The Impact of Changes to the Social Security Safety Net for Mortgagors In October 1995, restrictions were introduced to the State safety net provisions for mortgagors who lose all income through accident, sickness and unemployment. Recent research for the Joseph Rowntree Foundation has been carried out, into whether private insurance has bridged the gap left by the withdrawal of State support and looked at the consequences of the changing relationship between State and private safety net provisions. The main research findings are:-
- Borrowers have little knowledge or understanding of the nature of the
changes. those who claimed to be knowledgeable often had an inaccurate picture of their
likely entitlement under different conditions.
- Few new private insurance products have been developed to mirror the
cuts to State provision. There has been a change from excluding whole categories of
borrowers (such as the self-employed) to accepting most applicants but attaching specific
conditions to their policies.
- At most, only 21 per cent of borrowers have private insurance.
Take-up amongst post-October 1995 borrowers (those most affected by the changes) is higher
at 30 per cent. overall, take-up grew by three to four percentage points between 1994 and
1996.
- Three-quarters of people at greatest risk are not insured and could
wait up to nine months for help with mortgage interest costs. This group make up a quarter
of borrowers.
- There was no evidence that those at greatest risk were more likely to
insure. Take-up was more linked to borrowers' attitudes to insurance and/or the date of
their mortgage, suggesting that private mortgage payments insurance is sold rather than
bought.
- Take-up of private insurance has been unaffected by falls in its
price. The level of take-up also reflects the fact that half of new mortgages are arranged
by intermediaries which limits lenders, ability to discuss and sell insurance.
- Despite relatively low take-up of private insurance, the predicted rise in arrears and possessions has not occurred. This is largely due to tight lending policies, to relatively low interest rates, to falling unemployment and to more cautious borrowing. Lenders believe that the situation will worsen if interest rates rise and the economy slows.
Conclusions
The development of the private market for mortgage payments protection has been relatively slow, given that the changes to Income Support for Mortgage Interest (ISMI) were thought likely to stimulate the market. On the whole, policies have been sold to borrowers and not bought by them. There is no evidence that those with the greatest potential risk are the most likely to insure, and so currently no evidence that the market is characterised by adverse selection. There are approximately 2.5 million borrowers who might in the past have qualified for (some) ISMI at the start of a claim for Income Support who have no Mortgage Payments Protection Insurance (MPPI) as yet and who will now have no assistance for up to nine months of any Income Support claim. Borrowers' understanding of the ISMI changes and of MPPI is either absent or often incorrect.
Further information - contact Mike Chandler, Policy & Development officer - 01622 602093.