Conversion of Support for Mortgage Interest to a loan

Regulations converting Support for Mortgage Interest to a loan have recently been passed. We take a look at how the new payments of SMI will operate for claimants.

Loans for mortgage interest

All payments of SMI made on or after 6th April 2018 will take the form of a loan.

From 16th October of this year, the Department for Communities will start to send letters to existing SMI claimants, advising them of this and asking them to provide consent to any payments after 6th April 2018 to take the form of a loan. Initially these letters will be sent to pension-age households receiving SMI. The Department will begin notifying working-age households of this change in November.

The Department must provide the following to potential recipients of this loan:

• A summary of the terms and conditions of the loan.
• An explanation that DfC will, where possible, obtain a charge in respect of the accommodation.
• An explanation of the need for consent from occupiers of the property who are not legal owners.
• Information about sources of independent advice, including Housing Rights and Welfare Changes helpline.

In order for a loan to be paid to a household, the Regulations state that the following conditions must be met:

• The claimant and the claimant’s partner must have a telephone conversation with the third party provider instructed (Serco), which will explain the information sent in the original letter from the Department.
• All legal owners must be within the benefit unit and execute a charge on the property in favour of the Department. 
• Any occupiers of the property who is not a legal owner must also supply written consent
• The Department must receive the signed loan agreement and charge deed.

Repayment of loan

Once the loan for mortgage interest is in payment, all loan payments will be added to the Department’s charge against the property. Interest will also be added to the loan, at a rate which tracks the Office for Budget Responsibility’s forecast of gilts.

The Department’s charge will become due in the event of any of the following:

• Sale of the property
• Transfer/inheritance of legal title in the property
• The death of the claimant or the last surviving member of the benefit unit

It is important to note that where there is insufficient equity in the property to pay the charge – for instance, where all equity from sale goes to the mortgage lender – the Department will “write off” the loan at this stage.

Claimants will be able to pay off their loan before the sale or transfer of their property – however, the minimum individual payment that the Department will accept is £100.

Loans for mortgage interest: legacy benefits & State Pension Credit

Where the claimant is receiving any “legacy benefits” – Income Support, Jobseeker’s Allowance or income-related Employment & Support Allowance – or State Pension Credit, SMI is payable on the following loans:

• A mortgage or remortgage
• A loan – whether secured on the property or not – taken out to pay a service charge to meet costs of repairs or improvements
• A loan – whether secured or not – taken out to pay for certain repairs and improvements, as long as the money was used for that purpose within 6 months

Claimants of any legacy benefits or State Pension Credit will also see their SMI subjected to non-dependant deductions. The level of these deductions varies depending on each benefit.

Loans for mortgage interest: Universal Credit

Where the claimant is receiving Universal Credit, SMI will be payable on the following loans:

• Any loan secured on the relevant accommodation
• Alternative finance payments which were entered into to enable a person to acquire an interest in the relevant accommodation (typically these are arrangements which will comply with certain religious requirements relating to borrowing)

Amount of loan

SMI will continue to pay interest on up to £200,000 capital for claimants of Universal Credit, Income Support, Jobseeker’s Allowance, income-related Employment & Support Allowance, and State Pension Credit “modified rules” cases; and interest on up to £100,000 capital for all other State Pension Credit cases.

The interest payable by SMI is set at a “Standard Interest Rate” – the Bank of England’s average interest rate for new lending. This is currently 2.61%.  If the BoE average changes by more than 0.5% from the Standard Interest Rate, the Rate will be changed to this new average after 6 weeks.

Get advice

Taking out another loan on a property is a big decision for any homeowner, and it’s best to get advice before you agree to take on any more debt.  Homeowners who are concerned about this change can call our dedicated housing advisers for advice on their options.