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Low take-up for private mortgage insurance leaves home owners at risk

1 May 1997

Research supported by the Joseph Rowntree Foundation finds that only a fifth of borrowers are covered by private mortgage protection policies, more than eighteen months after major restrictions were imposed on help with mortgage interest payments through Income Support. Those without cover include three out of four owners who would formerly have qualified for early support from the state if they fell ill or lost their jobs.

Bridging the Gap? a report by Janet Ford of the Centre for Housing Policy at the University of York and Elaine Kempson of the Policy Studies Institute shows that even among new borrowers since the social security changes were introduced in October 1995, the take-up rate for mortgage protection insurance is only 30 per cent.

The study, based on surveys of nearly 900 owners and a sample of lenders and in-depth interviews with borrowers, lenders and insurers, also finds that:

  • Borrowers have little knowledge of the changes in Income Support for mortgage interest or understanding of how they are affected. Only one in five of those surveyed knew what help they could expect if they became ill or lost their job for a long period.
  • Falling unemployment and a subdued housing market have helped prevent the Income Support changes from leading to higher arrears and repossessions among uninsured owners. However, lenders believe the situation would change following interest rate rises or an economic downturn.
  • Take-up of private insurance has been largely unaffected by a reduction in the cost of policies. Improved take-up after October 1995 reflected active selling by the insurance industry and lenders following the social security changes, rather than strong demand among home buyers.
  • Few new financial products have been developed by lenders and insurers to match the restrictions in Income Support mortgage interest payments. In general, policies are not seen as affordable or offering good value for money. Although coverage of policies has been widened to include more people, new conditions have been imposed that may make it hard for them to claim.

Janet Ford said: "Despite the presumption that private insurance would increasingly provide an alternative safety net for mortgage protection, it is clear that the market has been developing slowly. Our research also finds no evidence that those with the greatest potential risk are the most likely to insure. Fears within the insurance industry that take-up of mortgage protection policies would be dominated by those most likely to make a claim - so-called adverse selection - have not so far been realised."

Elaine Kempson said: "Owning a home is now a riskier business than it was in 1995. There is no longer an effective safety net to prevent borrowers from sliding into debt or losing their homes through repossession."