When times are tough, homeowners get far less State support than tenants do. We expose the failings in government support for homeowners.
Being a homeowner can be tough.
Generally speaking, if you own your own home, your monthly outgoings are usually considerably higher than those of a tenant. This is partly due to a massive rise in house prices and mortgage debt over the past decade, which has pushed up the costs of housing for owner-occupiers. So, given that homeowners normally have higher living expenses than tenants, then the State support for owner-occupiers must be superior, right? Wrong!
In fact, State support for homeowners has slumped over the past decade. Indeed, I'd go so far as to say that the government has almost abandoned homeowners to the twists and turns of fate. This is largely because of the roll-back of the main benefit paid to homeowners, which is known as Income Support for Mortgage Interest (ISMI).
For example, in the 1994/95 tax year, the government paid a total of £1,014 million (more than a billion pounds) in ISMI payments to non-working homeowners who were unable to meet their mortgage repayments. Ten years later, in 2004/05, this figure had plunged by more than three-quarters (77%) to a mere £237 million.
To cut a long story short, the government decided after the last housing crash that the cost of supporting struggling homeowners was too high, so it took a knife to the ISMI regime. Hence, the State safety-net for homeowners today has been largely withdrawn, following sweeping cutbacks to ISMI from October 1995 onwards.
Thus, if you're a homeowner who can't keep up your mortgage repayments because your income has dried up for one reason or another, then get ready for a shock. The simple truth is that ISMI is fiendishly difficult to claim and, if you do get it, then it won't be enough to cover your mortgage in its entirety. Here's why:
- If your home loan started after 1 October 1995, then you get no help whatsoever with your repayments for nine months (39 weeks), although the over-sixties receive help from day one.
- ISMI is paid at a standard interest rate (the Bank of England base rate plus 1.58%), or the rate which you pay if that is lower. Therefore, if the interest rate that you pay is higher than the ISMI rate, then you face a monthly shortfall.
- If your mortgage is greater than £100,000, then you lose out again, because only the interest on loans up to this sum is paid by ISMI. So, if you have a large home loan, then you face an even larger deficit.
- ISMI pays only your mortgage interest, not any capital repayments on a repayment mortgage. Hence, most homeowners will build up further arrears unless they temporarily switch to an interest-only loan.
- ISMI leaves homeowners with repayment mortgages facing a shortfall, but it leaves those with interest-only loans in the lurch, too. That's because it provides no help with payments to savings and protection plans linked to your home loan, such as mortgage endowments, ISAs, pensions, life insurance policies, etc.
- ISMI doesn't cover second mortgages and secured loans for non-essential home improvements, debt consolidation and so on -- it only covers first mortgages (home-buyer loans).
- Lastly, ISMI is means-tested, so you can't claim it if you have a partner (a spouse or someone who lives with you as if you were married) who works 24+ hours a week, you have savings of £16,000+, or you receive other income which disqualifies you. If you have savings of £6,000 to £16,000, then your entitlement to ISMI and other means-tested benefits reduces to zero on a sliding scale.
The sad truth is that very few people actually qualify for any ISMI grant, and the vast majority of those who do face a substantial shortfall on their housing expenses.
Finally, given that ISMI is such a scrappy safety-net, what can you do to protect yourself and your mortgage repayments against job loss and other risks? The government and mortgage lenders want you to fend for yourself, so they urge you to buy private insurance to protect against accident, sickness and unemployment, known as mortgage payment protection insurance (MPPI).
However, as I warned in The Shocking Cost Of Mortgage Cover, MPPI is a £10 billion scam, so don't buy it from mortgage lenders. Instead, by shopping around for a stand-alone policy from independent suppliers, you could slash the cost of this cover by three-quarters (75%). See Ditch Your Rip-off Protection Today for more details. For the record, leading low-cost providers of MPPI include Best Insurance, British Insurance, Paymentcare, the Post Office, and SecurityFirst.
So, watch out for the next housing downturn, because government support for homeowners is all but non-existent these days!
More:How High Could Mortgage Rates Go? | Use The Fool to find great-value mortgages and home insurance.