When mortgage elastic snaps

But beneath the record total, £16.6 billion, of home loans granted in March is an alarming statistic.

In February, first-time buyers borrowed an average £71,500. One month later, the figure soared to £80,200, a 14 per cent surge when annual wage inflation is two to three per cent per year and many companies, particularly in manufacturing, telecoms and financial services, are in financial distress.

The personal finances of young home buyers are an elastic band stretched to the limit and it isn't only pessimists who await a painful snap.

If jobs were to go as interest rates start to climb, how could overstretched borrowers maintain monthly mortgage repayments?

Nobody knows how this housing boom might unravel.

Simon Burgess, of independent brokers Goodfellows, which sells policies protecting home buyers against accident, sickness and unemployment, says it is often too late to get cover when companies hit trouble.

When the Post Office announced it would be axing thousands of jobs, its soon to be redundant workers with mortgages almost certainly lost the chance to arrange cover for repayments.

Employees of other firms in turmoil, Marconi, Arthur Andersen and dozens more in the financial sector, may have been in the same boat for months. Others will join them when their firms make the wrong sort of headlines.

Mr Burgess said: "If they have no savings or no second income to buy valuable time, there is a serious risk of repossession."

The Council of Mortgage Lenders (CML) confirms the Government has weakened the safety net for home owners who lose their jobs, thanks to reforms started by the Tories in 1995 and continued by Chancellor Gordon Brown.

The Government extended from two months to 39 weeks the waiting period for entitlement to benefit help with mortgage interest payments.

In doing so, it slashed the annual cost of state help with mortgage interest payments from more than £1.2 billion in 1993 to £490 million in 2000.

The CML warns: "The full impact of the 1995 reforms have yet to be tested by a significant economic downturn.

"But one of the key arguments for the reforms, the Government's belief the former benefits system was preventing the development of private insurance to cover mortgage payments, is only partially borne out by events."

Sales of mortgage payment protection insurance (MPPI)

have grown steadily since 1998 but the CML says the take-up occurred largely because of better products, pricing and awareness, rather than the benefit cutbacks.

Only 21 per cent of outstanding mortgages are protected by MPPI, far short of the Government's target of 55 per cent by 2004. But more than a third of mortgages (36 per cent) taken out in the last six months of last year were covered by MPPI.

Recent borrowers are most likely to need MPPI because lenders allow more time to home owners in distress if they have a substantial amount of equity in their property.

The CML survey says competition between suppliers is cutting the cost of cover, from £7 a year for each £100 to £5.50.

In January, Nationwide Building Society announced new borrowers taking MPPI would get it free for the first year.

The MarketPlace at Bradford and Bingley launched Payment Protection.

Costing £4.90 for every £100 of mortgage covered, it guards against accident, sickness or unemployment and even provides skilled advisers to help claimants find a new job.

Mr Burgess said: "Every person who is employed should seriously consider unemployment cover, because he or she has no real control over future income stream.

"Everybody is jumping on the bandwagon of low interest rates, failing to realise we have a 40-year low in rates and the economy is drastically overheating.

"Even when people eventually qualify for state help, benefits only cover interest payments on the first £100,000 of the loan. Many buyers in southern England, borrow much more than that."

There are two problems which dent the charms of MPPI.

The first is policy small print, which enables many insurers to duck claims.

That is the conclusion of Mark Hayes-Newington, of The Research Department, the financial products research company.

He says: "If at the time of taking out cover, an employee had even the slightest knowledge his or her company could be planning future redundancies, the insurer is likely to refuse payment on the policy.

"Even if the employee in question had no knowledge whatsoever of possible redundancies, the insurer could refuse a claim if someone else in the office suspected redundancies or if there is evidence of an office rumour about downsizing."

The other problem is price.

MPPI costs much more than it should do.

Mr Burgess said some traditional mortgage lenders creamed off 70 to 80 per cent of MPPI premiums in commission.

He feared home owners wasted more than £6 billion a year on MPPI by failing to find the cheapest deal.

Before you buy MPPI, these are the key points to check:

Go to an independent
provider for a quote.

How much cover do you
need?

Accident, sickness and unemployment can all be insured against but Mr Burgess advises income and mortgage protection as employers with sick pay schemes may have disability dangers covered.

Do you want cover for
one or two years, the longer period costs an extra 50p a month per £100 of mortgage covered.

Study the policy small print
before you buy.

Many policies have an initial exclusion period ranging from 60 to 120 days but specialist brokers have policies to avoid this.