Buying a house? It's going to be riskier than ever

Whatever the outcome of the jousting now taking place between mortgage lenders and the Government over its planned mortgage interest changes, buying a house will be a riskier proposition in future than it has ever been.

Insurers are devising new mortgage protection policies that will both provide cover to more borrowers and remove some of the exclusions that commonly apply today. At a price, however, that may well be higher for some than what is being charged today.

At present, the average cost of insurance cover is about pounds 7 per pounds 100 of monthly repayments. Somebody with a pounds 55,000 mortgage would pay about pounds 25 a month for insurance.

The new policies would aim to replace the Government's planned cuts in mortgage interest relieffrom October, where new borrowers who become unemployed will not have their interest payments met for the first nine months. Existing borrowers will receive no benefits for two months and 50 per cent for four months thereafter.

The prospect of a combination of more imaginative and cheaper mortgage protection than at present is in sight, therefore, as insurers react to a potential premium bonanza from the 7.5 million people who do not already have such cover.

Steve Devine, a product development manager at Pinnacle Insurance, which offers mortgage protection cover to many of the UK's top lenders, said that if his company had requests to develop new protection policies it could meet them. "What we really need to know," he said, "is exactly what the Government intends to do and what areas we should be trying to provide cover for."

Despite their campaign against the interest relief cuts, lenders are themselves racing to provide a range of new loan packages to take account of the unemployment fears now felt by millions of borrowers. These would be complementary to mortgage insurance protection.

Gary Marsh, assistant manager at the Halifax, said: "Lenders are already coming out with new types of mortgages. Some offer interest payment holidays, where a person stops paying for a while in return for increasing repayments later.

"Similarly, where only the interest is paid back on the loan, the providers of endowments or other investments can offer premium holidays to take account of unemployment."

However, both sides warn that no matter what new packages are rolled out in the next few months, there will inevitably be a substantial proportion of borrowers slipping through the net.

The "cherry-picking" phenomenon - where people who are young and fit and have safe, long-term jobs will be offered cheaper cover - will rapidly become the norm.

This has been apparent in motor insurance for years, with the advent of companies like Direct Line. It is also becoming more common in, for example, health-related insurance.

Conversely, it also means that other groups - those on short-term contracts, those who have already undergone serious surgery or borrowers over 45 - either will find it impossible to get cover or will have to pay far higher premiums for it.

The prospect for potential future buyers is likely to be one of more tightly controlled loans, as lenders cut the risk to themselves by restricting supply to those they feel may not be able to make regular repayments. Without a fresh supply of would-be borrowers entering the housing market, house prices risk a further downward spiral.