Support for Mortgage Interest (SMI) is intended to help people with the cost of their mortgage if they aren’t working. SMI has been given as a benefit so far, but from April 2018, it will only be given as a loan.
SMI has been an important part of the UK benefits system since it was introduced in 1948. It only helps with the interest part of the mortgage repayments, not the capital.
Who gets SMI?
In 2016 there were about 124,000 people getting SMI help with their mortgage.
About half the people getting SMI are pensioners who get Pension Credit. These people tend to be on SMI for long periods.
The other half are younger but not working. They have to be receiving one of the following benefits: JSA; ESA; Income Support; or Universal Credit.
How SMI works in 2017 – two big problems
There have always been restrictions on the amounts that can be paid, but two changes in recent years have meant SMI has provided less help.
The first problem is the delay. 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, there may already be mortgage arrears.
The second problem is that SMI is paid based on the average interest rate for new mortgages. In June 2017 it was reduced to just 2.61%. This is an unfair arrangement that takes no account of the fact that most SMI claimants have older mortgages and are likely to be paying much more interest than that. People who are not working often can’t remortgage on good rate new deals.
From April 2018, SMI becomes a secured loan
If you are currently getting SMI, you will receive a letter and an information leaflet from the DWP, probably in February 2018. These will explain the “offer” of a loan. It is an offer because you don’t have to accept it, but if you don’t, your current SMI benefit will end in April 2018.
To accept the offer, you first have to have a telephone conversation that will outline your other options. Then you (and your partner if the house is jointly owned) will need to sign the loan agreement and a charge form. The charge will be registered at the Land Registry.
Each month the loan will increase by the amount that is being paid to your mortgage provider. Interest will be charged on the loan at the OBR’s forecast of the gilt rate – at the moment this is less than 1% and it is always likely to be lower than any mortgage rate.
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 equity, the remaining balance will be written off.
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 SMI loan will reduce the chance of that working.
At the moment, mortgage companies are slow to repossess a house if there are mortgage arears. 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.
Should you agree to this?
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 savings you could use or there are relatives who could help you, you probably should take it. 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: benefits, other debts etc.