Personal Finance: Borrowers to run for cover

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THE GOVERNMENT'S privatisation of social security benefits has, so far, been creeping along.

Personal pensions, private health care insurance and private care of the elderly are edging into place. Now it is the turn of welfare benefits for home-buyers to be undermined.

The Government is uncomfortable paying mortgage interest for those who become unemployed. Isolated cases where home-buyers were sitting pretty in huge houses with a large mortgage being paid by the state have led to the Government restricting the benefit to loans up to pounds 150,000 - shortly to be cut to pounds 125,000.

This has helped to lay the foundations for further restrictions.

The easy answer is to force home- buyers to take out insurance to pay their mortgage bill when they are ill or made redundant.

There is a precedent for the Government forcing individuals to take out insurance cover: the way that drivers have to take out third-party insurance before they are allowed on the roads.

But the only harm home- buyers inflict when disaster strikes them is on the government coffers - not their fellow citizens.

If home-buyers were forced to take out the insurance, it should become much cheaper. At the moment, there is a presumption that those who take out the payment protection insurance are the people most likely to call upon it. But if everyone was corralled in, a flat-rate system would - other things being equal - bring premiums down.

The building societies would expect to provide block policies for borrowers in the same way that they negotiate own-brand buildings and contents insurance. Lenders are not allowed to force borrowers totake out commission-earning insurance with them - although the law is largely skirted by 'special' deals. If there were freedom to buy the redundancy and sickness cover anywhere, some insurers might see the opportunity to cream off the better risks and offer a cheaper deal - although no job seems very certain these days. This could leave those who have ever suffered ill-health or unemployment totally outside the home-ownership market.

Lenders are already tightening their loan criteria, and this would screw them down further and have long-term consequences for the property market - never mind a short- term collapse.

If income support rules meant that those in rented accommodation could continue to claim their housing costs in the same old way, it would surely not be long before mortgage lenders devised mortgage-to-rent schemes. This could change the status of borrowers, who might remain in their own homes in hard times to exploit the difference in benefit rules.

The foundations for plans like these were laid more than a year ago when the lenders got together with the Government and came up with the direct payment of mortgage benefits to lenders, in return for an easing off in repossessions.

Most lenders are set against the idea of privatising income support payments for mortgages. Andrew Longhurst, chief executive of the Cheltenham & Gloucester, said it was 'a hopeless idea' and that if it was put into place, it would have a far worse effect on the property market than the threatened removal of mortgage tax relief.

David O'Brien, chief executive of National & Provincial, believes the scheme could work, and that the time to put it in place is when interest rates are low and people can afford to pay for protection.

N&P's scheme, which pays for two years, costs pounds 4 per pounds 100 of payment for redundancy cover and pounds 3.20 per pounds 100 for sickness cover. So on payments of pounds 300 a month, the cover would cost pounds 21.60 a month. The reduction in cost due to taking in all borrowers would be wiped out if the Government proposed a longer period before the state stepped in or abolished the benefit for home-owners altogether.

The three most common reasons for home-buyers getting into trouble are death, redundancy and divorce. If insurance for the first two becomes compulsory, it cannot be long before brides and grooms have to sign the insurance form at the same time as the register.