YOUR MONEY: Faults emerge in home policies

Mortgage protection blues are justified, says Clifford German

JOHN MAJOR'S failure to move Peter Lilley from Social Security in the reshuffle has severely dented hopes that the Government would do a U-turn and withdraw its plans to make home-owners who take out mortgages after 1 October and subsequently lose their jobs wait nine months before they can get mortgage interest paid for them. Existing mortgage holders will have to wait up to two months.

The change was announced by the Chancellor in the Budget last November, but Mr Lilley has been its most determined advocate in the face of universal condemnation from mortgage lenders as well as borrowers. He has made some concessions - carers, victims of divorce, people with existing medical conditions including HIV, and people who move house but take out a new mortgage for no more money and with the same lender will remain under the "old" rules - but he is adamant on the basic principle.

Mr Lilley argues that borrowers should take out mortgage payment protection policies (MPP) to cover the risk. But conventional MPP policies are not cheap: they cost about pounds 7 a month per pounds 100, ie, pounds 28 a month to protect an average mortgage. They do pay out even if claimants have savings or working partners, but they exclude cover for people with a medical condition that could cause them to give up work and those whose jobs are at risk, from known redundancy plans or because they are contract workers with reduced job security. And they offer little protection to people who lose their jobs and can find only part-time or casual work, or jobs at substantially reduced rates of pay.

David Whistler, who lives in Hertfordshire, has discovered another flaw in MPPs. He took one out in 1991 to protect his mortgage in case he was made redundant. Last February, he was. He made a claim and was relieved to hear that the policy was perfectly in order, and his mortgage interest would be duly paid. The policy even allowed him to work for up to 16 hours a week and still claim.

Unfortunately, its rules decree that payment will only be made 30 days after the DSS has assumed responsibility for his National Insurance contributions. But the DSS, of course, will only pay his contributions if Mr Whistler is wholly unemployed. As a television transmission controller, he could find casual work, but if he did the DSS would stop paying his NI, so he would breach the conditions of his mortgage protection policy and his interest payments would stop.

He is now back in permanent employment, but thousands of others have not been so lucky - and tens of thousands more may well be living in a false sense of security, thinking they are covered when they are not, unless they are able and willing to live on the breadline until they can find another full-time job.

Most, if not all, mortgage protection policies were drawn up in the days when borrowers had nine-to-five jobs and life-time careers. They were not designed for borrowers with existing medical conditions, or casual or contract workers, who were unlikely to get a mortgage in the first place, and they were certainly not designed to cope with variable incomes. Most are linked to the DSS taking over payment of National Insurance contributions, and will fail the casual or part-time trap. If policy-holders are in doubt, they should ask their insurers.

Some insurers, notably General Accident Direct, sell policies designed for self-employed and fixed-contract workers and others with irregular incomes, which will maintain payments if the insured borrower works less than 16 hours a week or an average around that level. To qualify for payments, policy holders need to register for work, but there is no link to NI contributions being paid by the DSS.

With the October deadline looming, and hope for a U-turn fading, most lenders are working with their insurance companies to devise plans that will cope with the problems that conventional MPPs fail to address, and they will now redouble their efforts.

One line of thinking is to devise policies that would provide a scale of protection and pay a proportion of mortgage interest for people whose incomes are reduced rather than wiped out, in place of the all-or-nothing current policies. The same would apply for people whose employment is not secure.

But one thing is certain: policies that provide realistic cover in a full range of circumstances will not be cheap. And if by chance lenders are persuaded or pressured to follow the example of the Skipton Building Society, which is offering free mortgage protection policies, the costs will have to be carried somewhere else in the society - either through higher mortgage interest rates, or lower rates offered to investors, or through permanently reduced profit margins to the lender. This is something that a dedicated mutual society like the Skipton might carry but shareholders in a bank or a converted building society are unlikely to want.