Keeping your home if your income dries up

Finding the right mortgage is one thing, keeping up payments another. About 700,000 people are made redundant each year, while 1.6 million are off sick for six months or more.

Since 1995, benefits covering mortgage payments have been cut. Anyone with a mortgage taken out since then will have to claim unemployment benefit for nine months before qualifying for supplementary mortgage payments.

This affects not only first-time buyers but hundreds of thousands of people who have taken advantage of the many and increasingly popular cut- price fixed and discounted rates on offer over the past two years or so. Many lenders now offer insurance packages designed to meet the short-term consequences of accident, sickness or unemployment (ASU). Such policies offer extra security, but anyone contemplating taking one should carefully consider both the costs and benefits, and where to get the best deal.

Such policies pay a monthly benefit to meet interest on a mortgage loan, usually for 12 months, after a deferred period of two months. This means that if you claim, no benefit will be payable until you have been off work for two months, and then only for the 12 month period thereafter. Returning to work after a claim, you will not be able to claim again for a minimum period, usually set at three months' continuous employment.

Claiming for accident or sickness should be straightforward. Making a claim for unemployment may prove trickier. If made redundant from long- term employment there should be no problem. Being sacked for misconduct or not being re-hired at the end of a fixed-term contract will exclude you from claiming. The self-employed can qualify, but only if their business becomes insolvent, and ceases trading.

The cost of ASU is set as a percentage of benefits. As our table shows, there are wide differences both among lenders and between them and providers of individually rated policies.

Differences in rates are a result of the different ways in which lenders and insurers set up their policies. Lenders offer a group rate. This applies to all borrowers within a broad limits of age and occupation. Insurers rate individuals according to age, medical history and occupation.

This last method offers the advantage of tailoring prices more closely to a person's actual risk. But it also leaves providers open to charges of "cherry-picking", where the most vulnerable are either unable to obtain quotes or pay heavily for them.

The rates from Norwich Union, Zurich and ITT are for a man aged 34, or a woman aged 29, both office workers. They would save pounds 160.80 each year going to ITT instead of Bradford and Bingley.

Ian Burrell at ITT says: "Anyone under 40 in low-risk employment should shop around. Going into a group scheme means they are likely to subsidise higher-risk members. Of course, the reverse applies if you are older or fall into a higher risk occupational category."

Important differences can emerge when the basis for calculating benefits is taken into account. Zurich offers ASU as part of a larger package including life cover. ASU benefits must be 1 per cent of the amount of life cover taken. So life cover of pounds 50,000 for a mortgage of the same amount means ASU benefit of pounds 500 per month. Interest rates would have to top 12 per cent annually for a pounds 50,000 mortgage to cost as much. This looks like over-insurance.

Other policies, like that from ITT, allow extra cover to be built in for the cost of home insurance and premiums on an endowment. Portability may also be important. A free-standing policy should be transferable if you re-mortgage with a new lender.

The advice you receive on ASU will depend on where you buy your mortgage. Lenders are not obliged to inform you of alternative policies cheaper than their own. An IFA or mortgage broker should find the best deal for you.

THE COST OF UNEMPLOYMENT COVER

Provider Rate as % of Cover Cost of pounds 400 monthly cover

Bradford and 6.76 pounds 27.00

Bingley

Lambeth B.S. 5.99 pounds 23.96

Alliance & 5.0 pounds 20.00

Leicester

Norwich Union 4.46 pounds 17.84

Zurich 3.60 pounds 14.40

ITT London 3.40 pounds 13.60

For an indepedent financial adviser near you, call IFA Promotion on 0117 971 1177