Home owners: the new poor

Anne Spackman on plans to withdraw state support from mortgage holders
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With Easter only just over, October seems a long way away. But for people hoping to move house this year it may arrive uncomfortably soon.

October is the kick-off date for the Government's plan to cut state support for home owners who lose their jobs. Anyone with a mortgage after the start of October will be affected; those who take out a new mortgage or move their mortgage to a new lender will be affected most.

The Halifax Building Society reckons that the average move is taking six months to complete. Savills' figures for country house sales are very similar, with London moving a little faster - at an average nearer four months. If the market continues to move so slowly, most of this spring's house-hunters look set to complete after the October deadline.

Income support is currently available to any home owners who are made redundant, as long as their spouse is not working and their savings amount to less than £8,000. At present they get half their mortgage interest paid for the first 16 weeks after they lose their job and after that, the full amount - up to a maximum mortgage of £100,000.

Under the new rules, existing borrowers will get nothing for the first two months, half-payment for the next four months and full payment after six months. New borrowers - and that includes people who switch lenders (remortgage) - will get nothing for the first nine months that they are out of work. If they do find a short-term job and it ends more than 12 weeks later, they must wait another nine months to qualify again for help.

Mortgage lenders are leading the campaign against the proposed new rules, which are seen as the latest blow to the fragile housing market. "It is yet another example of how the Government's commitment to owner-occupation has weakened over the past two years," said Adrian Coles, director-general of the Council of Mortgage Lenders. "It couldn't be more different from the years when Margaret Thatcher said the needs of home owners must never be forgotten."

It is not just people moving house who need to be aware of the changes. Anyone moving a mortgage will be affected. Last year one in six of all loans was a remortgage, most by borrowers taking advantage of attractive fixed-rate deals. When those deals come to an end, any borrowers who decide to switch to another lender will also lose their unemployment protection.

The same applies to anyone who takes up one of the tempting two-year fixed-rate deals currently on offer. They will have to weigh up the benefit of lower monthly mortgage payments against the risk of losing their job or the costs of buying redundancy insurance.

Redundancy cover is currently very expensive. On average it costs £7 for every £100 of income you protect. In the case of a 30-year-old earning £20,000 a year with a mortgage of £60,000, it would cost £30.45 a month just to cover the standard monthly repayments.

Increasing numbers of people are not eligible for this kind of insurance because they are self-employed, work part-time or are on 12-month contracts. Few lenders will offer cover to existing borrowers, using it merely as a lure to attract new business.

The Government claims the current system "is a constraint to the growing insurance market in this area". The Council of Mortgage Lenders argues that any growth in the insurance market lies with those who are too wealthy to qualify for help, rather than with the poorer home owners who will be hardest hit by these measures.

Yolande Barnes of Savills Research thinks insurance protection is not the way people will choose to go. Many policies contain a clause excluding cover for anything up to three months, so the gap in income support would not be covered.

She believes the public is rightly suspicious of these policies and that people are choosing instead to build up a portfolio of savings to cover for any periods when they might be out of work.

"There is a feeling that the welfare state is not going to take care of us," said Ms Barnes. "People are saving to build up a cushion for themselves."

Income Support for Mortgage Interest - known as ISMI - cost the country just over £1bn in February 1994, a fall of £200m on the previous year's figure. This is the same amount as the Government expects to save by introducing the changes.

Opponents of the measure argue that the costs should decline without these changes, as unemployment continues to fall. They point out that any savings could be lost in the cost of rehousing owners whose homes are repossessed as a result of the new rules.

Some analysts think the income support gap would best be plugged by more flexible mortgages. Borrowers might take out a loan for 25 years, with the option of paying it off in 20 years. They could opt for higher monthly payments, so that if they were temporarily unemployed they would have earned themselves a mortgage "holiday". A scheme like this would save home owners from falling into arrears.

Ms Barnes believes the time is coming when struggling owner-occupiers will be the new poor. The value of their homes is flat or falling, their tax relief has been cut back and now they face the prospect of reduced income support if they lose their jobs.

It is ironic that the Government has now announced it is planning to encourage more housing association tenants to buy their own homes, just as it is making home ownership more risky. As tenants, these people would be entitled to have all their rent paid if they lost their job. Living in the same property as owner occupiers, however, they would be on their own.