In less than 3 weeks’ time, the Government stops paying mortgage interest to for those on certain benefits.
Some bright spark at the Department of Work and Pensions came up with a way to save the Government money – by getting a private company, Serco, to operate a loan scheme. Instead of having payments covered by the state, they will be covered by the homeowner taking out a private loan with Serco in return for a charge on the property. That means that they will have to pay back an unspecified sum of money if they eventually sell their house.
The Government is supposed to have contacted everybody who claims benefit under the current system (SMI). They haven’t, though. And they are leaving it a bit late for people to be given informed consent for the change. Only 10,000 people, a tiny proportion of those anticipated, have signed up for the new scheme. This means that they will end up having to pay their mortgage interest in full.
Today, Vince Cable called on the government to act quickly to protect these vulnerable home owners:
The lack of take-up for this scheme is financially dangerous for tens of thousands of families at a time when personal debt is already mounting.
The scheme must be re-advertised and delayed so that more people sign-up and don’t end up in chronic debt.
Something has clearly gone wrong in the preparation for this change. The very least that should happen is that it should be delayed to ensure that everyone has had the chance to make an informed decision about what they should do.
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17 Comments
At a time of low interest rates (and therefore low mortgage interest relief benefit) the low take-up may also be due to people deciding that paying it up front is better than getting into debt with Servo.
In the 1990’s the government would pay a person’s interest payments on their mortgage after I think 13 weeks of claiming the out of work benefit. The actual interest payments not an average which happens today. If it was fair then why can’t we go back to it? In 2008 the government ditched the then current system and went to paying I think this old one because they didn’t want a large number of repossessions.
Even if we think paying the full interest is not fair then the least the government should pay towards the interest is the Local Housing Allowance amount.
@Michael BG
My recollection is that the system in place in the 1990s was scrapped because of “revelations” by the tabloid press of people who had been having their mortgage interest paid by the state for several years. It was brought back, as you say, because the then Labour government were afraid of the consequences of large numbers of repossessions. The lack of social housing means people cannot simply sell their house.
What a perverse world we live in where those at the top end of the income scale can enjoy perks like
Meal Expenses.
Travel Expenses
paying themselves in dividends at 7.5% tax instead of wages.
Then there are those at the bottom end of the scale who fall on hard times often through no fault of their own or through accident and sickness and are forced into taking loans to help towards cost of mortgage interest payments….
I agree with Michael, the bare minimum home owners should be entitled to when falling on hard times and needing support should be the Local Housing Allowance.
Why is it ok for public money to go to private landlords, but not to go to mortgage lenders towards “interest” payments. I don’t get the logic
In 2016 there were about 124,000 people getting SMI help with their mortgage. Roughly half were pensioners who get Pension Credit and who tend to be on SMI for long periods. The other half are younger, not working and receiving one of: JSA; ESA; Income Support; or Universal Credit.
You can’t claim SMI for 39 weeks and it is paid based on the average interest rate for new mortgages currently 2.61%. Any interest costs above that level you have to pay yourself.
In September 2017, the DWP started sending letters and an information leaflet to people who currently get SMI to explain what is changing and say that they will receive a call from Serco to explain it further.
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. There is no option to stay on the current benefit. The loan itself is from the government, not from Serco.
SMI will be calculated for your mortgage using the same rules as before. You will get the same amount of help as you are getting now, the only difference is at some point in the future when your house is sold, the loan will have to be repaid.
Each month the loan will increase by the amount of the SMI 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 1.5%. You don’t have to make monthly repayments to this loan, even if your finances improve so you stop getting SMI.
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.
Joe
Do you have a link to your figures for who was receiving SMI in 2016? Thank for the information. 39 weeks is correct – a very long time for someone not to be paying their mortgage interest payments. For someone who is of working age their not working is out of their control. However for a pensioner they must have planned for their mortgage not to be paid before they retired assuming that we are not considering a woman whose husband died before his retirement age. For the pensioner couple there is an argument for them having a loan to pay their interest and for that loan being paid off with interest when they sell the house. I wonder why the mortgage company does not just roll up the interest until the house is sold?
