State Benefits – Changes to Mortgage Interest Support
Changes to state benefits over the past couple of years have weakened the safety barrier for those who claim them and the introduction of Universal Credit has created uncertainty around what benefits are available now and in the future.
In April 2018 the Department of Work and Pensions (DWP) introduced Support for Mortgage Interest (SMI) loans to help people cover their mortgage payments on mortgages up to £200,000 if they’ve stopped earning an income. A crucial point that mortgage holders need to be aware of with this loan, is that the DWP will put a charge on the property. To qualify for an SMI loan a claimant needs to be getting one of the following benefits: Income Support, Income-based Jobseekers Allowance, Income-related Employment and Support Allowance, Universal Credit or Pension Credit. In contrast with how the state helped with mortgage repayments before April 2018, the amount received is treated as a loan and must be repaid when the person dies or sells their home so, unless the home owner has protected their mortgage, the equity in the property will get eaten into. Although the DWP don’t make any credit checks before offering someone a loan, they will apply a daily rate of interest to calculate how much the home owner will receive. The current standard interest rate used to calculate SMI is 2.61% per annum. This is important because this rate might be lower than the actual interest rate for the loan with the mortgage lender. If this is the case, there will be a shortfall between the SMI payments and the rate that someone has to pay to their mortgage lender; for some people looking to take out an SMI loan it might not be their best option. It is also important to note that for people receiving Pension Credit, the upper limit is usually £100,000 rather than the £200,000 previously mentioned. It’s also worth bearing in mind that there’s a long wait of 39 weeks from when someone makes a claim for the SMI loan until they get their first payment.
The DWP has confirmed that any income people get from an insurance policy that specifically covers their mortgage payments won’t be taken into account when assessing means-tested benefits. This applies to both legacy benefits and Universal Credit. This means that people can take out insurance that’s intended to cover their mortgage payments without any fear that their benefits will be cut if they can’t make the repayments and need to make a claim. However, if the person has a choice over how to spend the payments, then only the amount the DWP decides has been used for the mortgage cover will be disregarded.
It is important that people are aware of the risks of not protecting their mortgage should they die or find themselves unable to work because of sickness or injury. Unfortunately, many people still believe that whatever happens, the government will look after them and fail to take out any form of protection.