Mortgage insurance policies - the Government's preferred option to protect against sickness or unemployment - will not prevent many people from from falling into debt, the new study shows.
The number of those who are in arrears on their mortgages has fallen recently - to just under 500,000. But two-thirds of them are suffering increasing debts rather than reducing arrears.
"Interest rate increases and proposed changes to the social security support for borrowers who lose their jobs will be likely to reverse the recent fall in arrears," the report's authors said yesterday.
The 124-page report, prepared jointly by the Policies Studies Institute, an independent think-tank, and two academics at Loughborough University, was commissioned by the DoE last year.
Interviews with more than 1,100 households in England were carried out, together with surveys of 72 mortgage lenders and some of their staff, plus interviews of judges responsible for handing out repossession orders to those in default.
Its findings are likely to be an embarassment to ministers.The report has been studied by officials at the Department of Social Security, who are said to have praised its "thorough approach".
Insurance companies that provide cover do not escape criticism. Elaine Kempson, a fellow at the PSI, who co-authored the report, said: "Our findings studied the typical wordings of many policies and in our experience people found themselves suffering from exclusions.
"This was either because people were self-employed, or because they had not been unemployed for the requisite number of weeks. On other occasions, if they did just one or two days' work in between periods of unemployment, they were turned down.
"One lender told us that insurers would be much more likely to look at the fine print of a policy if they faced a claim."
The report also found that mortgage arrears, which now average pounds 2,500 per household, have spread well beyond the original nucleus of first-time buyers and those who bought homes in the high point of 1988 and 1989.
A Department of Social Security spokeswoman played down fears that its policies would lead to more arrears and repossessions. Only a minority of people in arrears were unemployed and dependent on mortgage interest relief, she said.