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 in April 2018 this changed and now it is only given as a loan that is secured on your house.
Here is the DWP leaflet describing the new loan: DWP SMI Factsheet (6 April).
There are about 100,000 people eligible for SMI in 2018:
- about half are pensioners getting Pension Credit. They tend to be on SMI for long periods and often have an interest-only mortgage;
- the other half are younger, not working and receiving one of: JSA; ESA; Income Support; or Universal Credit.
How much help does SMI give?
If you were getting SMI before April 2018, the answer is simple – you will get the same amount as you were getting before April 2018, it is just being paid in the form of a loan, not as a benefit. It will be paid directly to your mortgage lender each month just like the benefit was.
If you lose your job, you can’t claim SMI for 39 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.
The help SMI gives is likely to be less than your monthly repayments for three reasons:
- SMI only helps with the interest you pay on your mortgage not the capital repayments.
- 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.
- 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 unfair. 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 works
In September 2017, the DWP started sending letters 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 loan itself is from the government, not from Serco.
The letter 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 after April 2018. There is no option to stay on the current benefit. The legal terms for the loan arrangements are described in this government document.
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 – this is the rate the government can borrow money at so it is low compared to normal loan and mortgage rates. In October 2018 this is 1.7%.
Repaying the loan
You don’t have to make any repayments to this loan.
This applies even if your finances improve, for example if you return to work. At that point, you won’t be able to get more SMI help every month, but you don’t have to make any payments to the loan amount you have already been given.
But if you want, you can repay the loan, or part of it, at any time, with a minimum repayment of £100.
The loan will be repayable when your house is sold, 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 will need to sign the loan agreement and a charge form. If the house is jointly owned and you live together your partner also has to sign. The charge will be registered at the Land Registry.
Should you agree to take the loan?
A lot of people find the idea of getting a loan to pay their mortgage very worrying. “It’s not right to get new debt to pay off other debts” is a common comment.
And as I debt adviser I would normally agree! But this SMI loan is very unusual – it is cheap, but you don’t have to make any repayments to it. So you need to think about your situation and make a practical decision.
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 this SMI loan is a good option for four reasons:
- it is cheaper than you could get from a bank;
- you don’t have a job so you probably can’t remortgage;
- if you don’t take the loan and mortgage arrears will accumulate, your house may 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 the loan.
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 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 at this loan and at the rest of your situation, including your benefits and other debts.
How many people are taking the loan
By 3 October 2018, six months after the switchover was supposed to have happened, the DWP has successfully contacted 101,000 people who are eligible for SMI – 96% of the total number. Of these 101,000:
- 70% have decided not to take the loan;
- 22% have decided to take the loan – of these about three quarters have completed the loan documentation and the other quarter are in progress;
- 8% are still undecided.
You can change your mind if you have rejected the loan
In October 2018, DWP statistics showed that 70% of people have rejected this loan – that is a lot more than the government expected.
It is worryingly high, as some people may be struggling to make their mortgage repayments without help from SMI.
In March the DWP decided to allow people to change their mind and switch to getting the new loan. If you do this, there won’t be a “waiting period” because you have been eligible to get the loan since April, when your SMI benefit payments stopped.
So if you think you made a hasty decision to reject this loan and you are now worried about getting into arrears with your mortgage, you should contact the DWP and say you now want to take the loan. If you do this, the loan can be backdated back to April if you want – that may help you clear some mortgage arrears
Media coverage of SMI becoming a loan
Anger as thousands unaware they face a ‘second mortgage’ (Guardian 5 February 2018)
Radio 4 Moneybox (17 March 2018) with the DWP minister – and me!
This article was first published in August 2017 but it is kept up to date.