DWP confirms 80,000 have not accepted new SMI terms

Posted on 1 May 2018 by Ray Boulger

1 comment(s)


Figures issued by the DWP on the continued take up of Support for Mortgage Interest Benefit (SMI) following the payments being changed from a free benefit to a loan from 6 April were released on 24 April.

These show that only 18,000 (17.5%) of the 103,000 homeowners claiming SMI have opted to continue to receive SMI now it is being paid as a loan. Those who have not chosen to accept the offer of a soft loan will no longer receive SMI, which will likely increase their risk of mortgage arrears and ultimately repossession.

SMI is available to those claiming benefits such as Pensions Credit, Income Support and Universal Credit, but in the Summer 2014 Budget The Chancellor announced that from April 2018 payments would be made as a loan. However, no monthly repayments are required and the loan only has to be repaid when the property is sold or there is a transfer of equity.

The first letters advising of the changes were sent in July 2017, with a plan to follow up with a phone call to allow claimants to come to an informed decision. However, successful phone contacts were only made with 72,000 claimants (69.9%). Not every claimant will be contactable by phone and so it was always obvious that some face to face meetings would be needed, but the DWP has given no indication any have taken place.

It is worth noting that:

  • The loan won't appear on credit files.
  • SMI payments will continue to be made direct to the lender.
  • The loan can be repaid early (min £100) but as this loan is likely to have the lowest interest rate of any borrowings by people in receipt of SMI, it is unlikely to be in recipients' interest to do this.
  • Recipients of SMI who are classed as 'vulnerable' won't see payments stopped yet. They will continue to receive the benefit until they switch to a loan, or until the later of the following:
    • 4 November 2018.
    • 6 weeks after the DWP confirms a lack of capacity.
    • If the DWP applies for a decision to appoint a financial deputy, six weeks after the Court of Protection decides whether or not to appoint a deputy, or such application is withdrawn.

 As the Government has had nearly 4 years to manage this change, the exceptionally low take up of only 17.5% raises serious questions about how competently the process has been handled and whether claimants properly understand the implications of refusing the loan. 

Everyone previously entitled to this benefit is still entitled to receive the same amount, assuming their circumstances haven’t changed, and the Government has said that claims can be backdated to 6 April. It may be that following some telephone conversations it transpired that a few people were no longer entitled to receive SMI. But for the majority who will continue to be entitled it is difficult to find any logical reason to decline to accept the loan, providing the options are clearly explained.

Legally the loan will be a second charge mortgage and therefore had the Government wanted to comply with FCA rules for advising on second charge mortgages, it would have contracted with regulated mortgage advisers to explain and advise SMI recipients of their options rather than use a firm not authorised by the FCA. It doesn’t help the FCA get its message out that people should only use regulated firms for mortgage and investment advice when even the Government chooses to flout these rules!

Naturally, anyone who qualifies for SMI would prefer to receive payments as a grant rather than a loan, but as that is no longer an option it is difficult to see why (providing the options are clearly explained) anyone would choose to risk being repossessed rather than accept a soft loan, albeit secured on their property, with a very low interest rate and on which no monthly payments are required and which only has to be repaid when the property is sold.

An SMI loan and a Lifetime mortgage have some things in common; both only have to be repaid when the property is no longer required by the homeowner, i.e. when it is sold or on death (the second death for couples) and no repayments are required prior to that.

Approximately 40% of SMI recipients are low-income pensioners who qualify for SMI because they are receiving Pension Credit. Some of these borrowers will have an LTV too high to qualify for a Lifetime Mortgage, but some could choose a Lifetime mortgage instead of the SMI loan.

However, unless there is another reason for remortgaging onto a lifetime Mortgage, e.g. to release some capital, it is hard to see why anyone would choose a Lifetime Mortgage in preference to the Government loan. The Lifetime Mortgage interest rate would be higher (around 4% or more, albeit fixed for life) and there may be some costs, whereas the initial interest rate on the Government loan is only 1.5% and there are no costs.

The SMI interest rate is calculated in a ridiculously complicated way, based on a forecast of future interest rates; the rate can change twice a year, on 1 January and 1 July. Explaining the change of SMI payments from a grant to a loan would have been simpler if the explanation didn’t have to include how the interest rate is calculated. Linking the rate to something easier for recipients to understand, such as Bank Rate, would have had a negligible impact on the actual amount of interest received by the Government. 

As mentioned above the SMI second charge loan doesn’t have to be repaid except in the following specific circumstances:

  • On a sale of the home, providing there is enough left from the sale proceeds after repaying the mortgage. Otherwise it will be written off, or the homeowner will only have to repay what they can afford.
  • On a transfer of title, including adding someone as joint owner.
  • On death, but if the property is jointly owned not until the second death.

Categories: Mortgages, Interest rates, Regulation, House and home

Comments

Unless the government gets ahead of this now, it may pay a heavy price later.

The government is responsible for getting value for taxpayer money, so converting the SMI benefit into a soft loan is not necessarily a bad idea. There are some safeguards in that the loan is at a very low rate of interest and is generally only payable on sale or death, etc. There is public utility in providing help for vulnerable people on benefits to receive encouragement and help to own their own home; and in offering an option to own (rather than rent) a home.

However, the very low take-up of the loan by those receiving the SMI benefit suggests that the change is not being explained properly.

This is a common weakness in the UK. It results from being afraid to make clear recommendations out of a bureaucratic aversion to giving clear advice. Where people do not know what to do, they do nothing.

Very few people take professional advice because it is expensive and often so hedged and caveated as to be almost incomprehensible. The very best professionals are capable of of giving superb advice, but that quality does not come cheap and only the wealthiest have access to it. Everyone else receives what is too often poor value for money from “professional” advisors who are too often more interested in their commissions and getting rich quick than what is in the best interests of the client. The poor and vulnerable receiving SMI benefit are unlikely to have access to professional advice. Those in government responsible for the transition from SMI benefit to a loan should recognize this, and take responsibility and pride in ensuring that the take up of the SMI loans is as high as possible.

The default position for those receiving SMI benefit is that they are better off accepting the loan because the alternative (losing the benefit altogether) is likely to be a mistake and may prove catastrophic to those who are living on the edge.

It should not be beyond the government to make this clear. The fact that only 17.5% of those receiving SMI benefits have opted for the loan suggests the government has failed to do so. If it doesn’t dedicate some resource to calling people to fix this now, it will pay a heavy political price for its failure later.

Khalid04/05/2018 15:12

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