Keep the roof over your head

As recession bites and job cuts are a daily occurrence, the big fear of most families is being made redundant, falling into arrears with the mortgage and having their home repossessed.

Unfortunately, millions believe that they can rely on government help through social security benefits to support them if they get into difficulties.

'Borrowers should have income or mortgage protection insurance'

And many are pinning their hopes on the recently announced Homeowner Mortgage Support Scheme (HMSS), a voluntary scheme with the lenders.

This allows borrowers to postpone mortgage interest payments for up to two years. But the reality is that a vast number of homebuyers will not be eligible for either scheme.

The Centre for Policy Studies says that initiatives aimed at helping homebuyers avoid repossession will help “only a very small number of households”. The think-tank estimates that more than 145,000 households could lose their homes this year, based on Council of Mortgage Lenders estimates, and 245,000 could face court actions.

There are three schemes offering help to avoid repossession

The Support for Mortgage Interest (SMI) scheme, which has recently been improved; the Mortgage Rescue Scheme, a version of shared equity operated by local authorities in conjunction with housing associations; and the proposed HMSS, where payment of mortgage interest can be deferred for up to two years. Details have yet to be finalised but the scheme should be up and running by the end of April.

The SMI scheme has been revamped and it now pays mortgage interest (but not capital repayments) on a home loan of up to £200,000 after 13 weeks of unemployment. The trouble is that it usually takes two incomes to afford a mortgage. If one person loses their job, most couples will not qualify for SMI because you are disqualified if your partner earns above about £5,000 a year. Anyone with savings of £16,000 or more is also disqualified. Those most likely to qualify will be single home-owners with little or no savings.

“The fact that a partner’s earnings are taken into account certainly reduces the number of people eligible to claim, says Sue Anderson of the Council of Mortgage Lenders, which has been lobbying the Government to reform the system for a long time. “If only one partner is working then SMI is helpful but we think it could usefully be broadened out.”

The CML would like to see SMI benefit paid - even when one partner remains in work - but secured against a second charge on the property and repaid when the property is sold.

Alternatively, it would make sense if SMI benefit was paid in proportion to earnings. For example, if one partner earns £40,000 a year and the other £20,000, then if the higher earner loses their job, two-thirds of the benefit is paid. As the scheme stands at the moment, the couple would receive no state help with the mortgage at all.

SMI is no use, anyway, for many middle-class couples with mortgages way above the £200,000 maximum loan on which it is paid. Many City workers, for example, now face redundancy and frequently have mortgages of £400,000 or more.

Homeowner Mortgage Support Scheme

It is with these homebuyers in mind that the Government is putting together the HMSS. Due to come into effect in April, it aims to allow borrowers with larger mortgages up to £400,000 to postpone mortgage interest payments for up to two years. The idea is that the unpaid interest is rolled up and added to the loan, to be repaid once the borrower gets a new job. Any loss suffered by the lender is guaranteed by the Government.

But the scheme is voluntary and lenders are not obliged to join. It is hard to see how it would benefit homebuyers already in, or near, negative equity because rolling up unpaid interest simply increases the debt. Also, the hoops that borrowers have to jump through in order to qualify for this scheme will deter most from trying to access it.

“It isn’t just negative equity that is a problem,” explains Anderson. “It will be extremely difficult for lenders to assess how likely the borrower is to get another job, resume payments and pay off the arrears. What happens if they are not back on their feet at the end of two years?”

Many are sceptical of the new scheme. Shadow housing minister Grant Shapps says: “The measures introduced will simply not help the vast majority of the families facing repossession.”

Insurance broker Simon Burgess of Burgesses agrees. “The Government is living in cloud-cuckoo-land. Many people get caught by the partner’s earnings rule and the new proposals are just hype. But worse, they are a distraction because they could lull people into a false sense of security and deter them from taking out the insurance cover most people need.”

Richard Morea of mortgage broker London & Country agrees. “We always recommend borrowers take out some form of income- or mortgage- protection insurance before they are affected by redundancies.

Most people need two incomes to be able to borrow enough to buy their first home and none of these homebuyers can afford to rely on the government schemes. Even if you qualify for benefits under the SMI scheme, you still have to find mortgage repayments for the first 13 weeks, and this can soon add up.”

For most homebuyers it makes sense to take out Income Protection or Mortgage Payment Protection cover. It is relatively cheap - around £3.50 to £4.50 a month for every £100 a month of sickness and unemployment benefit. So for a £200,000 mortgage at five per cent with monthly payments of around £1,000, monthly insurance premiums work out at about £40 a month.

You can get quotes from the comparison sites such as www.moneysupermarket.com or www.moneyfacts.co.uk, or specialist brokers www.lifesearch.co.uk or www.britishinsurance.co.uk.

'Why I took out protection'

Homeowner Stewart Hastings, an office manager, took the trouble to find out how benefits work. He is in his early thirties and owns his terrace house in Braintree, Essex, with his partner, a teaching assistant.

“When I looked into how social security benefits are paid, I realised that if your partner works, then you can’t claim,” he says. “I have some savings, too, which would have excluded me anyway.”

He has taken out a mortgage protection policy through specialist broker Burgesses. The policy will provide benefits for up to a year - long enough for most people to find another job - and will pay monthly income sufficient to cover mortgage repayments in the event of him being made redundant.

“People aren’t really aware of how social security payments for homeowners work and think it will pay the mortgage if they are unemployed,” says Stewart. “For most couples where both partners work, it won’t.”

Who qualifies for the Homeowner Mortgage Support Scheme?

Government guidelines say that, to qualify, borrowers will need to:
* have suffered a loss of income from employment or self-employment that makes full mortgage payments difficult but which is not expected to be a permanent loss of income;
* have been in dialogue with their lender, including over the use of existing forbearance policies, and have been making some level of regular payment;
* have taken out a mortgage of up to £400,000;
* have savings below £16,000;
* not be in receipt of SMI or mortgage rescue assistance;
* apply for assistance as owner-occupier - the programme will not apply to people with second homes or buy-to-let properties;
* have been assessed as being able to pay a certain monthly amount on an ongoing basis;
* have received financial advice from a party other than their lender to determine their eligibility for the scheme, including testing the long-term sustainability of their financial position and their ability to resume full payments once their income increases;
* have fallen into arrears for a number of months during which the lender has exercised forbearance.