Posted on 10 November 2003
In today's relatively benign economic climate 60,000 are struggling to pay their mortgage and have more than six months' mortgage arrears or have had their homes repossessed. Home ownership has risen to 70% of all households, and half the people defined as 'poor' live in their own homes.
Meanwhile, although interest rates are historically low and unemployment remains relatively stable, the Bank of England recently warned of the UK entering a period of higher interest rates.
Professor Janet Ford, of the University of York's Centre for Housing Policy, said: "An effective approach to sustainable home ownership ought to emphasise the role of prudent lending as well as borrower responsibility and forward planning. Having safety nets in place such as savings and insurance is a key issue."
The researchers from the Centre for Housing Policy and the Department of Social Policy and Social Work investigated what evidence existed to demonstrate the effectiveness of safety nets. They looked at Income Support for Mortgage Interest (ISMI), which is a state benefit; Mortgage Payment Protection Insurance (MPPI), insurance to cover mortgage payments when income is lost due to periods of sickness or unemployment; flexible mortgages; and other insurances such as critical illness cover and permanent health insurance.
The study was part of a wider Economic and Social Research Council project into 'evidence-based' policy making. The study systematically reviewed the existing research and searched exhaustively for studies on mortgage safety nets from all interested parties - consumers, insurers, lenders, and government regulators as well as academics. It then looked at the research to identify what it said about the effectiveness of the safety nets.
Researchers found evidence suggested that their effectiveness is limited: they work for some people some of the time but they do not cover mortgagors comprehensively. Many circumstances that give rise to mortgage difficulties, such as relationships breaking down, are not adequately covered, and many people do not have sufficient savings or insurance to rely on if they lose their income.
They found around 2000 references to the subject but only a very small proportion - just two per cent - said whether ISMI and MPPI, which form the main part of the government's safety net policy, actually reduced mortgage arrears and repossessions.
There has been a modest rise in the take-up of MPPI since 1995, but it remains used by only 23% of borrowers. Evidence from the review suggests that many financial intermediaries and borrowers consider it expensive and restrictive, and borrowers do not always understand it. Further, regardless of the risks they may face, evidence suggests that many people do not have the inclination to purchase private insurance.
Borrowers also had an equally poor knowledge of the state benefit (ISMI), but backed the idea of some form of limited state support for people in mortgage difficulties. There was evidence that described the difficulties many face when trying to use mortgage protection policies to cover the nine-month waiting period introduced in 1995, as ISMI and MPPI are un-coordinated.
Meanwhile, the ability of flexible mortgages to provide a safety net if people lose their income remains untested. There was evidence that showed that people who have taken up these products are largely those who have resources to cover their mortgage payments in a crisis anyway. At the time of the academics' review, there was no evidence that other insurances such as critical illness cover had been examined specifically as a mortgage safety net. Policyholders also found it difficult to distinguish between different types of protection policies.
Overall, the main safety nets worked some of the time for some people, but represent a poor failsafe, as many circumstances are not covered. Many borrowers appear over-optimistic regarding their own ability to manage a financial crisis themselves.
The systematic review methods were very useful in uncovering a wide range of research undertaken by many stakeholders, although a lot of this relied too heavily on the opinions of experts or small poorly conducted studies. Research that demonstrated whether government or the finance industry's safety net mechanisms actually worked in achieving reductions in arrears and repossessions was scarce. Current safety net provisions remain untested in a bleaker economic climate.