To help struggling homeowners the last government introduced Support for Mortgage Interest (SMI). It was meant to help people on low incomes pay off mortgage interest, so they wouldn’t have their homes repossessed, it was never intended to pay off any of the actual capital. To qualify for SMI you have to be on certain benefits like income support, job-seeker’s allowance or pension credit. Everyone gets the same support, regardless of which mortgage they’ve got.
This is how it’s worked out. The last government calculated a general mortgage interest rate for the benefit based on the Bank of England base rate plus 1%. This was fixed when the base rate was high which explains why it’s currently 6.08%. This is used to calculate a monthly payment from the government which covers up to 100% of your monthly mortgage interest bill. The base rate’s plummeted since then to 0.5% so now many mortgage rates will be a lot lower too.
If the payment is more than your interest payment then the extra money is credited to your mortgage i.e. it pays off some of the capital – which remember, wasn’t the intention. If it’s not enough, homeowners have to stump up the shortfall.
The Department for Work and Pensions (DWP) says it’s unfair that some people are getting more money than they need, and that there’s no reason it should pay inflated interest rates that don’t reflect the reality of the market.
Currently the payment’s based on a hypothetical mortgage with a 6.08% interest rate. From 1st October, this rate will drop to 3.63% which is the Bank of England’s average mortgage rate. About a quarter of a million people get SMI and this cut’s going to affect all of them. The DWP told CutsCheck it expects the change to save about £15m by the end of this year.
But some say the way the new rate has been calculated isn’t fair. The government’s sums are based on some sample data from the Council of Mortgage Lenders (CML) which it used to estimate how many people might be being overpaid. The CML told the government that 90% of people in its sample were getting more money than they needed to pay their mortgage interest. But the CML doesn’t represent the whole market.
CML told CutsCheck it stressed to the government that its sample “wasn’t representative” of the market catering for people with poor credit histories (‘credit-impaired’ in the jargon). They’re much more likely to be on mortgages with higher interest rates.
We also noticed that over half of those affected by this change are on pension credit (and over 60) and therefore have less chance of increasing their income to meet any shortfall. One homeowner who spoke to CutsCheck on condition of anonymity said that thanks to the cut, they will have to find around an extra £130 per month just to keep up interest payments. The homeowner told us: “It basically means that we’re going to have to walk away from owning our home and start renting. We didn’t even know the cut was coming because we only got a general letter from our lender.”
The DWP maintains everyone’s been written to about the change and says it was advertised on the Directgov website and mentioned in the June budget.
Housing charity Shelter told CutsCheck it’s worried the government may make even more cuts to the benefit. Its chief executive Campbell Robb said: “Support for Mortgage Interest is a crucial lifeline for people but changes made in the emergency budget will mean claimants – mostly elderly people – will see their payments decrease dramatically, putting them at real risk of losing their home.
“The government should recognise how important this scheme is and make no further cuts.”
Cathy Newman’s verdict
When the government’s trying to cut a socking great £83bn, a meagre £15m doesn’t seem like much. But it still affects a quarter of a million people. And what’s particularly damaging is that it hits the poor – people already on benefits. So this is further ammunition for those who claim the coalition is hurting the vulnerable most.