The plans, part of the review of public expenditure, potentially extends the no-benefit period from nine months for new borrowers to 18 months, and might be linked to a compulsory insurance scheme for all new borrowers. The insurance cover would cost about pounds 7 a month for a typical pounds 50,000 loan and would replace the benefits currently paid.
In 1996, the total spent on mortgage interest as part of income support payments was about pounds 760m. While this amount is expected to fall in the longer term as more people are excluded from benefits in the first nine months because they took home loans after October 1995, the cost could soar again in the event of a renewed rise in unemployment.
Compulsory home loan insurance, though not linked to a cut in mortgage interest payments, forms part of series of proposals put forward in a report by the Council of Mortgage Lenders (CML) yesterday.
A spokesman from the Department of Social Security, said yesterday that although ministers had not yet seen the report, a number of options were now being considered by the public spending review, including this one.
The CML report argues that, taken with a series of other reforms of the welfare system affecting homeowners, compulsory cover would help to reduce the number of home repossessions, which currently stand at about 30,000 a year.
The state's financial burden, incurred when it has to rehouse evicted homeowners and pay their rents, might be further eased if it were prepared to offer support for low income homeowners at a cost of pounds 300m a year, the CML study estimates.
Michael Coogan, director general at the CML, said: "The DSS and the Department of the Environment and Transport are carrying out a spending review and they are looking at how assistance in the housing market is paid. What we are trying to do is add to the informed debate within the Government. I think [ministers] are interested in these sorts of views. They do not want to add to the financial burdens of borrowers.
The report, written by Steve Wilcox, an academic at the University of York, and Holly Sutherland, from Cambridge University, will be unveiled at a one-day forum to be addressed by Hilary Armstrong, the housing minister.
The two writers argue that structural changes in the housing market mean that more borrowers than ever before operate in a climate of job uncertainty. In the event of a new economic downturn, the scale of repossessions which has dropped below its peak of 60,000 a year in the early 1990s would begin to climb again.
Mr Wilcox and Ms Sutherland propose a combination of three policies to prevent the problem faced earlier this decade from reocurring. The first would involve lender flexibility and a commitment not to repossess properties if mortgage debts rise in the first three or four months after borrowers loses their jobs.
Second, the authors suggest that while tax relief on cover might make insurance more popular, this move alone is unlikely to stimulate many people to take out insurance. They suggest compulsion is the best option, because it would allow lenders to provide it more cheaply, without "adverse selection" from people who expect to be made redundant before they take the insurance out.
The third proposal involves offering borrowers similar benefits as are made available to tenants on low income.