Defaqto welcomes proposed changes to ISMI rules, but protection cover still useful

Edited by the Insidemoneytalk editorial team Sep 4, 2008

Today's announcement by the Department for Work and Pensions that it is reforming the Income Support for Mortgage Interest (ISMI) system

will be welcome news for mortgage holders who are worried in the current economic downturn.

At present anyone losing their job will not receive any government support to pay their mortgage for the first 39 weeks of unemployment, and after that the benefits will only cover the interest on the first ?100,000 of the mortgage.

From next April the rules will change and ISMI benefit will be paid on the first ?175,000 of the mortgage and will cut in after just 13 weeks of unemployment, for new claimants.

"This is very good news." said Brian Brown, Head of Insight at financial research company Defaqto, "In the current climate there is a good chance that an individual not able to pay their mortgage because they lost their job is likely to have their house repossessed long before the government assistance cuts in.

From next April they will be eligible for more support, and after only three months.

"But mortgage holders still need to be wary, cautions Brown: "There is still the issue though of how you would survive if you lost your job.

You will still need to repay the mortgage for the first 13 weeks of unemployment, and after that ISMI only covers the interest on the mortgage.

Although your house is more likely to be safe in future, you still need to consider how you will pay all those other bills as well." Many mortgage holders currently have some protection in the form of Mortgage Payment Protection Insurance (MPPI) policies, but these have had a very bad press recently, with claims that they are overpriced and only cover one of your potential debts.

Many people might want to consider buying a Short-Term Income Protection (STIP) policy, which will allow them to insure other income so that they can keep living through a period of unemployment until they get back to work.

"There are a number of companies selling STIP policies", says Brian Brown, "They work very much like an MPPI policy but allow you to insure a proportion of your income, rather than just a mortgage.".