Home is where the mortgage protection premiums are

Borrowers hit by the loss of state benefits if they lose their source of income face more misery when they apply for mortgage protection policies to replace the state aid.

In the past, premiums were standard. But some lenders are planning to charge different rates depending on clients' occupations and their likelihood of claiming because of redundancy, illness or accident.

Those in low-paid jobs susceptible to redundancy could end up paying more than double the rates of high- salaried professionals. A manual worker living in an inexpensive area of the country could end up paying the same premium for this insurance as an accountant in a well-appointed detached home in Surrey.

But it's not just the low-paid who could feel it in the pocket. With merger mania having gripped the mortgage-lending world, it is employees of big banks and building societies who are considered a bad risk.

You have only to look at those towns where there is a Halifax branch right next to an old Leeds Permanent branch to realise the threat of redundancy facing many building society personnel. The Halifax, having swallowed up the Leeds, aims to get its full stock market listing in 1997, when it will become answerable to shareholders baying for bigger profits.

A spokesman for Cornhill Insurance, which itself does not offer stand- alone mortgage protection insurance, says the people most likely to be hit by high premiums work in financial services and for nationalised industries. The privatisation of nationalised industries is another risk- enhancing situation. British Rail staff could find the premiums on their mortgage protection policies going through the roof.

This sort of insurance has become more widely available (and more essential) since the Government brought in controversial changes to income support rules on 1 October. From now on if you contract a serious illness or are made redundant, you should ask who is going to pay your mortgage while you're not earning. You certainly can't rely on the state to bail you out.

Borrowers taking a new loan from now on have been told it will be their responsibility to meet interest payments for the first nine months after losing a job. The message coming out of Kenneth Clarke's last Budget, which proposed the benefit changes, was if you haven't got mortgage protection insurance, get it.

The Chancellor has refused to back down, and unless he does so in the Budget next month it looks as though this insurance will become a must for homeowners. But it is not cheap, nor is it always available. Most lenders charge between pounds 3 and pounds 8 per pounds 100 of cover needed per month. For cover giving protection against accident, sickness and unemployment, NatWest charges pounds 3 while National & Provincial, on the pricey side, asks for pounds 7.37. So, for a borrower wishing to cover monthly mortgage repayments of pounds 500, the cost would be pounds 15 a month with the bank and pounds 36.85 with the building society.

A more innovative pricing structure props up the Cheltenham & Gloucester's scheme, Protection Plus, where premiums are calculated according to the amount of your loan, not on the amount of cover taken. This means the premium remains the same even if the mortgage rate goes up and guarantees that the mortgage instalment will always be paid in full up to a maximum of pounds 1,300 per month. The lender charges 50p per pounds 1,000 of the loan insured, a reduction of nearly 20 per cent since the changes to income support came into effect.

C&G chief Andrew Longhurst says: "Homeowners will now get less state help with their mortgage payments should they fall ill or lose their jobs, so it's vital that they are adequately covered. We're trying to give our borrowers as much help as we can."

Mortgage protection insurance could become another compulsory insurance, along with buildings and contents and some form of life insurance. Homeowners must be wondering where the soaring costs of home ownership will end.

But mortgage protection policies still need reshaping to meet practical needs. Most lenders say you are not allowed to trigger the payments when it suits you. You have to make a claim, usually within 30 days of whatever it is that is stopping you from making mortgage repayments.

Say, for example, you're not earning because you have been made redundant. You have to make a claim within 30 days and your mortgage repayments will be paid for a year starting in one month's time. The first year might not be the problem, however, if you have a generous redundancy settlement. It is the protracted period of unemployment a year later, or a year after that, where the insurance payouts could really help.

With motor insurance you get a reduced premium if you agree to pay for, say, the first pounds 500 of repairs following an accident. A similar arrangement could prevail with mortgage protection insurance so that borrowers get cheaper premiums if they agree to pay their first three monthly mortgage repayments after being made redundant. The inflexibility of so many lenders' schemes means some homeowners will really feel it in the pocket if ever they have to make a claim.

James Hipwell is deputy editor of Your Mortgage magazine