From April 5th, thousands of people across the UK are at risk of losing their homes due to the Support of Mortgage Interest (SMI) benefit being switched into a loan repayment. In other words, SMI is being switched from a free benefit into a loan from the government.
For those of you who may be unfamiliar with SMI, it’s a benefit which is designed to help certain homeowners who struggle to repay their mortgage. It’s only used for help on interest, not on the amount borrowed. If the homeowner is already receiving certain income-related benefits, they may be able to get help towards the interest payments on their mortgage. Keep in mind, the help will be paid towards the lender other than the homeowner.
Though the loan won’t be repayable until their home is sold, those dependent on SMI – mainly homeowners who are retired or struggle financially – will be pushed further into debt.
What is SMI?
SMI (as said above) is a benefit which is paid towards homeowners who receive certain income-related benefits – such as Jobseekers Allowance and Pension Credit – to help them with their mortgage repayments.
As of April 2018, SMI will no longer be paid as a free benefit. Instead, the payments will need to be repaid to the government in the form of a loan, along with interest. Letters were sent out by the Department of Work and Pensions (DWP) to those currently receiving SMI to warn them about the changes, advising to claimants they can either take up the loan or drop the benefits altogether.
There are currently around 140,000 households that receive SMI – of whom 50% are retired and the rest being workers – but it’s been said by the DWP that thousands of those Brits are unaware of the new switch.
In a recent Freedom of Information request made by DWP, they found out only 6,850 claimants have decided to go ahead with the loan, with a further 18,177 saying they’re thinking about going with the loan. As it turns out, most communication about the changes have been directed towards pensioners, meaning 67,000 workers who receive SMI haven’t been contacted about the new changes.
How does the loan work?
The new SMI loan will be available from April 5th to those who are eligible or currently receiving the free benefit. The loan will only be repayable when the property has been sold and the mortgage is paid off.
Those who decide to apply for the loan won’t have to go through a credit check, meaning their credit rating won’t be at risk. However, the only ones who have to repay the SMI loan are those who end up with equity in their home. If their home doesn’t have enough equity, the debt will be written off.
Although the government have introduced the loan changes, Brits are worried as they’re at risk of losing their homes. As it turns out, homeowners who are currently struggling have been advised to take out a second mortgage.
Royal London specialist Helen Morrissey said: “Up until this point SMI has been paid as a free benefit but any payments made from April 2018 will now need to be repaid with interest – this is a massive policy shift.”
Morrissey added: “The DWP should pause the implementation of this policy until it is confident that everyone has had full information about the changes and the time and support to make an informed decision.”
With the new changes approaching, thousands of SMI claimants are becoming more fearful. Morrissey said if people “fail to complete the process in time they could face real hardship and even potential repossession if they can no longer afford to meet their mortgage interest bill”.
How much will it cost?
Although warning letters have been sent out to claimants, it turns out they’re missing important details such as what the new interest rate is going to be.
Royal London conducted an analysis which estimated the interest rate will be set at 2.2%. With this estimate, they found out a Pension Credit recipient receiving an average of £20 from an SMI payment could up in debt by £5,552 – if they’ve claimed SMI for 5 years.
Concern has risen among claimants who currently receive the benefit as they fear they may not be able to pay the final sum of their mortgage when it’s reached it’s end, plus having to pay back a loan to the government.
While working age people have been advised to extend their mortgage deal to give them more time, those who are retired may find it hard to get their lender to extend their mortgage term.
Can we help?
If you’re worried, get in touch with Basik Money today on 0330 041 2299. You can get free impartial advice from one of our qualified advisors who can help you take the best course of action.