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Borrowers at risk from end to mortgage benefit

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Consumers and lenders risk being caught out by a little-known Government change to mortgage benefits currently claimed by 140,000 households, experts say. 

The change could see the most vulnerable fall into arrears, face repossessions and see increases in already high levels of household debt. 

Next April the Department for Work and Pensions will stop paying a current benefit called Support for Mortgage Interest.  

SMI, also known as Help with Housing Costs, gives claimants cash to pay off their mortgage.

It can be claimed by those who already get income benefits, or those who are either unemployed or pensioners. 

But from 5 April next year SMI will change from a benefit to a loan from DWP, secured by a second charge on the claimant’s property. 

Claimants need to repay the loan, plus daily interest, when they sell the house or transfer its ownership. 

Low awareness

While the DWP is currently writing to consumers to inform them of the change, overall awareness is low. 

Scottish Widows protection specialist Johnny Timpson says the SMI change is not known by many.

Although the Government originally consulted on the issue in 2011, the matter went quiet until the 2015 summer Budget.

It was then not finalised until this summer, when the Loans for Mortgage Interest Regulation 2017 passed through Parliament without fanfare.

Building Societies Association head of external affairs Hilary McVitty says: “The DWP’s own research into attitudes towards SMI shows that knowledge of the scheme is limited among claimants. 

“Around 50 per cent of them are in receipt of pension credit and some of these may be vulnerable consumers.

“It is essential that customers are well-signposted to organisations such as the Money Advice Service and Shelter and encouraged to speak to their lender if they are concerned that they may fall into arrears.” 

A DWP spokeswoman says: “This reform means we will continue to provide a safety net to help homeowners avoid repossession. However, over time, someone’s house is likely to increase in value, so it’s reasonable that anyone who has received financial help towards their mortgage should be asked to pay that back if there is available equity when the property is sold.

“Anyone currently in receipt of SMI will be offered an SMI loan and we will be writing and phoning all those people to provide information and to give them plenty of time to consider their next steps.”

Waiting list

Shelter is worried that the waiting list for SMI has increased from 13 to 39 weeks, according to the charity’s head of policy and research, Kate Webb. 

She says: “SMI can buy struggling homeowners some crucial extra time to sort out their mortgage payments and keep hold of their home. 

“But, following a change in the rules in 2016 you now have to wait nine long months before you can apply for SMI. We are deeply concerned that this extended waiting period will mean some people lose their home before they are even eligible for help.  

“Based on our experience of supporting families at risk of repossession and negotiating with lenders, we would urge the government to reverse the waiting time to a more manageable three months.”  

Opting in

The DWP has also not yet told lenders if claimants have decided to opt in or not. 

The BSA says this is a problem for lenders, as they may suddenly find that their monthly interest payments dry up with no warning. 

McVitty says: “As SMI is paid direct to the lender in most cases, the first a lender may hear is when SMI stops being paid, unless a customer gets in touch.” 

Arrears risk

Current SMI claimants do not get the new loan automatically from 5 April, and need to apply separately. 

There is a risk of arrears if this catches consumers unawares, according to McVitty. 

She says: “It will be up to claimants to ‘opt-in’ to the terms of the loan. Any who don’t engage with these changes will stop receiving the benefit in April and could risk falling into arrears at that point.” 

But lenders will work to avoid arrears and repossessions, according to a UK Finance spokesman.

He says: “Lenders will always work with a borrower experiencing payment difficulties to help them recover their financial position and avoid possession of their home, which remains the last resort.”

Rates rising

Timpson says that financial protection is one solution to the problem. He adds that the whole issue will be worsened if base rate rises, fixed mortgage rates rise as a result and more consumers struggle to meet their monthly repayments. 

He says: “It does raise the question, if interest rates do start to tick up again and people do start to feel a squeeze, will we start to see the number on this benefit start to tick up to back where it was when interest rates were at normal levels, so to speak?

“This is potentially just going to add to peoples’ burdens that they are carrying as a household.” 

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