"What we drew from the meeting is that this is no longer a Government for home ownership," said Adrian Coles, secretary general of the Council of Mortgage Lenders.
The Government spends £1bn on income support for mortgage payers and is looking at ways to cut this bill, yet it spends £10bn on housing benefit, mostly for council tenants.
The Government announced in the November Budget that it plans to cut mortgage payments it will make for home owners claiming income support .
It currently pays half the mortgage interest for 16 weeks, then the full amount, but from 1 October new borrowers will get no payments at all for nine months. Existing borrowers will get no help for two months and half payments for a further four months.
Mr Coles said the two sides could not agree about the scope for private mortgage insurance. "We think it will be expensive with limited coverage. They think it will be universal and cheap."
There is no question of mortgage insurance being made compulsory, he said. The Government is not going to do it, although they considered whether the mortgage lenders might make it compulsory.
"That's not viable. It's a competitive market. Lenders not making it compulsory will get the best borrowers," he said.
Mark Boleat, secretary general of the Association of British Insurers, said he personally would never take out mortgage insurance and there were many others who did not see the need for it in their own circumstances.
About a third of new buyers take out mortgage protection, and the market could be for 50 to 80 per cent of borrowers. It usually starts payments after 60 days and they continue for one year. Most lenders have their own version of the cover and charge, onaverage, £7 per £100 of monthly payments, but rates can go as high at £10 per £100. For a loan of £50,000, this would add £36 to the £360 monthly payment.
The lenders did wring one small concession from their meeting with the minister. Mr Lilley assured them that the standard rate of interest that will be used to assess claims would be a genuine average of current rates and would not be artificially low tolimit the cost to the Government.
There are about 15 insurance companies in the mortgage payments market, which is worth £250m a year in premiums.
General Accident is piloting a new form of the cover where five factors are taken into consideration to set a rate - age, gender, location, occupation and employer's business. The first two factors weigh most heavily, as claims for sickness have more impact as people get older.
Nicola Yeoman, development manager of General Accident Direct, said the average claim was for five or six months. "Most people have gone back by nine months. It will not be possible to trade off immediate payment for limiting cover to nine months."
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