Joe do you like the idea of this loan?
The last quote from Vince, seems to imply that he fully supports the government’s secured loan scheme.
From my reading of the article and comments, it would seem that ultimately MORE people will end up in “chronic debt”, just that the debt will be largely out-of-sight held against a couple’s property. I can’t see someone on Pension Credit being in a position to make any repayments (ignoring a lottery win) and young people struggling to get a start in life, get hit as soon as they sell their current home, making it harder for them to make the next step…
Whilst it sounds very nice that the loan only becomes repayable on the death of the claimant, life is rarely that clear-cut.
However, what I do see is in this scheme is a money grab by the DWP (ie. Central government) at the expense of local government, when an elderly has to sell up and go into care! I presume the DWP take their cut ahead of the local authority responsible for the care…
Michael BG,
the current figures appear to be circa 135,000, of which 65,000 are said to be low income pensioners https://www.lovemoney.com/news/68401/support-for-mortgage-interest-benefit-switch-smi-loan-april-2018-what-to-do
I think the loan scheme is fair enough but,as with all these schemes, how it is implemented is crucial to ensure that low income homeowners are properly supported. The 9 month waiting period is a long time and if your mortgage interest payments are higher than the support payments you are left with a cash flow problem. A homeowner is reliant on the bank rolling-up interest and capital payments during the waiting period and rolling-up capital and any interest payments in excess of the support payments. This kind of financial forbearance by mortgage lenders is by no means automatic and has to be agreed on a case by case basis.
An alternative to support payments might be for the state to offer the option of taking over the mortgage directly and to recover the mortgage and rolled-up interest when the homeowner re-mortgages or the property is sold or bequeathed giving homeowners security of tenure.
This is yet another clear example of poor choices by the current government. This is simply both a way of taxing poverty and kicking the problem into the long grass of the future. It is also another reminder, if we needed one, of the conservative attitude to anyone who is in need. The homeless, the underpaid, the unemployed, the old, the terminally sick and the home carers. Do not expect anything from Mrs May!
The big problem is because we only had a small crash in house prices due to QE and ultra low interest rates, the boom/bust cycle in house prices which is circa 18 years is no longer predictable and can happen at any time in the future… not sure how a private company holding the loans will react to suddenly not having the equity it was expecting to plunder, as well as higher interest rates. Compound interest can also dig into the equity held by the owner.
I agree with the other poster, the govn should have rewarded itself with a fair share of the equity in exchange for paying the mortgage which, if necessary, could have been rolled over into the next housing price cycle (so the new owner of the house would be buying a part share until the govn was able to get its money back). The govn would then have an asset to balance against expenditure so could fiddle its debt (tiny difference but every little helps).
I am concerned that Vince and a money adviser on BBC Breakfast yesterday are releasing statements effectively telling people to take out a loan without speaking enough about the advantages of it compared to other solutions, and what other options there might be. It sounds like there is nothing else as good a deal but contradictory to move people onto Universal Credit to help them getting into the habit of managing their money, then go ahead and tell them to do something like take out a loan without giving the information required to make an informed choice.
Perhaps that’s the issue? People don’t know enough about this new scheme and are nervous at the “take out a loan” rhetoric.
Roland
According to Joe the new loan is not from the government but from Serco. So it isn’t “a money grab by the DWP”.
Joe
I note that the Lovemoney article talks of an interest rate of 2.2% not your 1.5%. It can’t be right for people to be asked to make a decision on a new loan if they are not told what the interest rate will be and how it is likely to compare with other rates available when it increases or decreases. I assume that as in the past a claimant doesn’t get the payment based on the actual rolled up debt after the waiting period but on the size of the mortgage either when making the claim or when the mortgage was taken out whichever is the smaller.
