Support for Mortgage Interest (SMI) helps people with the cost of their mortgage if they aren’t working. Up till now, SMI has been given as a benefit so you don’t have to repay it. But from April 2018, it will only be given as a loan that is secured on your house.
This is a cheap loan and you don’t have to start repaying it until the house is sold, but many people are finding this very worrying.
In September 2017, the DWP started sending letters to people who currently get SMI to explain what is changing and say that they will receive a call from Serco within the next three weeks.
The loan arrangements are described in legal terms in this government document.
Who gets SMI?
In 2016 there were about 124,000 people getting SMI help with their mortgage:
- about half 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
SMI has been an important part of the UK benefits system since it was introduced in 1948. It helps with the interest part of the mortgage repayments, not the capital.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 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. People who are not working 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. These are being sent out by Serco on behalf of the DWP. The loan itself is from the government, not from Serco.
The letter and leaflet 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 documentation you are sent is apparently over 60 pages long. 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 forecast for 2018 is 1.7%.
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 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, so this can’t become a problem for your children.
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 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.
Should you agree to this?
Although it’s not good, 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 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
Media coverage of this
Low-income households at risk as mortgage support benefit is axed (Guardian 9th December 2017)