The Department for Work and Pensions has written to more than 100,000 borrowers who currently claim SMI to help them pay their mortgage interest, explaining that as of 5 April next year, the benefit will become a loan with interest payable.
An estimated 135,000 low-income homeowners are at risk of losing their homes as the government gears up to bin a key benefit known as support for mortgage interest.
Estimates suggest that around 65,000 of those most affected are older, vulnerable borrowers who took out interest-only mortgages before the financial crisis hit in 2008 and now claim Pension Credit.
The rate of interest on the new SMI loans has not been confirmed but is expected to be charged at the gilt rate – which is forecast to be 1.7 per cent in 2018
Working-age borrowers are also affected as SMI is paid to homeowners in receipt of certain income-related benefits, such as Jobseeker’s Allowance.
Currently SMI covers the interest payments on mortgages and some home improvement loans and is paid as a free benefit.
However, from April 2018 any SMI payments will need to be repaid to theGgovernment with interest when the property is sold.
While the rate of interest has not been confirmed, it is expected to be charged at the gilt rate – which is forecast to be 1.7 per cent in 2018/19.
Independent investigations by insurer Royal London suggest that the initial interest rate will be around 2.2 per cent, however, and the firm has warned this could rise if interest rates rise, which looks increasingly likely.
WHAT IS SMI?
SMI is a benefit paid by government to low income homeowners.
It is normally paid direct to your lender.
You can’t get help towards the amount you borrowed – only the interest.
After 5 April 2018, SMI will stop being a benefit and will become a loan you will have to repay with interest when you sell your home.
While the new SMI loan and interest won’t have to be repaid to the Government until the property is sold, the fact it will start to pile more personal debt on claimants has allegedly prompted mortgage lenders to write to claimants threatening repossession.
One lady, aged 68 and who wished to remain anonymous, got in touch with This is Money claiming that her mortgage lender wrote to her in September threatening to evict her, citing, as part of the issue, the withdrawal of SMI.
She is already struggling with arrears on her mortgage interest, having been granted a self-certification interest-only loan in March 2006 by then Lehman Brothers-owned mortgage lender Southern Pacific Mortgages Ltd (SPML).
She kept up with her payments until she retired in 2009, when she began to fall behind.
She claims SPML – now owned by a mortgage servicing company called Acenden – has pursued her ‘relentlessly’ since, threatening court action and eviction while piling on penalty fees and extra charges which have caused her debts to spiral.
She said: ‘I am caught up in a terrible financial nightmare. Every time I think I’m catching up, more charges appear.
I am caught up in a terrible financial nightmare. Every time I think I’m catching up, more charges appear
‘I tried to sell my home but the market is down and now SPML says I’m in breach of my contract and are threatening repossession in October ahead of SMI going in April.’
This is Money has approached Acenden for comment but so far, the firm has not responded to our requests.
The customer added that she has sought legal aid to help her protect her home but has been turned away.
She added: ‘Just because you own a property doesn’t mean you’re flush with money. Sometimes it is the elderly and vulnerable people in this situation.’
A spokesman from the Department for Work and Pensions, which administers SMI, said: ‘This reform means we will continue to provide a safety net to help homeowners avoid repossession.
‘However, over time, someone’s house is likely to increase in value, so it’s reasonable that anyone who has received financial help towards their mortgage should be asked to pay that back if there is available equity when the property is sold.’
What is happening to SMI?
Anyone currently in receipt of support for mortgage interest will be offered a support for mortgage interest loan.
DWP is getting in touch with all SMI claimants over the coming months to explain the change and signpost them to independent advice so they can consider their next steps.
The SMI loan will come into effect on 5 April 2018 and is only repayable after the property has been sold.
It will be repaid from proceeds after the outstanding mortgage is paid off. If there are insufficient funds to repay the SMI loan, government will write it off.
Additionally, there will no longer be a two-year limit on payment of SMI to claimants of Jobseeker’s Allowance.
There is already concern that some people may not have the money to pay off their mortgages
What will this mean for SMI claimants?
Helen Morrissey, personal finance specialist at Royal London, said: ‘Thousands of low-income pensioners and working-age benefit claimants have started to receive official letters w
arning that the help they receive with their mortgages will end in April 2018 unless they sign up to a second mortgage with the government.
‘Of particular concern is the potential impact on those SMI recipients on Pension Credit who have interest-only mortgages stretching into retirement.
‘There is already concern that some people may not have the money to pay off the balance on these mortgages when they come to an end, but this will be exacerbated if they also have to pay money back to the government on top.’
If the SMI loan amount is more than the equity left within the home when it is sold then the remaining balance is written off but this could still leave claimants with no way of purchasing a new property so they will be forced back into the rental market.
How much is it going to cost?
Long-term claimants could face bills running into thousands of pounds.
Royal London analysis shows that a Pension Credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claim SMI for five years, which is the typical claim duration for pensioners.
If they were to claim it for 10 years then the loan amount would stand at £11,744.
Once the mortgage term ends they face the prospect of having to repay the SMI loan as well as the outstanding capital sum on their mortgage.
Morrissey said: ‘While people of working age might be able to extend their mortgage term to give themselves more time to pay, those in retirement may struggle to get a lender to agree to do so.’
Where can you get advice and help?
This is Money has partnered with Key Retirement, a firm of independent advisers who specialise in finding retirement mortgages and equity release that work for you.
For more information click here.
You can also download a free 32-page guide to equity release.
The government is pointing people in the direction of the Money Advice Service and Citizens Advice, both of which will be able to explain the SMI changes.
However, neither organisation is authorised to give financial advice, so if you want a personal recommendation on your best options, you should speak to a financial adviser or a mortgage broker.
Dean Mirfin, of retirement lending specialist adviser Key Retirement, said: ‘There could be unknown implications resulting from these changes, causing many issues for older borrowers including impacting on their ability to move later in life and also the capability to access further borrowing.
‘Whilst until now SMI has been viewed a benefit, it should be an essential step that financial advice is sought, not just guidance to understand the change.
‘Advisers can recommend the best course of action for those affected. This could have very wide reaching implications.’
Read more on your options for paying off interest-only mortgages in retirement.