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Mortgage safety net benefit becomes a loan and charge...

Welfare safety net provision in the form of “Support for Mortgage Interest “ (SMI) assistance has been available within our benefit system to support owner occupier claimants’ mortgage interest payments since 1948.

However, a Statutory Instrument introducing “ The Loans for Mortgage Interest Regulations 2017 “ was laid before Parliament on the 6th of July and outlines the most significant reform to mortgage safety net provision in almost 70 years.

SMI currently contributes towards interest on a claimant's qualifying mortgage (the support is limited to mortgage interest of up to  £200,000 for working age claimants or £100,000 in the case of claimants receiving Pension Credit) while they’re in receipt of Income Support (IS), income-based Jobseeker's Allowance (JSA), income-related Employment and Support Allowance (ESA) or Pension Credit (PC). Working age claimants serve a 39-week qualifying period and SMI ensures that homeowners receiving these benefits are protected from repossession during periods of unemployment, sickness or retirement. Note, however, that it is not available if the claimant’s household has more than £15,000 in savings and when SMI is replaced by Universal Credit, a non-earnings rule will apply meaning that when a party to the mortgage continues to receive earned income, no support will be available. 

From April 2018, however, the Government plans to make SMI a loan, with a charge being taken on the property. This means that homeowners have to pay back the amount of mortgage interest that the State paid for them either when they return to work, when they sell their home or on the claimant’s death. 

The prime objective of SMI has been to provide short-term help to prevent repossession by the DWP making a contribution towards mortgage interest payments directly to mortgage lenders while claimants take steps to move back into work. The reform will apply from 5th April 2018  to current SMI benefit claimants and they will receive a letter by February 2018 telling them about the reform, the switch from a benefit to a loan, and the options available to them. It will also apply to new claimants from the same date. 

The current SMI limits and 39-week waiting period will remain as is now with interest payment support being paid directly to the SMI claimant’s lender. But with SMI becoming a loan, a third party administered charge will be taken on the property. “SMI loans” will carry a six-monthly reviewable interest rate equal to the forecast gilt rate (this is typically lower than the market and currently 1.7%)  The amount of SMI paid to any claimant, plus interest on that loan, would be recouped from the equity in the property when it is sold, when there’s a transfer of ownership (e.g. on death) or is repaid voluntarily when the claimant returns to work. If there is insufficient equity in a claimant’s property to repay the whole SMI loan, the balance would be written off. 

The rationale for this mortgage safety net reform is that the growth of interest-only mortgages, together with households taking mortgages increasingly into retirement, makes the provision of SMI under the current non-repayable benefit basis, where the owner occupier continues to benefit from any capital appreciation in the property, increasingly unsustainable. This is especially so if rates increase. It’s also unfair to the taxpayers who cover the cost, many of whom are renting and unable to buy a home of their own. Importantly, without the policy change, there’s an incentive for households to allow the taxpayer to take the burden of their mortgage without taking steps to repay it themselves. 

This major reform of the mortgagors’ welfare safety net gives good reason to review the resilience and finance protection needs of all mortgage clients, new and old. Further information on SMI and entitlement can be found at www.turn2us.org.uk 

Johnny Timpson, Financial Protection Technical & Industry Affairs Manager, Scottish Widows Protect