Support for mortgage interest: a loan alone
Gareth Morgan explains how the new Support for Mortgage Interest loans will work
In December 2011, the government published ‘Support for Mortgage Interest — Informal call for evidence’. In this, it expressed the view that help with mortgages should only be given for short-term crises and that longer-term support should be provided by loans. The issue went quiet for the remainder of the coalition government, but reappeared in the 2015 budget. In June 2017, regulations were laid down and, from 6 April 2018, mortgage support will be provided by way of loans.
At the moment there are an estimated 124,000 claimants receiving Support for Mortgage Interest (SMI), with about 45% being of Pension Credit age. The average weekly amount of SMI for pensioners is about £20, while for those of working age it is about £40. That equates to mortgage amounts of about £40,000 for pensioners and £80,000 for those of working age.
The new rules
The rules for the new structure are set down in the Loans for Mortgage Interest Regulations 2017 (2017 №725) and are part of the changes implemented by the Welfare Reform and Work Act 2016. The scheme is different in many respects from that considered in the consultation document, but retains the core feature that replaces interest support, as a part of benefits entitlement, with a loan scheme that is, for most people, secured by a charge on their property. There are similar rules for ‘alternative finance payments’ or Sharia mortgages, but only for Pension Credit or Universal Credit.
Before a loan can be offered, or accepted, each claimant must receive ‘relevant information’ about the scheme and its consequences. The regulations define this as including a summary of the terms and conditions, an explanation about charges and security, an explanation of the requirement to accept a charge and information about where further independent legal and financial advice can be received. This is somewhat less than the original intention to require ‘industry-standard’ advice, although that always seemed likely to be difficult to deliver. The information condition is being met by outsourcing to a third party, Serco, which is following a ‘warm-up’ letter and leaflet with telephone calls. The calls are scripted and do not seem to be carried out by people with a high level of knowledge of the scheme. Confidence has not been improved by the initial script containing errors in the likely interest rate to be charged.
Once claimants have agreed to take out a loan, and agreed to the associated conditions, the process begins.
Those who have existing loans will be contacted before April, while new claimants will be contacted, immediately in the case of pensioners and towards the end of any waiting period in other cases. Once a claimant, and any partner, has agreed to a loan by signing and returning the agreement, then charges or other measures will be put in place as soon as possible after the first loan payment has been made. Where all legal owners are within the benefit unit, a charge in favour of the Secretary of State must be executed. Where not all the owners are within the benefit unit — for example, in the case of shared ownership properties — then those owners who are within the unit must execute an equitable charge in respect of their beneficial interest. In Scotland, each legal owner within the unit must execute a standard security.
Loan payments will then be made at the same rate as that used for current SMI support (2.61% at the time of writing in October 2017). The payments will normally be made to the lender, but may be made directly to the owner where the loan is not made by a qualifying lender. Non-dependant deductions from the loan amount will be applied to legacy benefits and Pension Credit, but not to Universal Credit.
Loan payments will continue to be made indefinitely (there is no two-year Jobseeker’s Allowance limit) until a relevant change in circumstance occurs. These changes include:
- ceasing to be entitled to a qualifying benefit;
- ceasing to be liable to make owner-occupier payments;
- no longer occupying the premises;
- completing the mortgage; or
- in the case of Universal Credit, having any earnings.
It must be stressed that the ending of loan payments does not trigger the repayment of the loan.
Once loan payments begin, then so does the liability to repay both the loan amount and the compound interest accrued on it. The interest rate that is applied will be reviewed twice a year. The rate is set by the forecast of the Office for Budget Responsibility for weighted average interest rates for conventional gilts. The probable initial rate announced in November 2017 is 1.5% and the rate is likely to be consistently lower than mortgage interest rates. Interest accrues daily from the first day a loan is made and is added to the loan amount at the end of each month.
Repayments can be made of the loan and interest, voluntarily, at any time. The minimum amount that will be accepted is £100, unless the total amount outstanding is less.
The loan and interest must be repaid immediately following certain events. These are:
- the sale of the property;
- the transfer of title of the property;
- the claimant’s death; or
- in the case of a couple, the death of the last member of the couple.
Recovery is made from the proceeds of sale or transfer, or from the estate in the case of death. If there is insufficient equity in the property, after prior charges have been settled, to settle the outstanding loan and interest, then the additional amount will be written off.
There are three elements of transitional protection within the new scheme. The first, a short-term measure, protects payments during the changeover period if there are operational difficulties, or if the introduction date falls within a benefit week or assessment period.
