CML calls for revamp to the way SMI is calculated

1 February 2012 | By Natalie Thomas

SMI is currently paid by the government at a flat rate, which, in most cases, is likely to differ from the rate payable on a borrower’s mortgage.

The current rate of payment of SMI, at 3.63%, is determined by the Bank of England average mortgage rate.

But in the Council of Mortgage Lenders, News & Views newsletter today, the CML, says: “We believe it would be fairer – and potentially cheaper for the government – to pay the benefit to borrowers at the rate payable on their individual mortgages.

“That would lessen the problem of some borrowers facing a shortfall because the benefit does not cover their interest payments in full, while others have their mortgages overpaid by the state.”

In March last year, it undertook analysis based on members’ data on 8,300 recipients of SMI. It concluded that the government could save around £26m a year by paying benefit at the rate payable on individual mortgages.

Additionally, if the government applied a cap of, say, 1.5% above the current standard interest rate, it could save a further £13m, bringing the total annual saving to almost £40m.

The CML will be setting out these arguments in response to an informal call for evidence on SMI by the Department for Work and Pensions.  Its response will argue that both the current limit of £200,000 for qualifying mortgages and the 13-week waiting period for entitlement to benefit should be kept as they are.

But it believes that paying SMI at the rate of interest payable to the lender, with a cap, would be better than any tweaking by the government of the standard rate at which the benefit is currently paid. 

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