Johnny Timpson, protection specialist at Scottish Widows, explains why the upcoming changes to support for mortgage interest should prompt brokers to talk to clients about protection.
Advisers regularly ask me how to raise protection needs with existing clients as well as new ones and what support material they need.
While the government’s welfare reform agenda has thus far not featured too highly on intermediaries’ agenda for discussion with clients, the changes to support for mortgage interest benefit give reason to have a financial resilience discussion with all mortgage clients both old and new.
The 2015 Summer Budget ushered in the reform of SMI, the safety net which underpins the financial foundations of mortgaged homes across the UK.
The move has been described as significant by both Shelter and the Council of Mortgage Lenders and marks a major shift in the way the benefit is provided.
Our own research shows less than a quarter of adults with children under 16 have any form of financial protection, with half of this group admitting that their savings would last just a couple of months or less if they were unable to work.
SMI is, in fact, the only safety net in place for many families if they were unable to pay their mortgage.
SMI can pay the mortgage interest for your client but not capital and should they be eligible for the scheme, the government steps in and makes interest payments direct to their lender on the first £200,000 of their outstanding mortgage for the time they can’t afford them.
The level of interest is set by the government, so your client’s individual rate isn’t used.
The current interest rate is 3.12%, although it’s subject to change each time the Bank of England average mortgage rate moves by at least 0.5% away from the current SMI rate.
This means as mortgage rates go up, the SMI rate will too, and similarly it will go down if mortgage rates drop (as it did in July 2015 – it was previously 3.63%).
At around £300m per annum SMI is small in terms of welfare spending, but it’s important, as those who benefit from it are protected from repossession during periods of unemployment or sickness.
To be eligible for SMI your client will need to be receiving income support, income-based jobseeker’s allowance, income-based employment and support allowance or pension credit.
So, if they’ve recently lost their job or had an income cut, it’s important that they sign on or they won’t be eligible.
The benefit currently kicks in 13 weeks after the person (or couple) responsible for paying the mortgage claims the initial benefit, with the exception of pension credit where they can claim immediately.
It was announced in the 2015 Summer Budget, however, that the waiting period for SMI will be increased to 39 weeks from April 2016.
If your client is claiming jobseeker’s allowance, they’ll only get SMI for up to two years, but there’s no limit for recipients of other benefits.
Your client’s eligibility for the scheme will automatically be assessed when they apply for an income-related benefit.
SMI is available in England, Wales and Scotland with a similar system in Northern Ireland, and it stops paying out once your client’s benefits stop – usually when they return to work or start working extra hours to earn more.
However, they may be able to claim mortgage interest run on to help them make the transition back to the world of work.
This lasts for four weeks and will be the same amount which SMI paid, but the big difference is that MIRO is paid directly to your client instead of their lender.
Your client can’t claim if they have more than £16,000 in savings or if they own more than one residential property.
If the benefit your client is claiming is pension credit, then the amount of mortgage they can claim interest payments for is capped at £100,000, not £200,000.
However, in this instance, they don’t have to wait the initial 13 weeks before claiming SMI (39 weeks from April 2016).
Currently, SMI is a benefit. However, under plans announced in the 2015 Summer Budget, the government plans to make it a loan, with a charge being taken on your client’s property.
It’s also proposing that advice in relation to this charge will be available, although details of this are not yet available.
This means that your client will have to pay back the amount the government paid into their mortgage for them either when they return to work or when they sell their home.
These loans will also attract interest, though the rate is likely to be quite low and linked to gilts – again, detail on this is awaited.
This change will come into effect from April 2018 and we can anticipate that the change will impact both SMI claims in progress and new claims, making this issue relevant to all of your mortgage clients.