A kick in the teeth for homeowners

Government plans to reduce support for unemployed borrowers will make house-buying even riskier. Perri 6 and Nic Cicutti report

If you are thinking of moving home, or taking out a second mortgage, or getting a loan guaranteed against your home, you should be keeping a wary eye over the next two months on the parliamentary progress of the Government's attempt to restrict help for mortgage borrowers. If you're self-employed, on a short-term contract, or have medical problems, you should be glued to the box. For you are the subject of one of the most important battles of the decade concerning the role of the welfare state.

The Government proposed in the last Budget that anyone who takes out a new home loan after October this year, and subsequently becomes unemployed, will not receive Income Support for their mortgage interest payments for the first nine months. Instead, those who want to cover themselves for such eventualities will have to take out private insurance. Regulations will probably be put before the House of Commons in July. Social security ministers have claimed the measure will save about pounds 200m a year.

Then, after the Budget, the war started. Like all wars, it's a story of temporary alliances and betrayals, bluff and counter-bluff. There are four armies. Right now, the lenders - the building societies and the banks - whose joint chiefs of staff are the Council of Mortgage Lenders, are allied with the home owners represented mainly by the housing charity Shelter. On the other side, it looks as though the Government may be able to count on the insurers, whose high command is called the Association of British Insurers.

Building societies are alarmed by the Government proposals. They are worried that many people won't be eligible for insurance, or won't be able to afford the premiums, and they'll run up even more arrears, so that lenders will be forced to repossess even more properties. They have a case. Over a quarter of a million households are six months or more in arrears, and repossession rates are still very high. Most unemployment insurance for mortgage interest payments presently excludes those with medical problems or over a certain age. Many self-employed people or short- term contract workers often have great difficulty in claiming under such policies and premiums are generally high. More and more middle-class people, moreover, find themselves in a condition of such insecurity.

Meanwhile, poverty trap problems at the bottom end of the market exacerbate these difficulties. A report published by Shelter yesterday says that three-quarters of those in serious arrears have no realistic chance of repaying their debt. Lenders argue that much of what is saved in social security will be spent again in housing benefit and support for housing associations in order to help those who lose their homes.

But Peter Lilley, Social Security Secretary, is unmoved by all this. He has told the lenders that he won't back down, and it is up to them and the insurance industry to find ways to manage any problems. He points out that only about a third of those in arrears are eligible for Income Support, so the difficulties should be manageable.

Why is Mr Lilley so adamant about his proposals, when the measure seems likely to increase the insecurity of so many of the middle-class homeowners to whom the Tories promised undying support in the Eighties?

The reasons are as much symbolic as practical. In the long run, controlling public welfare expenditure means getting private insurance to take the strain in a whole series of areas of middle-class life - notably, student maintenance, long-term care of the elderly, and pensions. Of these, financing home ownership during spells of unemployment is likely to prove the easiest nut to crack because it affects smaller numbers of people. Withdrawing Income Support from unemployed borrowers for the first nine months could prove an important way of opening a bridgehead for private insurance in what is now welfare state territory. What the Government needs is insurers, and if possible a few lenders, to announce before the July debate that they are willing to play the game.

Despite the Association of British Insurers' report last month which suggested that unemployment is basically uninsurable by the private sector, some insurers are already offering some policies in this field and these are expanding. The Government's proposals may not be wholly welcome for insurers - after all, they don't like being bounced into taking on risks they're traditionally wary of. On the other hand, millions of people will in practice be obliged to take out this insurance, and such a new and large market is likely to be very attractive.

Traditionally, insurance companies relied on deals with building societies or banks to sell mortgage default policies. That is beginning to change. General Accident Direct is now marketing direct over the phone, and Norwich Union has bought a specialist company that's likely to follow suit. Sun Alliance and others may be preparing to go even further and seek to offer products which are explicitly designed to fill in the gaps which will be left by the Government's withdrawal.

Further encouragement for the Government is likely to come from some of the building societies. There are signs that some may defect from the Council of Mortgage Lenders' official line that they cannot live with the Government's proposals. Skipton Building Society will probably announce a product for unemployed new borrowers soon, and others will follow suit.

The shift in alignments of industry interest groups is only part of the story. What is really at stake is a conflict between the political need to offer some balm for middle-class anxieties, and the economic need to start transferring responsibilities for welfare to private insurance, and therefore, in real terms, back to individuals.

Donald Dewar, Labour's shadow social security secretary, will be watching closely to see how many backbench Tories sign Nicholas Winterton's motion, tabled last week in the Commons, opposing the Government's plans. Hoping for a backbench Tory revolt on the regulations, Labour wants to use the issue to appeal to the increasingly worried and insecure middle classes.

For the Government, Mr Lilley has to turn the trick of consolidating a role for private insurance in traditional welfare-state heartlands, while reassuring middle-class voters that he isn't exposing them to risks they believe the taxpayers should shoulder for them.

The welfare politics of the 1990s are all about walking that tightrope. If Mr Dewar gets behind Mr Lilley's desk, he'll face the same problem.

Perri 6