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.
Should you remortgage after a fix ends?
Selling the house – a hard choice
Options for repaying an IO mortgage
Nick Pearson says
Funnily enough this is very similar to a proposal myself and a friend from Shelter put forward during the reposession crisis of 1991. The difference was we suggested that the loan should be for the actual mortgage payments as well as the actual payments due to any secured loans. It is difficult to justify why the taxpayer should assist a homeowner to purchase a property which is likely to be a often rapidly appreciating asset, unlike a property that is rented. The analysis at the time was that a large percentage of people on SMI had been for over 2 years and had substancial equity. I have no idea if this is still the case.
Sara (Debt Camel) says
Most of the people getting SMI as they are on Pension Credit are likely to have significant equity. For working age, it largely depends on how long ago the house was bought.
The changes are complicated and people are likely to find them stressful, but they aren’t nearly as much of a problem as the current rate SMI is paid at or the 39 week delay IMO.
Naomi Porter says
I think it’s appalling that people who have never used the system for housing benefit as millions have for years on end, have to take SMI as a loan. These people have mostly always worked and paid more money in to the system. Only a conservative government would do this. I can’t believe that Shelter made a similar proposal and I won’t be supporting them any more. I’ll do my own thing to support homeless people. Many people who were conned into voting conservative will suffer and it will add to the number of repossessions because that is exactly what the conservatives want. They believe they own everything and can do what they want with everything and everybody. They want it all back, they want total control, they are vicious thugs. It is the straw that will break the camels back -hopefully. Maybe some of the people that voted conservative the last time we had elections will wake up to this nightmare and look at what it going on with open eyes before more policies that damage home owners are proposed. Shame on Shelter too. Those that are lucky enough to have homes want homes for those that haven’t, this policy is just robbing Peter to pay Paul. It does nothing effective and it will only allow the conservatives to spin the figures if they can manage to do that efficiently. More lies and rubbish.
Sara (Debt Camel) says
Shelter’s view is explained here http://blog.shelter.org.uk/2015/07/changes-to-support-for-mortgage-interest-mark-fundamental-shift-in-welfare-provision/.
Gareth Morgan says
There is one improvement in the new proposals’, the 104 week limit for JSA goes. As for the rest, I’ve been doing some modelling about the effects on equity. It does depend on some factors that are difficult to forecast, like gilt rates and HPI, but for some long term claims there may well be an advantage in taking out a commercial Equity Release scheme.
Sara (Debt Camel) says
I did note that improvement but decided it was hardly worth mentioning as there is no 2 year limit in UC, is there? So JSA limit is becoming obsolete with the UC roll out.
Commercial Equity Release for someone on Pension Credit? That will be interesting. Another category of clients arrive at CAB that we aren’t allowed to give advice to…