The second removes the 39-week qualifying period for Universal Credit where a claimant has previously been in receipt of a legacy benefit, or reduces it where they were part-way through a qualifying period.
The third deals with those cases where the removal of SMI as a part of the benefit assessment would end qualification for the benefit, as the needs figure falls below that of income. In these cases, claimants will be ‘treated as entitled’ to benefits and offered loans. They will not, however, be entitled to any passporting on the basis of benefits entitlement, although low income rules may apply.
There are also provisions to continue SMI as a benefit when there is a question of capacity to enter into a loan agreement. This will not apply to new claims, where lenders are expected to apply forbearance instead.
There is no provision outside these which retains any entitlement to mortgage interest as a part of the benefit. Post April 2018, mortgage help for existing and new claimants will only be available as a loan.
There is no compulsion to take a loan, but it is expected that the majority of mortgage holders will do so.
Differences between benefits
There are some important differences between benefits in which mortgages qualify for support through loans and in the operation of the loan system. For all claimants there must be a liability to make payments, but there is no specific requirement to be making payments, so loans can continue to be made over a period of mortgage holidays and it is possible that at least some later-life mortgages will qualify.
For legacy benefits and Pension Credit, a supporting loan can be paid only in respect of:
- a mortgage taken out to acquire an interest in the relevant accommodation;
- carrying out repairs or improvements to the property (or to meet a service charge for such repairs and improvements); or
- clearing a previous loan used for one of those purposes.
There is a specific list of items which are considered to be eligible repairs and improvements. Loans taken out while the claimant is in receipt of benefit, or in a 26-week linking period, will not qualify normally unless:
- the claimant was previously receiving Housing Benefit;
- the loan was to acquire more suitable accommodation to meet the needs of a disabled person; or
- alternative accommodation was acquired to provide separate sleeping accommodation for children or young people over the age of 10 of different sexes.
In the case of Universal Credit, the only condition for a qualifying loan is that it is secured on the relevant accommodation.
The 39-week waiting rule before a loan will be made carries forward the existing position into working age legacy benefits and Universal Credit, but there continues to be no waiting period for Pension Credit. In the case of Universal Credit, there will still be a ‘zero earnings rule’, which means that any earned income will stop loan payments. The existing two-year limit on SMI in Jobseeker’s Allowance is not carried forward.
The maximum amount of mortgage on which a loan can be made is normally £100,000 for working age legacy benefits and £200,000 for Universal Credit claimants (plus any amount for necessary adaptations for a disabled person). For Pension Credit claims, that limit is normally £100,000, but it is £200,000 where, before claiming the benefit, the claimant had been in receipt of a higher allowance in a working age benefit. Similarly, the £200,000 limit applies to existing benefit claimants who had SMI mortgages of up to £200,000 under the terms of the Social Security (Housing Costs Special Arrangements) (Amendment and Modification) Regulations 2008.
Although the effects will vary from individual to individual because of such factors as the amount, length and interest rate of existing mortgages and any house price inflation, it is clear that, for those who remain on this support for a longer period of time, there will be a substantial impact on the equity in their home. The chart to the right shows the effect on the borrower’s equity in the house, where the value is £100,000 and there is a mortgage of £75,000. The mortgage rate is the same as the rate used to determine the loan paid to the lender and there is no house price inflation. With a charged interest rate of 1.5%, the reduction in equity can be clearly seen, when compared with what would have been the effect when SMI was a part of benefit entitlement.
The effect on equity will depend on a number of factors, including the rate of house price inflation, mortgage rates and gilt rates.
There are a number of areas where it is still unclear how the scheme will operate in practice. The consequences for joint owners, where they are not members of the same claim, when a loan becomes repayable could be serious. Where a lender may be willing to transfer a mortgage across to a joint owner, there is no provision in the regulations for this to happen with an SMI loan, although this is likely to be addressed in future amendments.
While it is expected that most lenders, including those whose normal rules restrict further charges, will accept the SMI-linked charge, there are some — particularly equity release schemes — where this may not be true, in which case no charge would be imposed but civil action for recovery could apply.
Although SMI payments have been small in total, and often small in individual cases, compared with payments of Housing Benefit for private or social tenants, it has seemed to many that the benefits system was supporting people to acquire an increasingly valuable asset. It could also be argued, however, that the Housing Benefit system is enabling landlords to acquire an increasingly valuable asset. Whatever the arguments, the impact of the new loan scheme will depend upon external factors in the housing market. It will not be possible to judge the effects for many years.