Support for mortgage interest (SMI) provides help to people on benefits with part of the cost of paying a mortgage.
Most homeowners whose household finances have been affected by Coronavirus have taken mortgage payment breaks. This has avoided problems with mortgage arrears and people haven’t had to think about how they could get help with their mortgage costs.
But mortgage payment breaks will be ending in the next few months. Around the same, time furlough payments and support for the self-employed will be ending. And many people may be made redundant.
So problems with mortgages are likely to increase from October and then people begin to find how little help SMI provides.
What is SMI?
People paying rent can get some or all of it covered through Housing Benefit or Universal Credit. SMI can be seen as the equivalent help for people with mortgages.
This House of Common Briefing paper gives a timeline of the changes to SMI since 1988. It looks in detail at the changes made in 2018 when the previous SMI benefit was replaced by a loan.
Most of the new SMI claimants over the next year are likely to be working-age people whose self-employment income has decreased or who have lost their job and who have applied for Universal Credit.
The many problems with SMI
1) 9 month delay until SMI is paid
You have to have been claiming a relevant benefit for 39 weeks before you can get help with your mortgage costs.
In 2009, to help Britain cope with the recession after the 2008 financial crisis, the 39 week waiting time for SMI was reduced to 13 weeks.
In 2016 this was put back up to 39 weeks. The rationale for this seemed to be that with jobs again easier to find, most people could find a new job within nine months.
But now, after Coronavirus, the jobs market is expected to be very difficult for a long while. 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 they may already have substantial mortgage arrears.
The Building Societies Association called in June 2020 for the waiting time to be cut:
In light of Covid-19 and the pressure on people’s incomes, we are calling for the waiting time to be reduced. Making this change now will help create an environment by providing a longer-term safety for homeowners. This will help people to able to stay in their homes, while dealing with financial pressures.
2) the “zero earnings” rule
You cannot get any help from SMI if you are on Universal Credit and you or your partner have any earnings at all.
The House of Commons Work and Pensions Committee recommended that this should be changed in 2012, saying:
Removing Support for Mortgage Interest as soon as any hours of work are undertaken could discourage some claimants from entering part-time employment… There is also the possibility of unintended higher spending consequences if claimants move to private rented accommodation, where assistance with housing costs will be given. We recommend that the Government looks again at this provision.
But the rule remains. So much for Universal Credit making work pay…
I can’t see any justification for this at all. If someone needs help with their rent, that doesn’t stop as soon as they earn £1, so why should help with paying a mortgage?
3) no help for mortgage amounts over 200,000
The limit of £200,000 for working-age claimants was set in 2009. At that time, the average mortgage on house purchases in 2008 was about £145,000 (ONS figures).
House prices and mortgages since then have risen considerably. The average mortgage on house purchases in 2019 was about £195,000.
That suggests that the £200,000 cap should be raised by about a third to provide the same level of help that was given in 2009.
4) payments that aren’t linked to mortgage costs
SMI only helps with the interest part of mortgage payments, not the repayment part.
The amount is assessed using a “standard rate” for mortgages, not the actual rate someone is paying. At the moment it is 2.61%
People who are fortunate to be on a very low mortgage fix can get more than it is costing them.
But many people are paying a lot more than 2.61%. The Standard Variable Rate in June 2020 was about 4.5%. People who can claim SMI – being on Universal Credit for 9 months without earning anything – will often have to pay the SVR as they will find it hard to get a good new rate when a fixed rate ends.
5) paying it as a loan – complicated & offputting
SMI always used to be given as a benefit. This was changed in 2018 to being paid as a secured loan.
The loan is on pretty friendly terms: interest is charged at “the gilt rate” so lower than a mortgage rate is (although I expect to see the SMI regulations changed rapidly if the gilt rate ever goes negative!); you don’t have to make any repayments until the house is sold; and it doesn’t show on your credit record.
However this is a major complication for people already in a difficult situation. And if they then get back to work and want to get back to normal, they will be saddled with a secured loan which can make it harder to remortgage at a good rate.
“Trying to pay as few people as little as possible”
My conclusion is that SMI has been designed to be as difficult as possible to claim and to pay out as little as possible.
The government needs to look urgently at reforming SMI so that it provides the help with mortgage costs that many people will need in the next year.
It will harm a future recovery if people are saddled with mortgage arrears. It will damage the housing market if people are forced to sell a house quickly. And no mortgage lenders want to see repossessions rise.
As a minimum I would suggest:
- drop the wait time back to 13 weeks;
- increase the cap to £250,000;
- remove the “zero earnings” rule;
- change the rate at which help is calculated to be more realistic.
Update: other people are now calling for similar SMI changes, for example Money Advice Trust in its response to the FCA on help with mortgages when payment holidays end.