At present, home-owners receiving income support are normally eligible to have the interest on their mortgages paid in full - except in the first 16 weeks, when they receive benefit to cover half the payments.
Following embarrassing revelations about payments of thousands of pounds a month to some formerly wealthy individuals - such as the Hampstead designer Peter Julien and a former insurance company head, Trevor Deaves - Peter Lilley, the Secretary of State for Social Security, said last weekend that mortgage benefits would be limited in future.
The Government hopes to lay regulations before Parliament, shortly after the Easter recess, which will restrict mortgage assistance for people on income support to loans of up to pounds 150,000.
Those already receiving help with loans larger than this will not be affected, but the restriction will apply to claims lodged after the new rule is implemented. In 1994, the ceiling will be reduced from pounds 150,000 to pounds 125,000.
The regulations will include provision to ensure that hard- pressed home-owners with loans above these amounts are not penalised if they have insurance to cover interest payments on sums above the DSS ceiling.
Money paid by mortgage protection insurance policies is normally counted as income by the DSS and deducted from the individual's benefit entitlement.
Without a change to the rules on mortgage benefit, people insuring the top slice of their loan, above pounds 150,000 or pounds 125,000, would have found that the payments they received from the policy were deducted from their DSS benefits for borrowing up to the new ceiling, leaving a shortfall on their total monthly commitments.
BNP Mortgages may in future insist people taking out loans over the ceiling take out mortgage protection policies.
John Schuster, general manager, marketing, said: 'We will be looking very carefully at this for larger loans.'
BNP, like many lenders, already encourages new borrowers to take out insurance policies to cover mortgage payments in the event of sickness or unemployment.
Citibank is also looking at compulsory insurance on large loans. At present, the bank does not lend more than pounds 150,000. But Stephen Balme, its marketing director, said it might want to in future.
The country's largest mortgage lenders, the Halifax and Nationwide building societies and the Abbey National, said they did not yet foresee a need for compulsory insurance on new loans above pounds 150,000 - mainly because only a minority of their borrowers took out mortgages of this size and the number who ran into difficulties with them was tiny.
Birmingham Midshires Building Society is considering making mortgage protection policies compulsory on loans equivalent to more than 90 per cent of a property's value. However, the society says this is not connected to the Government's announcement about the future of mortgage benefits.
Mortgage protection insurance is rarely offered at present to existing borrowers, because insurers fear people will only buy it when they expect to have to claim. Those with policies have also discovered they are not a universal panacea in troubled times.
Many policies do not cover the self-employed, and most require the borrower to register as unemployed.
Meanwhile, the premiums of these policies have gone up sharply because of increased claims. Halifax Building Society is at present notifying 170,000 borrowers of increases in their mortgage protection policies of up to 38 per cent.
Policies are also being changed so that unemployed policyholders will be paid benefits for a maximum of one year instead of two.
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