Thousands of hard-up older people are being given a stark choice: sign up to a “second mortgage” with the government, or lose some of the financial help you receive.
In a little-noticed move, the government is axing a benefit that has been around since 1948 and has thrown a lifeline to many people on low incomes. “Support for mortgage interest” (SMI) helps financially constrained homeowners with their mortgage payments – some of them might otherwise be at risk of being repossessed. But from April 2018, SMI will no longer be paid as a free benefit. Instead, the government is offering to loan people the money, which will have to be repaid later with interest.
Critics say this means tens of thousands of people, many of them pensioners, will be saddled with what amounts to a new mortgage on top of their existing home loan. A 68-year-old woman who is still paying off her mortgage and receives SMI contacted Guardian Money to say she isn’t comfortable taking out a government loan, so she is going to reject the offer. But that means she will have to find the money to replace the benefit. “This is going to cause a lot of hardship for people,” she says.
However, others argue that it’s not the role of UK taxpayers, many of whom can’t afford to buy a home of their own, to subsidise people’s mortgage payments and enable them to acquire a potentially valuable asset they can pass on to their children after their death.
SMI helps homeowners on certain income-related benefits pay the interest on their mortgage and the Department for Work and Pensions normally sends the money straight to the mortgage lender. It was introduced after the second world war as a working-age benefit that would offer a short-term lifeline to people who had lost their job or become ill and were trying to get back on their feet.
However, almost 70 years later, many of those who receive it are of pension age and retired, and they are able to claim it indefinitely while their mortgage is outstanding. That is because pension credit is one of the qualifying benefits. The others include income support and income-based jobseeker’s allowance.
According to the government, there are about 124,000 people receiving SMI at a cost of £205m a year to the state. Almost half the recipients are of pension age and many have interest-only mortgages.
However, the government said the current setup was unsustainable, so in the summer 2015 budget it announced that from April 2018, SMI would no longer be paid as a benefit. Instead, it will be replaced by a state-backed loan, secured against the mortgaged property. The loans will offer the same support – the DWP will carry on making regular payments to the individual’s mortgage lender – but interest will be added every month to the total amount the person owes. The longer someone has the loan, the more interest they will need to pay back, so those who claim for several years could easily face bills running into thousands of pounds.
This isn’t the same as a normal loan: the mortgage holder does not have to pay it back until the house is eventually sold or transferred to someone else, though they might want to make voluntary repayments if they can afford to. In that sense, it’s like a government-sponsored version of equity release. If someone inherits the house, they will need to pay back the DWP from any available equity if the property is sold or someone else becomes the legal owner. If there isn’t enough equity, any amount that can’t be paid back will be written off.
So will the government make a profit from these loans? The DWP says no, as the interest rate people will pay will be “the rate the government borrows at” and based on official gilt rate forecasts. The latest prediction is for an interest rate of about 1.5% in 2018-19, rising to 2% in 2021-22. If you turn down the offer of the loan, SMI benefit payments will stop on 5 April 2018.
The 68-year-old who contacted us (and didn’t wish to be named) has a £67,000 mortgage. As she has decided she doesn’t want to the loan, she is going to have to find another £55 a month for her mortgage payments, “which is not a lot for some people, but is for others”, she says. “Where are people going to find that kind of money when they are only on a pension in the first place?”
Mutual insurer Royal London has criticised the way the change is being handled. “The government needs to make sure people have the help and advice they need to decide whether or not to take out a second mortgage to pay for this,” it says. “But instead, thousands of people are getting letters that miss crucial details such as the interest rate on the mortgage.”
However, the DWP says switching to loans will save it about £170m a year. It adds: “This change continues to provide a safety net to help people stay in their homes and avoid repossession. 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.”
Thousands of people are getting letters that miss crucial details such as the interest rate on the mortgage.