Building societies broke ranks yesterday over their opposition to the Government's cuts in mortgage interest payments, amid signs that some are preparing to replace it with free mortgage protection insurance.
Market Harborough building society said that from 1 October mortgage payments for new and existing borrowers would be covered in the event of unemployment .
The Leicestershire-based society is following the lead of Skipton, which recently became the first to offer this benefit free to its own borrowers.
Britannia also announced that it will offer free mortgage protection insurance to new borrowers, but only for one year. Thereafter, homeowners will have to pay for it.
The move by building societies to offer the cover signals the end of a long campaign against the Government's plan to cut mortgage benefits for people who become unemployed or ill.
From 1 October, new borrowers will not have their mortgage paid for the first nine months after losing their jobs. Existing borrowers will not be paid for two months and receive only half the interest for another four months.
Mortgage lenders have waged a bitter battle against the plans, put forward by the Department of Social Security. They have argued that, if implemented, the cuts will lead to a sharp rise in the level of mortgage arrears and repossessions.
Philip Dearing, chief executive at Market Harborough, said: "We would have preferred it if the Government had not gone ahead with these changes. Now that they have, we have to protect our own borrowers.
"We have found that there is a very low awareness of these changes and we did not want a situation to develop where, should borrowers become unemployed, they would blame us for what is happening."
Borrowers who want additional sickness and accident insurance from Market Har borough will have to pay pounds 2 for every pounds 100 of monthly benefit, about half the cost of similar cover from Skipton.
Ian Darby, a director at John Charcol, one of the UK's largest mortgage brokers, said: "What we are seeing is building societies protecting their loan portfolios, but it is the customers who benefit, which is good. I would imagine that this is likely to be widely repeated in the next few years."
Although they are not yet following Market Harborough and Skipton, other societies are incorporating this insurance as part of their overall marketing strategy.
Lambeth announced this week that it would offer a 0.3 per cent discount to anyone taking out insurance cover when arranging a fixed loan and Woolwich Building Society is offering mortgage protection insurance at pounds 3.50 per pounds 100 of repayments, about half the cost of similar cover six months ago.