New benefit cuts for homeowners

Unemployed hit under Lilley plan to define 'standard' interest rate

Up to a million homeowners face big cuts in mortgage interest benefits if they become unemployed after a shake-up in the way payments are made.

The cuts planned by Peter Lilley, Secretary of State for Social Services, are on top of those the Government announced in November's Budget. They involve replacing the existing system - where mortgage interest payments are based on the amount charged by lenders - with one in which a standard rate applies.

Borrowers most likely to be affected are the self-employed, those with high fixed-interest mortgages, or with home improvement loans on which benefits are payable. They tend to have mortgages pegged at higher rates of interest than the norm.

The Council of Mortgage Lenders has been lobbying ministers to amend the plans. It estimated yesterday that, taken with the Government's other mortgage relief changes, they could lead to up to 24,000 more repossessions a year. A person with a mortgage 1 per cent above the standard variable, currently about 8.4 per cent, could face a monthly shortfall of £45 on a £60,000 mortgage.

The vote-sensitive confusion over tax on insurance policies continued yesterday, tripping up the Government as electors in England and Wales - bar London - voted in local elections.

Kenneth Clarke, the Chancellor, announced a review of tax on insurance pay-outs to cover credit card or personal loan repayments for the unemployed or sick. These policies had escaped Tuesday's hurriedly announced exemption for mortgage payments insurance.

Tony Blair, the Labour leader, tried at Prime Minister's Question Time to exploit ministers' apparent uncertainty about intricate details of the tax system, describing the move as a "pre-election panic attack". The Prime Minister dismissed that as "scaremongering" and tried to reassure voters that "until the matter is settled ... the Inland Revenue will not expect tax to be deducted".

However, ministers prepared to explain record poll losses. Turn-out was expected to be high in the fine weather, and Liberal Democrats reported "very few" Tory tellers at polling stations.

Sir Marcus Fox, chairman of the Tory backbench 1922 Committee, moved to quash stories that Tory MPs would try to force a challenge to John Major, by declaring next week their support for an autumn leadership election. "I don't think there is any likelihood. There is no provision under our rules that there can be a challenge anyway. It is only permitted once a year, after the new session starts in November."

The worst news yesterday for Tory councillors facing the voters came when it emerged the confusion over tax on insurance policies had been unnecessary. Tony Baker of the Association of British Insurers told BBC radio "very few" people were affected, as existing tax law applied only where insurance payments are guaranteed beyond 12 months. "The government's was rather a kneejerk reaction without knowing the full facts. It was a really academic point."

However, a briefing paper from Mr Lilley's department to the Social Security Advisory Committee, which oversees changes to the benefit system, admits there would be "significant gainers and losers" from his proposed change for higher fixed-rate mortgages.

The DSS document says some 8 per cent of claimants pay interest rates at 10 per cent or above, often for home improvement loans, on which benefits can be claimed. A further 2 per cent of claimants pay 5 per cent or less. After 1 October, anyone who become unemployed will be paid mortgage interest based on a rate set by the DSS - roughly mirroring existing variable rates. Existing claimants will be cushioned against losses by interim payments. But anyone becoming unemployed after October will not.

"Insurance is almost always offered with these [loans] at point of sale; for this reason the Government proposes that significant losers are not given special treatment," the document states.

So-called "significant gainers" will not benefit either. Any extra money paid over and above the lower rate will be held on account by lenders to offset future mortgage rate changes.

Although most loans on which higher than average interest rates are paid are for home improvements, Abbey National said about 5 per cent of its 1.2 million borrowers pay more than its 8.34 per cent variable rate, most for outright home purchases.

The SSAC is expected to report back to Mr Lilley within a month, after which he will decide whether to implement the changes.

The DSS denied the motive was to cut the amount paid out. A spokeswoman said: "The administration of such payments are enormous and very complex. We estimate the savings from moving to a standard rate will be of about £9m."