Advisers regularly ask me…How do I raise protection need with not just my new but also my existing clients?, what support material can I use?...Whilst the Government’s welfare reform agenda has thus far not featured too highly on intermediaries’ agenda for discussion with clients, the changes to Support for Mortgage Interest (SMI) benefit give reason to have a mortgage resilience and appropriate financial resilience discussion with all mortgage clients both old and new. Plus, the education material from the Seven Families project www.7families.co.uk can bring need to life as a number of the families featured discuss the mortgage issues and challenges they have had to face.
Why put SMI on the agenda and why now?...
The Summer Budget ushered in the reform of Support for Mortgage Interest (SMI) benefit, the welfare benefit safety net that underpins the financial foundations of mortgaged homes across the UK, and this move has been described as significant by both the Shelter Charity and CML. The SMI changes offer advisers every good reason to have a financial resilience health check discussion with their working age mortgage clients -especially as SMI is the only safety net in place for many homes and families. Aviva research in September 2015 highlighted that less than half (48%) of homeowners have appropriate financial protection cover in force should their physical and financial health fail.
Change to SMI is not the only welfare reform change to impact the assistance available to mortgage clients, as help to meet the costs of Council Tax was reformed and significantly reduced back in April 2013.
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 Support for Mortgage Interest 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 level of interest is set by the Government; your clients specific rate isn’t used.
The current interest rate is 3.12%, although it's subject to change each time the Bank of England 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 (as it did in July 2015 – it was previously 3.63%).
So, when would my client eligible for SMI?
Your client will need to be receiving Income Support, Income-based Jobseeker's Allowance (i-JSA), Income-based Employment and 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.
The benefit currently kicks in 13 weeks after the person (or couple) responsible for paying the mortgage claims the initial benefit (except pension credit where your client can claim straight away). However, it was announced in the Summer Budget that the waiting period for SMI will be 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 clients’ 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 amount Support for Mortgage Interest paid, but the big difference is that MIRO's 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 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 13 weeks before claiming SMI either (39 weeks from 1 April 2016).
Big changes for SMI from 2018…………
Currently, Support for Mortgage Interest is a benefit. However, under plans announced in the Summer Budget, the Government plans in future to make it a loan, with a charge being taken on your client’s property. The Government is proposing that advice in relation to this charge will be available – however, detail on this is awaited at time of writing this brief. 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's likely to be quite low and linked to Gilts – again, detail on this is awaited.
This change will come into effect from April 2018 – We can anticipate that the change will impact both SMI claims in progress and new claims, making this issue relevant to all of your mortgage clients.
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