Incoming government restrictions to mortgage benefits could increase arrears rates, drain equity from homes and hike debt for the worst-off homeowners, experts warn.
Next April the Department for Work & Pensions will stop paying a 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 existing recipients of income benefits, the unemployed and pensioners.
From 5 April next year, however, SMI will change from a benefit to a DWP loan, secured by a charge on the claimant’s property. Claimants will have to repay the loan, plus daily interest, when they sell the property or transfer its ownership.
But the DWP will also tighten criteria relating to eligibility for the new loan. Part of the changes to SMI mean that, if a household has two earners, both must be out of work to qualify for the loan. The current rules allow one partner per couple to be earning.
The planned SMI changes have drawn criticism from the mortgage market, housing charities and consumer groups. Many say the move could worsen arrears rates.
Fairer Finance managing director James Daley (left) thinks the changes could lead to an increase in mortgage arrears and repossessions if economic winds change. He says arrears and repossessions were suppressed after the last recession because the Bank of England was able to slash high interest rates, making borrowers’ mortgage repayments easier.
At the time the Bank also carried out a quantitative easing programme to boost the economy.
But Daley warns that: “This time around, those levers are not there to be pulled. Interest rates are at rock bottom and we’re not in a position where we can take on any quantitative easing either. So you would expect this to be a much harder landing than the last recession.”
He also points out that repossessions remained low after the previous crisis because the Government encouraged lenders to give borrowers slack if they fell into payment trouble, backed by the promise of SMI.
Daley says tightening rules around SMI will not incentivise lenders to take a sympathetic approach to arrears if a wave of consumers start to struggle with their monthly payments.
He adds: “So, without that, what pressure is there going to be on lenders to exercise some restraint?”
Current SMI claimants will not receive the new loan automatically from 5 April but must apply separately. The DWP will write to and phone existing claimants to inform them of the changes.
But there is a further risk of arrears if the SMI changes catch consumers unawares, according to Building Societies Association head of external affairs Hilary McVitty (right).
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.”
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.”
Housing charity Shelter is worried that the waiting list for SMI has increased from 13 to 39 weeks, according to head of policy and research Kate Webb. This could further increase the risk of arrears, she adds.
She says: “SMI can buy struggling homeowners some crucial extra time to sort out their mortgage payments and keep hold of their home.
“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.”
The SMI changes could also drain equity from homes and contribute to rising levels of consumer debt, according to Scottish Widows protection specialist Johnny Timpson.
He says: “It raises the question, if interest rates start to tick up again and people start to feel a squeeze, will we see the number on this benefit start to tick up, back to where it was when interest rates were at more normal levels? This is potentially just going to add to people’s burden as a household.”
Timpson adds that the level of future equity in houses is already under pressure, for example to fund long-term care, a growing concern as the UK’s population ages.
However, financial protection is one solution to the problem, he notes.
John Charcol senior technical director Ray Boulger agrees that more consumers should consider protection insurance.
He says: “People who do not have insurance through their employer, or chose not to take it out, will say they can’t afford it. In some cases that will be true. In other cases it may be down to what they choose to spend their money on.”