipton. "We think it is a great statement for mutuality [ownership of the society by its customers, called members rather than by shareholders] because it helps existing as well as new borrowers."

But other lenders, which are also trying to fly the flag of mutuality by offering added extras to members, are not convinced. David Homes of Yorkshire Building Society says "free insurance only benefits a small proportion of our members".

Similarly, a Bradford & Bingley spokeswoman says: "The problem is that the people who take up this cover are the ones most likely to claim on it. We think it is quite an expensive use of members' money in terms of what you get for it."

The fact that a number of lenders think this insurance is relatively poor value should ring alarm bells with borrowers. Even Sue Anderson of the Council of Mortgage Lenders, the lenders' trade body, says: "It is not a universal panacea, although we would urge people to think seriously about it."

Research commissioned last year by the Department of Environment found that while job loss was the single most common cause of arrears, there was no evidence that mortgage payment protection policies were an effective mechanism for preventing arrears, nor that the policies had the potential to give a widely available, affordable and effective safety net.

Certainly there are still serious drawbacks.The first is that the insurance is only short term, even though most borrowers think they are buying to cover a long-term risk. Policies can be reviewed annually, or even monthly, resulting in increased premiums, reduced benefits or even a borrower's cover being cancelled. In the last recession, many policyholders faced a sharp increase in premiums, often in return for less cover. In some cases their insurer pulled out of the market. If another sharp rise in the jobless occurs, the same thing is likely to happen again.

The second big problem is the range of exclusions. Common exclusions to beware of include:

q Becoming unemployed soon after taking out the policy. The typical initial qualifying period is around three months.

q Taking out a policy when you were aware, "or ought to have been aware", of the threat of impending redundancy, in the words of one insurance policy.

q Part-time workers who work fewer than 16 hours.

q Contract and short-term workers. The only exception is where you have worked continuously for the same employer for two or three years

q Anyone with a medical condition when they took out the policy that could lead them to give up work.

The self-employed are covered, but the conditions for claiming can be onerous.

Even if you clear all these hurdles, it is still questionable whether the level of cover justifies the premiums. You generally get, at most, 12 monthly payments per claim, although some lenders offer the option of increasing this to two years' worth of payments in return for a higher premium.

If you believe you would struggle with your mortgage should you lose your job, this insurance is worth considering. But if, for example, your partner is also working or you have a reasonable level of savings, the cover looks less attractive.

Certainly, the limited free cover on offer with certain mortgage deals should not be a deciding factor in choosing that deal. If you are worried about how you would cope if you were unable to work for a long period because of illness rather than unemployment then an alternative, albeit more expensive option, is permanent health insurance.

q Jean Eaglesham works for `Investors Chronicle'.

Don't rely on the state

IF YOU lose your job and can't pay your mortgage, don't assume the welfare state will help. Following cuts last October, the level of state support available is limited, to say the least. If you have savings of more than pounds 8,000 or your partner works, you almost certainly won't get any help.

Even if you do qualify, the payments are limited:

q Borrowers who took out a mortgage before 1 October 1995 get nothing for the first two months they are registered as unemployed, half their mortgage interest paid for the next four months, and all of the interest paid thereafter.

q Borrowers who took out a mortgage after 1 October 1995 - and that includes people who switched lenders after this date - get nothing for the first nine months, and all of the interest thereafter. Borrowers who have remortgaged with their existing lender since October and, importantly, not increased the size of their loan remain covered under the old rules.

These payments cover the interest on the first pounds 100,000 of the loan only. They don't cover capital repayments or payments into a linked savings vehicle, such as an endowment policy.

Major lenders' policies

Initial exclusion Waiting period Monthly cost

unemployment after claim2 for mortgages

(days)1 (days) pounds 50,0003 75,0003

Unemployment cover only

Abbey National 56 28 13.18 20.42

Nationwide 90 30 11.50 17.81

Unemployment, accident and sickness cover

Abbey National 56 28 19.43 30.10

Alliance & Leicester 60 30 14.56 22.55

Birmingham Midshires 120 60 18.91 29.30

Bradford & Bingley 90 30 19.17 29.70

Halifax 90 30 14.14 21.91

Lloyds Bank 90 45 12.50 to 19.36 to 26.704 41.364

Nationwide 90 30 15.86 24.58

Woolwich 905 60 14.91 23.10

All premiums quoted are for maximum 12 monthly payments per claim.

1 Period after taking out policy during which you are not covered for unemployment.

2 Period after making claim before eligible for any payment.

3 Assuming mortgage rate of 7.49 per cent and level of benefit covers monthly interest repayment only.

4 Premium varies depending on age, sex and occupation.

5 For new customers; 180 days for existing mortgage holders.