What would happen if you were unable to pay your mortgage?

Changes to the government’s scheme supporting people unable to make their mortgage repayments – Support for Mortgage Interest or SMI – could have significant consequences for struggling home owners. From 6 April 2018 SMI ceased to be a benefit payment and became a loan secured against the mortgaged property.

The SMI loan carries interest which is rolled up at a rate linked to government borrowing costs (currently 1.5%). It becomes repayable if the recipient moved home, dies or transfers the property in any way. SMI only helps to pay a claimant’s mortgage interest – there’s no support given for capital repayments of the amount borrowed.

While the nature of the payments has changed, some aspects of SMI are unaltered:

  • The maximum mortgage covered is still £200,000 (£100,000 if you claim Pension Credit), which was set in January 2009. Since then UK house prices have increased by over 40% according to Nationwide.
  • The waiting period remains at 39 weeks.
  • The standard rate for mortgage interest is unchanged at 2.61%, based on Bank of England average mortgage rate data. SMI loan payments to the lender may therefore not cover all the mortgage interest due, particularly if the mortgage has reverted to the lender’s standard variable rate.
  • Eligibility is still means-tested. You can only claim SMI if you are in receipt of Income Support, Universal Credit, Pension Credit, or the income-related versions of Jobseekers’ Allowance or Employment and Support Allowance. In most instances this means you will not be eligible to claim SMI if you have capital of over £16,000.

Reforms to SMI were announced in the July 2015 Budget, as part of a set of measures to constrain government expenditure. However, as is often the case with unwelcome adjustments, the most significant change to SMI was deferred, and only took effect this year.

The change means benefit payments under SMI ceased from 5 April 2018, including for current recipients. You will not have to repay any amounts received as a benefit, but to continue receiving support you must agree to take an SMI loan. The Department for Work and Pensions should have contacted those affected.

 

REDUCED PROTECTION

The new form of SMI will leave recipients with a debt. Even if you are eligible to claim, payments only start after nine months and they may not cover all of your mortgage interest. As safety nets go, the mesh is extremely wide.

Given the new SMI rules, it could be wise to arrange your own cover. You may not have such protection in place, particularly if your mortgage is more than two years old and started when the waiting period was thirteen weeks.

You may want to review your mortgage arrangements now. The alternative could be to learn the hard way that the warning below is more than just a standard regulatory requirement.