A kick in the teeth for borrowers

Big cuts are about to be made to a key benefit for borrowers who have fallen behind on their mortgage

A mortgage is a mammoth commitment and it isn’t something you go into lightly.

No-one takes out a mortgage thinking that at some stage they will be unable to afford it and will default on their monthly repayments. But arrears happen to all sorts of borrowers!

Indeed, the credit crunch and recession brought an expected rise in arrears, particularly in 2008 and the first half of 2009. However, the figures never reached the terrible heights of the nineties recession, due to a combination of factors including record low interest rates, lender forbearance and Government help and support for struggling homeowners.

But some of that Government support is under threat in this month’s Comprehensive Spending Review, and one benefit in particular is being slashed this week.

Support for Mortgage Interest

If you are a homeowner and get certain income-related benefits, you may qualify for help towards your mortgage interest payments. It’s called Support for Mortgage Interest (SMI).

You can usually get this help if you receive Income Support, Income-based Jobseekers Allowance, Income-related Employment and Support Allowance, or Pension Credit.

SMI is normally paid directly to your lender and does not cover the amount you borrowed (only the interest on the mortgage is paid).

However, being able to keep on top of your interest payments means your debt is not rapidly increasing. Your lender is also reassured because it is receiving something, and it will work with you to help you get back on track with your repayments.

SMI is an invaluable benefit for eligible borrowers who have fallen into mortgage arrears.

However, the coalition Government has announced changes which are to come into effect this week, and which will dramatically cut the level of benefit paid out.

What are the changes?

The standard interest rate used to calculate Support for Mortgage Interest is currently 6.08%.

However, from next week the standard interest rate will be set at a level equal to the Bank of England’s published monthly average mortgage interest rate. The starting rate from 1st October 2010 will be 3.63%.

This means that those currently in receipt of the benefit will see it almost halved in one fell swoop. Those who claim the benefit in the future will get it paid at the new lower level, regardless of their actual mortgage interest rate.

Why is the change being made?

The Government has noted that because interest rates are at a record low, the 6.08% rate of SMI meant that many borrowers were getting more than the amount needed to cover the interest portion of their mortgage. The surplus was credited to their mortgage account.

It says that by reducing the rate to the Bank of England’s average mortgage rate it can ensure that the benefit is better targeted.

However, the Council of Mortgage Lenders (CML) has said that the cut will mean a larger number of people will not have all their mortgage interest payments covered by the lower SMI rate -- which is the point of the benefit. Remember some borrowers are stuck on high rates and do not have enough equity to remortgage.

It accepts that the current rate of payment for SMI is high for some borrowers, and that there is case for reducing it. However it suggests that paying the benefit at the actual rate paid by the borrower would be the best option. Clearly this would make sense.

Further potential cuts

To make matters worse, there’s another potential change to SMI that many are worried could be part of the Comprehensive Spending Review on 20th October.

Recent question on this topic

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In the past borrowers had to wait either 39 or 26 weeks (depending on your circumstances) between claiming SMI and receiving it. The Labour Government shortened this waiting period in January 2009 to just 13 weeks to help struggling homeowners -- a change which played a significant role in keeping mortgage arrears and possessions in check during the current cycle. 

Now there are fears that the coalition could extend this waiting period, possibly back up to 39 weeks.

The CML reckons that the Government should acknowledge that paying SMI at a lower rate will already impose hardship on borrowers, and they should therefore not restrict payments any further by extending the waiting period. 

As if that wasn’t bad enough there are also concerns that the Government could chop the Mortgage Rescue Scheme (which helps borrowers facing repossession to stay in their own homes) in its coming Spending Review. It has already committed funding until the end of this year but announced this valuable scheme’s future is under review. Gulp!

It could be you

You might think none of this has anything to do you with, but consider how you would meet your monthly repayments if you lost your job -- unemployment is set to rise next year and it won’t just be ring-fenced to the public sector.

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Also think about the impact of a rate increase on your monthly repayments. If rates were to rise quickly, those borrowers on a variable or tracker rate could see huge increases in their monthly mortgage payments. Industry experts have already said that many borrowers are only just coping and a rate rise could tip them over the edge.

We will soon see the impact of the this week’s cut to SMI, but if further cuts are also announced later in the month, the cumulative effect on arrears and repossessions could be enormous. Shelter has warned that if the Government weakens the safety nets for struggling homeowners further, we could see a huge surge in homelessness.

If you are concerned about your ability to pay your mortgage, contact your lender to discuss your options.

You can also go to www.direct.gov.uk/mortgagehelp for impartial advice and information.

Free debt advice is also available from organisations including Citizens Advice, Shelter and National Debtline.

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