Homeowners could be hit with interest on mortgage support lifeline, as well as giving up stake in their home

  • Unemployed homeowners can claim help with mortgage interest
  • Government considering clawing money back with potential stake in home

The Government could charge interest on mortgage lifelines for unemployed homeowners as well as taking a stake in their home, as part of a major overhaul.

Currently, unemployed homeowners can claim for Support for Mortgage Interest help to pay their mortgage, 13 weeks after signing up for Jobseeker’s Allowance and other income-related benefits - without having to pay it back.

But a dramatic change could see the taxpayer take a stake in their home, as the scheme is turned into a loan system, with interest potentially charged. Current interest rates on taxpayer-backed loans range from the low 1.75 per cent starting rate put on Help to Buy deposit loans, to the RPI inflation plus 3 per cent on student loans, where borrowers are currently paying 6.3 per cent.


Payment help: SMI is a safety net for homeowners who lose their job for a long period of time

Payment help: SMI is a safety net for homeowners who lose their job for a long period of time


In a nutshell, the Government wants to recoup some money when mortgage support claimants sell their home or die. This is something currently being discussed by the Department for Work and Pensions, as reported by This is Money in December.

One option being seriously considered is that homeowners could give up a stake in their property, in a similar way to how those boosting their deposits with the first part of the Help to Buy scheme do.

A return to 39 weeks before SMI can be applied for, is also on the cards. This was the norm before the pre-financial crisis.

A protection insurance specialist has even speculated on eight per cent interest on SMI payments.

His figure is based on a long-standing standard rate used by the courts and the same one used for interest on the repayment of PPI claims. This has not changed despite the base rate diving to a record low of 0.5 per cent.

Simon Burgess said: ‘Mortgages are now available at three per cent, so how could the DWP justify a rate which is nearly three times higher?’

An 8 per cent interest rate would be seen as high and has the potential to be politically hugely unpopular, however.

This may make a lower rate more likely, such as the 1.75 per cent starting rate rising with inflation on Help to Buy deposit loans, or even the RPI plus 3 per cent charged on student loans. This is fixed from September on the March RPI figure meaning students currently pay 6.3 per cent.

SMI itself is paid at a standard rate of 3.63 per cent, deemed to be representative of average mortgage costs.

The DWP says that there is no decision being made on interest payments currently and that any changes to the scheme would require legislation and thus discussion in parliament. The current funding for the shorter period of 13 weeks before applying for SMI ends in April 2015.This could be extended or the scheme could revert to 39 weeks.

 

Mr Burgess believes the additional charge would take precedence over any mortgage commitments and so reduce the amount payable to homeowners and lenders.

WHAT IS SUPPORT FOR MORTGAGE INTEREST?

If you’re a homeowner getting certain income related benefits you might be able to get help towards interest payments on your mortgage or loans you’ve taken out for certain repairs and improvements to your home.

The idea is that those who have fallen on temporary hard times through unemployment can avoid losing their home, with assistance to make sure their mortgage interest is covered.

SMI is normally paid direct to your lender after a waiting period, which is 13 weeks after you’ve claimed benefit.

It is paid at a standard rate of 3.63 per cent, whatever the rate on a borrower's mortgage.

You can’t get help towards the amount you borrowed - only the interest on up to £200,000 borrowed.

You can find out more on the gov.uk website.

He adds that recipients of Legal Aid who retain money or property following civil cases are often required by the Legal Aid Agency to pay an eight per cent statutory charge on their assets. 

Data shows SMI was paid to 239,000 people to the tune of £400million last year - it is an important lifeline for many.

The Department for Work and Pensions said the Government wanted to reform SMI so it would still provide a safety net for homeowners while remaining fair to taxpayers.

Ministers believe the changes will work as homeowners tend to have greater levels of personal wealth than those who do not own a property.

However, it could prove unpopular with those who believe they already contribute enough to the welfare state through paying taxes when they are in employment and deserve help when it is needed.

Reader debate in our last SMI story

Previous headline: Provoked a flurry of responses

Previous headline: Provoked a flurry of responses

Comment by Lee Boyce

SMI is a safety net for many who fall on hard times.

Many homeowners who find themselves out of work for a long period despite constant job searching can use this as a tool to ensure they don't lose their property.

To ask them to pay a rate of eight per cent interest, while also paying back the SMI payments wouldn't sit right with me.

The question therefore is would a lower rate of interest be acceptable and what would that be. An average mortgage rate, similar low-cost assistance as Help to Buy or inflation-linked but potentially expensive rate on student loans.

The majority would have paid taxes all their working life, so a little support when it's needed should be expected, especially with other charges relating to property such as stamp duty also likely to have been forked out numerous times.

When This is Money reported on this at the tail-end of last year, it provoked a mixed response, with many asking how these changes were fair?

Anthony 63, from London, said: ‘This is not fair - people with mortgages are those usually who are working and therefore paying taxes, plus they probably paid stamp duty when they bought their home - so why should the government help itself to a slice of the equity when they fall on hard times?’

Vampire, London, said: ‘How can this be fair. The interest proportion is the same as renting in my eyes. Do the government think that property prices only go up. What happens when property prices go down?’

But not everyone agreed. Mailmale, Dorset, said: 'Good idea. Why should I as a taxpayer pay someone else's mortgage and bills, when I worked hard to pay my own way and pay my mortgage off? Anyone objecting to this just isn't reasonable. If they have assets - liquidate them by doing this.'

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