Mortgage safety-net is cut

The Government safety-net for home-owners was cut sharply back last night. Existing home-buyers were told their mortgages would not be paid for the first two months if they end up on income support, and new borrowers were warned to insure against unemployment.

The measures, announced by Peter Lilley, Secretary of State for Social Security, caused a furious political row. Donald Dewar, his Labour opposite number, said the effect on existing borrowers was ''tantamount to a sentence of homelessness''. Mr Lilley accused Mr Dewar of scaremongering and said it was perfectly reasonable that the initial costs should be met ''by the insurer, the lender or the borrower and not by the

taxpayer''.

At present half the interest on home loans is paid for 16 weeks, and then all of it. From October, new borrowers will get no benefit at all for the first nine months. Existing borrowers will receive no help for two months and only half the interest for the next four months.

Mr Dewar protested the changes ''bring to many people the threat that if they lose their jobs they will also lose their homes''. Lenders said the insurance cost to new borrowers was likely to be pounds 7 per pounds 100 paid monthly. However, Malcolm Tarling, of the Association of British Insurers, warned that people on fixed-term contracts and the self-employed are often refused cover.

And mortgage lenders threatened to end their ''softly softly'' approach to repossessions. They agreed in December 1991 that they would be patient with borrowers in difficulty as long as the Government continued to offer help in paying interest on the mortgage direct to the lenders.

But last night Adrian Coles, director general of the Building Societies Association, said lenders would have to look again at the agreement. He said the Government was watering down support for owner-occupiers. ''They are baling out. It is offensive. They are removing the safety-net. Vulnerable groups will suffer.'' Repossessions have fallen from a peak of 39,000 in the second half of 1991 to 25,000 in the first half of this year.

Yesterday's package of measures designed to cut social security payments to home-owners also includes a cut in the limit for payments from pounds 125,000 to pounds 100,000, and the use of a standard interest rate on which mortgage payments will be based.

Gary Marsh, housing economist at the Halifax Building Society, said lenders feared that if the standard rate was lower than the rate charged, borrowers would get deeper and deeper into debt.

''It is really quite worrying. The 16 weeks were bad enough.''

Shelter, the housing charity, called the decisions appalling. It said ministers were telling all home-owners to take out private cover. ''Some will not be able to afford to do this because they are too high-risk.''

Mr Lilley argued that some mortgage companies might insure all their clients

themselves.