As William Fowler states having to pay compound interest on the new loan will increase the size of the loan on top of the mortgage interest payments.
It is a shame that it appears that the party hasn’t got a policy on what we would replace this new system with.
@Micheal BG – I can find no credible reference that says Serco is the loan provider, only that as said in the article, Serco were contracted to administer the DWP scheme.
It is a money grab, in the sense that currently, someone receives SMI benefit, on death or sale of the property the SMI benefit ceases and there is no outstanding charge. With the loan, there is an outstanding charge on the property, which like stamp duty etc. has to be paid out before any other calls on the capital released. Now if a person is moving into a local authority care home, the proceeds of the house sale are taken into consideration and impacts the level to which the local authority funds that persons care. Given one of the changes currently going through is an effective separation of tax collection between central-government and local-government, with the aim of removing the Treasury from the local authority funding route, I can’t help but think that either this an unintended consequence or a deliberate action on the part of the DWP.
You might say that I’m imagining things, but if you’ve read the inspectors’ report on Northampton County Council(*) …
(*) https://www.gov.uk/government/publications/northamptonshire-county-council-best-value-inspection
@Micheal BG
>I note that the Lovemoney article talks of an interest rate of 2.2% not your 1.5%.
The DWP website quotes a current figure of 2.61% (which I presume is the APR) [https://www.gov.uk/support-for-mortgage-interest ] that can be varied twice a year.
>a claimant doesn’t get the payment based on the actual rolled up debt
From my reading of the limited information, I suspect interest is calculated from the date of first monthly payment (aside: it is not clear whether after the 39 week waiting period, whether the SMI loan pays the outstanding mortgage payments or not) which then gets added to and compounded each month. I wonder if by saying it is not a ‘loan’ even though they are calling it a loan, the government is able to avoid giving the level of detail an open market loan provider would have to give…
Given the loan parameters are a maximum mortgage of £200,000 and savings of less than £10,000 if on Pension Credit, otherwise £16,000. It seems there is an expectation that people will not repay the loan other than through sale or death (if someone does return to work, I can see them treating covering the weekly bills at a higher priority than making repayments to a largely invisible loan…).
I agree with you, the LibDems do need to come up with something to replace this system. Whilst, in a rising house price market, we can argue about whether the claimant is or isn’t entitled to the increasing value of their home, the key issue is creating a fair and transparent system to all parties involved – specifically DWP, local authority and the claimant and their dependents.
Michael BG,
the loan is provided by the government and administered by Serco. The current rate of support for mortgage interest the government will pay is given as 2.61% as per the government website
https://www.gov.uk/support-for-mortgage-interest/what-youll-get. That rate is based on average mortgage rates, so can go up or down with mortgage rates.
The loan payments the government makes to the homeowners mortgage company will accumulate and are subject to an interest rate based on an OBR forecast of the gilt rate. The OBR website gives this rate as 1.5% for 2018. That rate can be revised up or down semi-annually depending on the OBR forecast.
Apologies to both Roland and Joe. I misread Joe’s earlier post – the loan is from the government.
Roland
In the past the government wouldn’t pay interest on arrears including the arrears caused by them not paying the interest from day one. It would be nice to think that the new scheme will cover the arrears but it doesn’t read like that – “SMI is currently paid as a benefit. From 6 April 2018 it will be paid as a loan” and “What you can’t use SMI for … missed mortgage payments (arrears)” (https://www.gov.uk/support-for-mortgage-interest).
The interest rate on the SMI loan isn’t given on the government website.
Joe do you have a link where the government states the interest rate for SMI loans? I couldn’t find the OBR forecasts of the gilt rate only amounts of interest not rates.
Michael BG,
this forum discusses the interest rate and has a link to the OBR forecasts https://www.rightsnet.org.uk/forums/viewthread/11734/#54394