Pensioners need help ahead of mortgage interest benefit being scrapped

Ryan Bembridge

October 9, 2017

Pensioners need help assessing their options when (SMI) Support for Mortgage Interest is withdrawn, experts have warned.

SMI is a benefit for people with jobseekers allowance or pension credit which pays off the interest on mortgage loans – but from 5 April 2018 it is being withdrawn.

In its place will be a government loan to be repaid when the property is sold or transferred to someone else, and people who currently receive the benefit can opt in to take out a government loan.

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The Department for Work and Pensions (DWP) has written to borrowers explaining what’s changing, although it hasn’t published a loan rate and refers them to the Money Advice Service, Citizens Advice and Shelter for more help.

Helen Morrissey, personal finance specialist at mutual insurer Royal London, said: “People aren’t really being given advice.

“They are being passed onto the Money Advice Service and Citizens Advice but they don’t offer advice; they offer guidance.

“They might get too nervous, not take up the loan offer and struggle to make mortgage payments after.

“People selling who have to repay the loan may struggle to get another mortgage.”

Asked whether the government should fund them getting financial advice, she added “something like that would be amazing”.

She went on to say a lot of people on pension credit typically claim for several years, meaning the loan amount could end up building up.

What is more a lot of those in receipt of SMI are woefully uninformed, as some with interest-only mortgages aren’t aware they need to repay the capital at the end.

The interest rate on the ‘second’ loan is set to be 2.2% according to a representative from the DWP, though that is subject to change depending on what happens to the Bank of England base rate.

Simon Chalk, director of equity release adviser laterlivingnow!, thinks the DWP should send a representative to brief people.

He said: “I don’t think Citizens Advice is a go-to place for advice.

“Bless them they are staffed by volunteers, they are overworked and are limited in what they can do.”

But he added: “Financial advisers don’t necessarily understand the ins and outs of this either.

“Those impacted should be briefed by a representative of DPW but that’s wishful thinking.”

David Hollingworth, director of communications at mortgage broker London & Country, reckoned the terms of the loan need to be made clearer as well as other options, such as equity release.

He said: “The key point is it’s a fundamental change of approach.

“If people fail to understand that it could have far-reaching consequences for them, particularly among the most vulnerable borrowers.

“Who is going to be able to advice people appropriately if options are limited?”

He added: “It all depends on how distressed their position is – taking out the loan will still benefit some people.

“You’ve got to give as much information in as simple a format as possible to help people understand the implications, like with any loan.

“You’ve got to set out other options, so people have a better view of what the options might be – for older borrowers equity release might be a solution.

“From a mortgage point of view if they’ve got into difficulty already that closes down what their options are.”

Affected people will be sent a letter about SMI changes by February.

A DWP spokesman 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.”

Despite the difficult situation facing some older mortgage holders Helen Morrissey, Simon Chalk and David Hollingworth agreed that removing the benefit is fair enough.

Morrissey said: “People are saying ‘why we are subsidising other people’s mortgages?’

“It is understandable that the government has made it into loan.

“But people need to be informed and given time to get these decisions.”

And Chalk said: “It’s a welcome move. I don’t think somebody should get interest paid on their mortgage by taxpayers.

“Benefits should be there for the worst off in society. I think making it a loan is a fair way of treating the taxpayer and recipient of the benefit.”

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  • Gareth Morgan

    “The interest rate on the ‘second’ loan is set to be 2.2% according to a representative from the DWP, though that is subject to change depending on what happens to the Bank of England base rate..”

    That’s not the case – it’s the OBR forecast for gilt rates. The initial rate on the latest forecast will be 1.7%.

    The payment to the lender will be at the same rate as the current SMI scheme; that’s 2.61% at the moment.

    Simon Chalk says ““I don’t think Citizens Advice is a go-to place for advice.
    “Bless them they are staffed by volunteers”. Patronising and inaccurate twaddle! If you want advice about benefits, I know where I’d rather go.

    The way the scheme operates is actually quite complex and there are real difficulties, and opportunities, for lenders and advisers. That’ why we’re holding seminars for lenders, and separate ones for advisers, to spread more knowledge about the issues.

  • Debt Camel

    “The interest rate on the ‘second’ loan is set to be 2.2%” oh no it’s not … I know Serco have been telling people that, but the DWP has agreed that it will actually be 1.7% and are now amending Serco’s call script.

    See the discussion in the comments below this article where the error was spotted by Gareth Morgan: https://debtcamel.co.uk/smi-loan-help-mortgage/