Vulnerable borrowers `will be unable to buy property'

Simon Midgley on plans to cut state safety net for homeowners
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Some of the most vulnerable members of society - the ill, elderly, lone parents, self-employed, part-time employees and contract workers - may be unable to buy their own homes unless the Government steps in to help them.

The Government's planned cuts in the state safety net for homeowners and its aim to make borrowers take out private mortgage insurance will increase the cost of home ownership. But private insurance will not be readily available for the more uninsurable members of society and, when it is, it will be more expensive than the same cover for full-time employees.

Peter Lilley, Secretary of State for Social Security, has said the Government will consult the Social Security Advisory Committee, mortgage lenders and insurers about making arrangements to protect those who cannot be covered by private insurance. However, it seems virtually inevitable that the state will have to reintroduce a safety net for the infirm, unemployed and elderly.

The Council of Mortgage Lenders, which represents 150 lenders, accounting for 95 per cent of all lending in the UK, says potential purchasers identified by insurers as particularly vulnerable to unemployment would find it very difficult to buy a house. It adds that the increased costs of acquiring a property with private insurance will prevent some potential purchasers from buying and that the number of repossessions will rise because private insurers will not offer as comprehensive cover as the state.

From next October, the Government is proposing that new borrowers who resort to income support will be unable to get the state to pay their mortgage interest until after nine months. Existing borrowers who start claiming income support will not be able to ask the state to pay their mortgage interest for the first two months.

In future, the upper limits for mortgage payments will be reduced from £125,000 to £100,000 and interest will be calculated at a standard and not an individual rate. The state currently pays the interest on the mortgages of those who qualify for income support. A householder qualifies for income support if his savings are less than £8,000 and he is available for and actively seeking work.

At present, the state pays half the interest for the first 16 weeks and then the full amount. It is currently paying the mortgage interest on around half a million houses, costing about £1.2bn a year and representing 5 per cent of the 10 million mortgages in the UK.

However, the building societies, banks and insurers are far from certain that private insurance can provide such a comprehensive safety net. The lenders are worried that mortgages will become prohibitively expensive and the insurers are not willing to insure inevitable risks. Len Willcocks, creditor insurance manager at Sun Alliance, said insurers would not be willing to offer long-term cover for inevitabilities - for example, they would not offer repossession-free cover. Where someone was likely to lose their jobs, they would not be able to insure their mortgages. Almost all lenders offer new mortgage borrowers the chance to take out mortgage insurance at the time they take out their mortgages, when they top up their mortgages, or when the lender decides to make a bulk mailshot to all its borrowers offering such insurance.

But lenders will not give it on request for fear of being defrauded by people who know they are about to lose their jobs.

The cover offered is usually for accidents, sickness and unemployment. It is universally available for the employed, but much more selectively available for the self-employed and contract workers.

One new pilot scheme currently being tested by General Accident Direct - Protect Direct - offers any individual the chance to take out mortgage insurance cover at any stage of their mortgage. They use a matrix of five criteria to decide whether to allow such insurance. And unlike the building society standard rate for all bulk cover policies, they charge different rates to different people depending on the perceived degree of risk. The rating criteria include age, sex, occupation, nature of employer's business and post code. It will quote for 98 per cent of all occupations - it identifies 904 - but will not cover 16 occupations, including housewife, student and student nurse. Eighty per cent of its customers pay £4 per £100 per month, which is considerably cheaper than the average for such cover.

One thing is certain in the wake of the Government's proposed changes to the payment of mortgage interest: those who are refused private insurance cover will continue to need a state safety net to protect their homes and, in any event, the cost of mortgages on all homes is about to rise by several hundred pounds a year.