Protection through the hard times

The fear of redundancy in the nervous Nineties has been one of the biggest concerns holding back the housing market.

One positive consequence of this is that lenders and insurers have developed more attractive insurance policies to ensure that borrowers can carry on paying their mortgages if they lose their jobs.

Mortgage payment insurance has traditionally been a neglected detail of the mortgage process. Borrowers were offered, and sometimes required to take out, a policy that would cover the mortgage for a year should they become unemployed or be unable to work because of an accident or sickness. Little effort was made to tailor the policies to meet individual requirements.

As a result, payment protection was expensive, generally unpopular and delivered fewer benefits than it seemed to promise. Self-employed borrowers and those who already had a medical problem when they took out the policy often found themselves excluded from making a claim.

In the last year or so General Accident Direct and National & Provincial Building Society, among others, have introduced much more flexible policies. Borrowers can choose to be insured only against unemployment, or only against accident and sickness. They can choose how quickly they want the policy to start paying out, and for how long.

Being able to unbundle the package makes mortgage payment protection cheaper. A traditional policy covering unemployment and illness that starts paying out after two months, and continues doing so for a year will cost pounds 5 to pounds 6 a month for every pounds 100 of benefit. By restricting cover to unemployment only, a National & Provincial customer could reduce the cost to about pounds 3.50 a month. If he or she was happy to delay the payment of benefits to six months after the loss of a job, and limit the payment period to nine months, the person could cut the cost to pounds 1.62 a month.

N&P's payment protection insurance, underwritten by Guardian Insurance, is among the most flexible. Policyholders can choose payment exclusion periods of one, two, three or six months, and benefit periods of nine, 12, 18 and 24 months. As well as covering the cost of the mortgage it is also possible to insure against the cost of monthly bills.

The Government sparked renewed interest in mortgage payment protection when it cut the income support benefits available to homeowners who lose their jobs last October. Borrowers now have to wait nine months before getting any help.

Lenders and insurers are anxious to point out that even these reduced benefits are only available to a minority. About 70 per cent will not be eligible for income support because they either have a working partner or assets of more than pounds 8,000.

Len Willcocks, creditor insurance manager at Sun Alliance, said the income support changes have prompted the take-up of payment protection among borrowers to rise from about 10 per cent to about 25 per cent. Sun Alliance provides an old-style combined cover for several leading lenders, including National Westminster Bank.

Mr Willcocks cautions against the unbundled policies. Accident and sickness may seem less apparent than redundancy but 40 per cent of Sun Alliance's claims fall under this category.

However, N&P's policy seems to be popular. A spokeswoman said more than 60 per cent of the building society's branch customers have taken out some form of payment protection. She noted that many employees already enjoy good accident and sickness packages from employers.

N&P is offering its cover to existing as well as new mortgage customers. In the past, lenders have been wary of this kind of business for fear of taking on policyholders who already know they face a high risk of being made redundant.

Bank of Ireland Mortgages has also broken the link with the mortgage offer by introducing a policy that is "portable" so the cover continues if the borrower moves home or changes mortgage.

Julian Palmer, of Bank of Ireland Mortgages, said: "It's a cover which should stick to the individual, not the mortgage."