Thousands of pensioners and working-age families are at risk of losing their homes under plans to end Support for Mortgage Interest (SMI) benefit and replace it with a loan from April 2018.
The Department for Work and Pensions (DWP) has begun sending out letters to 135,000 households – 65,000 of which are low-income pensioners – telling them to decide whether they want to take responsibility for the loan when the benefit is scrapped.
However, insurer Royal London has slammed the move, pointing out that claimants aren’t being told what rate the new SMI Loan will charge or being given enough guidance on taking out the state-backed second mortgage.
How does SMI benefit work?
SMI is a benefit that is currently paid to help homeowners that receive certain income-related benefits like Jobseekers Allowance and Pension Credit with mortgage repayments.
It covers the interest payments on mortgages and certain home improvement loans for these struggling households and is either paid to direct to the lender or direct to a claimant to pass onto the lender.
Currently, SMI is paid as a free benefit to those that are eligible but, from next April, the support will end and claimants will need to apply for an SMI Loan that charges interest and has to be paid back.
How will the SMI Loan work?
The SMI Loan will be available to everyone who was eligible for SMI benefit, including those that receive Pension Credit, Income Support, Universal Credit, income-based Job Seekers Allowance and income-based Employment Support Allowance.
The SMI Loan will be available from 6 April 2018 and will be secured against the property. However, you won’t need to repay the loan or any interest you rack up until you sell the property or decide to transfer ownership.
The Government promises that applying for the SMI Loan will not impact your credit rating as it doesn’t require a credit check and it won’t make any money from the loans.
Only people who end up with equity in their property will have to pay the SMI Loan back. If there isn’t enough equity in the property the remaining debt will be written off.
If you accept the loan you will need to sign the documents and send them back within six weeks. If you don’t want to accept the offer you don’t need to do anything with these documents and your benefits will stop from 6 April 2018.
Why is SMI changing?
SMI benefit was originally designed to provide short-term support for those at risk of repossession while they took steps to move back into work.
But the Government says SMI has been paid to some recipients for extended periods and has increasingly been claimed by retired borrowers on Pension Credit.
How much will the SMI Loan cost?
The Government has not revealed what interest rate will apply to the state-backed SMI loan, but Royal London estimates it could be set at 2.2%.
Using this assumption, it has analysed the level of SMI Loan debt a Pension Credit claimant receiving £20 a week help with mortgage interest over one to 10 years would rack up.
SMI loan cost
Source: Royal London
The analysis shows that a Pension Credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claim SMI for five years – the typical claim duration for pensioners.
So, when selling the property, a pensioner would have to repay the SMI Loan plus the capital outstanding on their mortgage.
Of particular concern is the potential impact on SMI claimants on Pension Credit who have interest-only mortgages stretching into retirement.
There is already concern that some may not have the money to pay off the balance on these mortgages when they come to an end, but this will be exacerbated if they also have to pay money back to the Government on top.
While people of working age might be able to extend their mortgage term to give themselves more time to pay, those in retirement may struggle to get a lender to agree to do so.
While there is a clause that allows the SMI loan to be written off if it is more than the equity left in the home when it is sold, this could still leave people with no way of purchasing a new property which means they could be forced onto the rental market.
‘People could lose their homes’
Royal London has slammed the Government for not providing enough support to make such an important financial decision.
Struggling homeowners are being instructed to take out a second mortgage – without being told the interest rate at which they will be borrowing.
Those impacted by the switch are being directed to the Money Advice Service and Citizens Advice for help but Royal London says these services will only provide generic guidance rather than tailored advice.
Commenting, Helen Morrissey, personal finance specialist at Royal London said: “Up until this point SMI has been paid as a free benefit but any payments made from April 2018 will now need to be repaid with interest – this is a massive policy shift.
“The Government needs to make sure that people have the help and advice they need to decide whether or not to take out a second mortgage to pay for this.
“But instead, thousands of people are getting letters which miss crucial details such as the interest rate on the mortgage.
"The Government is pointing people in the direction of the Money Advice Service and Citizens Advice but they can only provide guidance as opposed to tailored advice.”
Morrisey warns a lack of support could mean some do nothing and risk losing their homes or signing-up and losing equity in their homes.
“Some people will find the process too daunting and will lose their mortgage help next April, with a risk of repossession.
"Others will sign up, but this will make it even harder for those with interest-only mortgages to clear their outstanding balance at the end of the mortgage,“ she said.