Thinking of remortgaging? If you fear losing your job you need to act now to beat the October clampdown on state interest payments

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The Independent Online
This is not the weather in which to be making substantial financial decisions. But if you are thinking of taking on a mortgage, or indeed remortgaging, you need to do it immediately if you want to beat the October deadline for cuts in state help for jobless borrowers.

Mortgages taken out after 1 October will attract severely reduced mortgage interest benefits where a borrower is claiming income support. And with the average mortgage taking roughly six weeks to complete there is no time to waste if you think you may lose your job in the future.

At present homeowners on income support - a means-tested benefit which provides financial help if you are not in paid work and your other income is below certain levels - can claim mortgage interest benefit. This benefit pays half of the mortgage interest on loans up to pounds 100,000 for the first 16 weeks of the claim and the full amount after that. After the first 16 weeks the benefit is paid direct to the lender.

After 1 October the benefits paid to existing borrowers will be reduced No benefit will be paid for the first two months of a claim, after which half the interest will be paid direct to the lender for the next four months. After six months the interest will be paid in full, again direct to the lender.

But if you take out a new mortgage after 1 October your benefits will be severely curtailed. No mortgage interest will be paid for the first nine months of a claim. After nine months the interest will be paid in full direct to the lender.

It is also worth remembering that when the interest is paid it will be at the standard rate. This may be less than the rate which the borrower is required to pay. For example, where a borrower has fixed at a relatively high rate of interest there could be a shortfall.

The new rules, brought in by the Secretary of State for Social Security, Peter Lilley, to save an estimated pounds 1bn a year, have been widely blamed for keeping the housing market pinned firmly to the floor.

The changes came in for fierce criticism from the Social Security Advisory Committee, which demanded a range of urgent concessions, including continuing state protection for part-time staff, people over 55, divorcing couples, seasonal workers and homeowners who switch lenders to get a better rate of interest.

These suggestions were firmly resisted by Mr Lilley who insisted that the insurance industry should provide the safety net where the state had pulled out.

However, there is no evidence that insurers will have suitable sickness, accident and redundancy policies in place by the October deadline. Many are still waiting for firm guidelines from the Association of British Insurers.

Lending figures published by the Building Societies Association yesterday showed a further weakening of the housing market in July. "The low levels of activity reported by estate agents, along with continued house price falls, underline the enduring malaise in the market,'' said Adrian Coles, director general of the BSA.

He urged the Government to make a commitment to homeowners to help restore some of the confidence required for the housing market to recover.

Meanwhile, the financial plight of an estimated 1.5 million borrowers was again highlighted this week when the High Court ruled that a couple threatened with repossession by Halifax Building Society should be allowed to sell their property on the open market and deduct the transaction fees from the proceeds.

Mr Justice Evans Lombe dismissed Halifax's argument that it could not sanction the sale of the property in South London unless it received the entire proceeds and the conveyancing fees were met from another source. The judge said that repossessed homes usually fetch less when sold by lenders rather than owner/occupiers and that Halifax was likely to receive more if the couple, who have negative equity of pounds 74,000, sold on the open market.

Despite the High Court victory the message for borrowers is limited. Borrowers are still liable for the transaction costs whether they are met from the sale proceeds or added to the outstanding loan.

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