Changes to Support for Mortgage Interest are getting ever closer and advisers must highlight this to clients whenever they review or arrange a mortgage.
Advisers no doubt already encourage their clients to think about the consequences — in the event of becoming ill and unable to work — of not taking out protection.
Some clients take the advice on board but many think they can manage without protection. Unfortunately, a good proportion of that attitude stems from a feeling that the state will be there to provide.
Closer scrutiny of the support available to those struggling to meet their mortgage payments suggests this would not be the case. It never really has been the case — and is likely only to get worse.
SMI is currently in place to provide homeowners in receipt of certain income-related benefits with help towards interest payments on their mortgage. More than 100,000 people currently claim.
Previously, one could claim the benefit after a 13-week waiting period, but in April last year this increased to 39 weeks. Managing to pay one’s mortgage for nearly 10 months, along with all other regular household bills, would present a significant challenge for most borrowers who receive only state benefits and have no other income source.
That said, further planned changes to the system make things even more worrying.
The current benefit covers mortgage interest up to a maximum loan amount of £200,000 (£100,000 in some cases) and the standard interest rate used to calculate SMI is 2.61 per cent. However, as of 5 April 2018, SMI will cease to be paid solely as a benefit and will be replaced by a loan.
The purpose of the loan will still be to provide support to borrowers to pay their mortgage interest (subject to the same limits above) but it will have to be repaid with interest if the claimant either sells their home or returns to work.
This means there will be not only the worry of repaying the loan itself but also uncertainty about how big the debt may become.
It is already difficult to imagine how hard it can be for families to cope with financial worries while dealing with serious illness. Rather than relying on SMI and struggling, the real answer lies in ensuring people are adequately protected.
In a UK financial capability report carried out in 2015, the Money Advice Service found that just over one-quarter of the working-age population had a savings buffer equivalent to three months’ income, and just over half of families had life cover.
Given these families may have to wait nearly 10 months to receive state help towards their mortgage interest, and after next year’s changes any help received will lead to an increase in debt, the future looks bleak. As a result, the responsibility to talk about illness protection, not just life cover, grows.
We need to ensure that, if and when a client has to deal with a life-changing illness or an inability to work, they will have peace of mind in knowing they are at least financially secure and can focus on getting better.
If we are armed with the information and can explain it clearly to clients, we have a better chance of engaging them with just how crucial it is to have the right protection in place.
Lucy Brown is head of protection at London & Country