Johnny Timpson, Scottish Widows' Financial Protection Market & Industry Affairs Manager talks about the need to inspect home and mortgage financial foundations.
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Your client would be concerned by movement under the foundations of their home and take advice… So, what about movement under the financial foundations of their home… And this has happened from April 2016.
The 2015 Summer Budget ushered in significant reform to the shape of the welfare benefit safety net that underpins the financial foundations of mortgaged homes across the UK. This move, described as significant by both the Shelter charity and Council of Mortgage Lenders, offers advisers every good reason to have mortgage financial resilience health check discussions with clients.
From April 2016, changes to Support for Mortgage Interest (SMI) benefit, the key benefit supporting mortgage clients have begun to be introduced. This comes at a time of financial uncertainty caused by the Brexit. In the short term there is a suggestion that Bank of England (BoE) interest rates may fall further than the historic low of 0.25% that the country has experienced since March 2009. However the long term forecast for interest rates is less than certain post referendum. Over 1.8m families have entered the mortgage market since the BoE interest rate reached 0.5% and have never experienced a base rate increase, but research from the Building Societies Association shows that just over half of all borrowers believe they are likely to struggle or fall behind with their payments if rates were to increase. Scottish Widows own protection research has highlighted that only half (50%) of the UK’s mortgage holders have life cover in place and only a fifth (20%) have a critical illness policy, meaning many homeowners do not have appropriate financial protection cover. This points to a significant number of mortgage customers being reliant on changing SMI benefit as their safety net should their physical and financial health fail.
Change to SMI benefit is not the only welfare reform change to impact the assistance available to mortgage clients. Help to meet the costs of council tax was reformed and significantly reduced with effect from April 2013, especially in England where each individual council now determines tax support. Due to cuts to their budgets by central Government, there is today limited council tax support available.
Support for mortgage Interest (SMI), the benefit and change explained
SMI can pay the mortgage interest for your client but not capital. Should they be eligible for the SMI scheme, the Government steps in and makes interest payments direct to their lender on the first £200,000 of their outstanding mortgage for the time they can’t afford them. The Government sets the level of interest; your client’s specific rate isn’t used.
The current interest rate is 3.12%, although it’s subject to change each time the BoE average mortgage rate moves by at least 0.5% away from the current SMI rate. This means as mortgage rates go up, the SMI rate will too - and similarly it will go down if mortgage rates drop.
So, when would my client be eligible for SMI?
Your client will need to be receiving income support, income-based jobseeker’s allowance, income-based employment & support allowance or pension credit. So if they’ve recently lost their job or had an income cut, it’s important that they sign on, or they won’t get SMI support.
Previously the benefit kicked in 13 weeks after the person (or couple) responsible for paying the mortgage claimed the initial benefit (except pension credit where your client can claim straight away). However, following the changes announced in the Summer Budget the waiting period for SMI has increased to 39 weeks from April 2016. If your client is claiming jobseeker’s allowance, then they will only get SMI for up to two years. There’s no limit for recipients of other benefits. Your client’s eligibility for the scheme will automatically be assessed when they apply for an income-related benefit. SMI is available in England, Wales and Scotland, with a similar system in Northern Ireland.
SMI stops paying out once your client’s benefits stop - it’s usually when they return to work, or start working extra hours to earn more. However, they may be able to claim Mortgage Interest Run On (MIRO) to help them make the transition back to the world of work. MIRO lasts for four weeks, and will be the same as the amount of SMI paid, but the big difference is that MIRO is paid to your client, instead of to their lender as happens under SMI.
Which of my clients can't claim support for mortgage interest?
Your client can’t claim if they have more than £16,000 in savings, or if they own more than one residential property.
If the benefit your client is claiming is pension credit, then the amount of mortgage that they can claim interest payments for is capped at £100,000, not £200,000. However, in this instance, they don’t have to wait the initial 39 weeks before claiming SMI.
The gradual introduction of universal credits across the UK replacing a number of welfare benefits and tax credits, including income support (of which SMI forms part) has impacted on SMI eligibility. Now, if your client is part of a couple they will be assessed based on their joint earnings, so will only qualify for SMI if both parties are not in paid work. Research from Scottish Widows has shown that 47% of mortgages are today reliant on two incomes to meet the payments. With no provision from the state, this means that many people could be at risk of financial hardship or losing their home if their partner becomes seriously ill or died.
Big changes for SMI from 2018…
Currently, SMI is a benefit. However, it was announced in the 2015 Summer Budget that the Government plans to make it into a loan with a charge being taken on your client’s property. It’s proposed that advice will be available in relation to this charge. However detail on this is awaited at the time of writing.
What this would effectively mean is that your client will have to pay back the amount the Government paid into their mortgage for them, either when they return to work, or when they sell their house, their home. These loans will also attract interest, though the rate is likely to be quite low and linked to gilts. Again detail on this is awaited.
This change will come into effect from April 2018 and the change will impact both SMI claims in progress at that point and new claims, making this issue relevant to all of your mortgage clients.
Extra but conditional and limited help currently available to clients living in Scotland and Wales
The Scottish Government, and some councils in Wales, provide extra help for homeowners to keep their homes. The Mortgage Rescue Scheme (different authorities might give it a different name) is aimed at families whose annual income is under £60,000, have ‘priority needs’ (someone pregnant, elderly, disabled or with young children must live there) and in danger of losing their home. However, if your client lives in either England or Northern Ireland this doesn’t apply to them.
Should your client in Scotland and Wales qualify for the Mortgage Rescue Scheme available to them, there are two options.
Option 1: Mortgage to shared equity scheme:
This is intended for homeowners who have experienced ‘payment shocks’ (Government and local authority speak for harshly increasing mortgage and living costs), but can still afford to pay something.
Under the scheme, your client sells a percentage of the property to the Government, which they can buy back at a later stage, or give it its share of the sale proceeds if your client decides to sell up. There are strict eligibility criteria which include:
• It’s your client’s main home and they own a minimum of 25% of the property debt-free (meaning their current loan-to-value of the existing mortgage is 75% or less).
• Your client needs to be at least three months in arrears and have tried, but been unable, to reach a repayment arrangement with their lender.
• Your client can’t have more than £2,000 in savings (£4,000 if they are over 60 years old).
• Your client’s home can’t be valued above a certain level, set by their area.
Their lender also needs to agree to this and they will have to speak to an independent adviser or agency such as the Citizens Advice Bureau before they can apply.
Once your client has applied, the Government will arrange for a valuation of their property and appoint a financial adviser to work out what level of debt they could cope with before making an offer to buy a certain percentage of the property by paying off a chunk of their mortgage.
Option 2: Mortgage to rent
Here, the authority pays off the entire debt to the lender, then rents the property back to your client at an affordable rate. In other words, your client no longer owns their home. This is clearly an extreme solution, and is targeted at those with unstable incomes or negative equity who are unlikely to sustain a mortgage in the future.
To be eligible your clients need to (but aren’t limited to):
• Have not made full payment for three months and have arrears of at least one month’s repayment.
• Have lived in the property for at least one year.
• Have been appointed a trustee by the lender to force the sale of the property.
• Not have more than £2,000 in savings (£4,000 if they are over 60 years old).
And your client’s home can’t be valued above a certain level, this varies by area.
To see whether your client qualifies for either of these, read the Scottish Government’s information or Shelter Cymru’s factsheet in Wales. To apply for the rescue schemes, the application needs to be made via the client’s local council.