SMI is now only given as a loan (LMI) – should you agree to this?

Support for Mortgage Interest (SMI) helps people with the cost of their mortgage if they aren’t working. It has been paid as a benefit since 1948, but on 6 April 2018 this changed and now it will only be given as a loan that is secured on your house.

You may see LMI (loans for Morgage Interest) used as the new name for this, but the government is continuing to use the term SMI.

This will be the same amount of money every month as SMI was before the change. It is a cheap loan from the UK government, and you don’t have to start repaying it until the house is sold, but many people are finding this very worrying and so they haven’t agreed to take the new loan.

In March 2018, only 12,000 households had agreed to take the new secured loans out of the 90,000 the DWP says were receiving the SMI as a benefit.

I think this is a shocking figure, see SMI watch – 25 March – no real progress in last week and I thought the switchover should be postponed, but it hasn’t been and paying SMI as a benefit has now ended.

How much help does give?

If you were getting SMI before April, the answer is simple:

• the new loan will give you exactly the same amount of money as you were getting through the old SMI;
• it will still be paid directly to your mortgage lender each month;
• you don’t have to reapply – but you do need to sign up to the loan documentation;
• there is no new waiting period before the loan is paid.

For people who haven’t been getting SMI here is a brief overview of how this mortgage help works:

Who gets SMI?

In March 2018, there were about 90,000 people getting SMI help with their mortgage:

• about half were pensioners who get Pension Credit. These people tend to be on SMI for long periods and they often have an interest-only mortgage.
• the other half are younger, not working and receiving one of: JSA; ESA; Income Support; or Universal Credit.

SMI not payable for 39 weeks

If you lose your job, you can’t claim SMI for 39 weeks – before April 2016 this was a much more reasonable 13 weeks!

Many people don’t have enough redundancy pay, savings or insurance to get them through to this 39 week point, so by the time SMI starts being paid, you may already have mortgage arrears.

It doesn’t cover your full mortgage

The help SMI gives is likely to be less than your monthly repayments for three reasons:

SMI only helps with the interest part of your mortgage repayments, not the capital.

There is a cap on the maximum amount of a mortgage you can get help with – this is £200,000 for working age claimants and £100,000 for pensioners (I can’t think of any good reason why these should be.)

SMI is calculated based on an artificially low rate – the average interest rate for new mortgages. In June 2017 it was reduced to only 2.61%.  This is an unfair arrangement. Most SMI claimants have older mortgages and are likely to be paying much more interest than that and they are not working so they can’t remortgage on good rate new deals.

How the loan will work

The legal terms for the loan arrangements are described in this government document.  The loan itself is from the government, not from Serco.

In September 2017, the DWP started sending letters and an information leaflet to people who were getting SMI to explain what is changing and say that they will receive a phone call from Serco within the next three weeks to explain it further.

The letter and leaflet explained the “offer” of a secured loan. It is an offer because you don’t have to accept it, but if you haven’t, your current SMI benefit will end in April 2018 (apart from some transitional arrangements, see below). There is no option to stay on the current benefit.

How the loan is calculated

Each month the loan will increase by the amount that the government is paying to your mortgage provider plus the interest added

Interest will be charged on the loan at the OBR’s forecast of the gilt rate – at the moment this forecast for 2018 is 1.5%. (You may previously have been quoted 1.7% but this has now reduced.) This interest rate is variable so it is expected to go up over the next few years but it is always likely to be lower than your mortgage rate.

Repaying the loan

You don’t have to make any monthly repayments to this loan, even if your finances improve so you stop getting help with your mortgage interest.

But if you want, you can repay the loan, or part of it, at any time, with a minimum repayment of £100. Otherwise, the loan will be repayable when your house is sold or transferred to someone else, or on death.

If there isn’t enough money to repay the loan, the rest will be written off, so this can’t become a problem for you if you sell your house or your children after you die.

To accept the offer

To accept the offer, you first have to have a telephone conversation that will outline your other options – basically getting help from friends/family instead of the new loan or deciding to sell your house.

Then you (and your partner if the house is jointly owned and you live together) will need to sign the loan agreement and a charge form.  The charge will be registered at the Land Registry.

Should you agree to this?

It’s a cheap loan – is it a problem?

You probably don’t have any better options, see below. But this loan from the government isn’t good news for two groups of claimants:

• if you are only temporarily out of work – perhaps while your children are very young or until you find another job – then having this secured loan will reduce your equity and make it harder for you to remortgage at a good rate in future.
• if you are a pensioner with an interest-only loan, you may have been hoping your equity will build up over the next few years until your mortgage ends. This new secured loan will reduce the equity you end up with – this may make it harder to get a new mortgage, or equity release, or to downsize to somewhere with no mortgage.

At the moment, mortgage companies are slow to repossess a house if there are mortgage arrears. It is possible that if you don’t have a lot of equity, this secured loan will mean your mortgage company may decide to repossess sooner… but it will be a while until it’s clear if this is a problem or not.

Do you have a better option?

In practice most people won’t have a better alternative to this government loan:

• it will be at a lower interest rate than you could get from banks or other commercial lenders;
• as you don’t have a job, there are unlikely to be any options involving remortgaging that would help;
• if you don’t take the loan and just let mortgage arrears accumulate, your house is likely to be repossessed;
• you don’t have to make any repayments to this loan, even if you start work.

So unless you have a lot of savings you could use or there are relatives who could help you, you probably should take it. Planning to cut back elsewhere, or sell things from your house could turn out to be very stressful and difficult – you may end up with mortgage arrears. it’s also not a good idea to use all your savings hoping to delay the point at which you need the loan – that will leave you with problems if any repairs are needed to your house or if you have an unexpectedly large bill, so make sure you keep a reasonable emergency fund.

If you are unsure, go to your local Citizens Advice and ask for their assistance, to look not just at this loan but at the rest of your situation, including your benefits and other debts.

“Transitional arrangements” and backdating if you change your mind

Many people getting SMI haven’t actually had the phone call with the formal offer of a loan from Serco. As a result, the government has had to introduce some transitional arrangements to mean that these people’s SMI isn’t going to suddenly stop.

A lot more people have been saying they don’t want the loan than the government expected.  The government has decided to allow people to change their mind and start getting the new loan, with no waiting period. And the loan can also be backdated if you want.

See what happens if you haven’t agreed to take the loan? for more about the transitional arrangements and changing your mind about taking the loan.

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Media coverage of SMI changes

Take our loan, or lose your home… Vulnerable property owners face a (costly) offer they can’t refuse – as official safety net is snatched away (Mail 31 October 2017)

Low-income households at risk as mortgage support benefit is axed (Guardian 9 December 2017)

Thousands more households in danger of losing their homes after switch to universal credit as critical safety net is removed, banks warn (Mail 9 December 2017)

Anger as thousands unaware they face a ‘second mortgage’ (Guardian 5 February 2018)

Radio 4 Moneybox (10 February 2018) with Gareth Morgan, who often comments here

Calls for controversial mortgage scheme to be halted (Moneywise 2 March 2018)

Radio 4 Moneybox (17 March 2018) with the DWP minister – and me!

Warning – if the state helps pay your mortgage interest, act now or it’ll be stopped MoneySavingExpert 20 March 2018)

Major mortgage benefit is being axed TODAY – here’s what you need to know (Mirror 6 April 2018)

Labour urges rethink on mortgage benefits (BBC 6 April 2018)

This article was first published in August 2017 but it is kept up to date.

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