The DWP is writing to tens of thousands of low-income pensioners telling them their mortgage interest support will cease unless they take out a second mortgage with the Government.
Support for Mortgage Interest (SMI), which is paid to people receiving Pension Credit and Jobseekers Allowance, will cease to be payable from April 2018 unless recipients take out a second charge on their property to repay the benefits received.
Around 65,000 pensioners currently in receipt of SMI have been sent letters from the DWP, although these communications are not clear about the interest rate on the loan, says Royal London. If they fail to comply they will lose help with their mortgage and could face repossession if they get into arrears as a result.
Up until April 2018 it has been paid as a free benefit but after this point any SMI payments will need to be repaid to the government with interest when the property is sold. The Government has not confirmed the interest rate that will apply, but investigations by Royal London suggest that the initial interest rate will be around 2.2 per cent, although this could rise if interest rates rise.
Some pensioners may not have the money to pay off the balance on mortgages stretching into retirement when they come to an end, but this will be exacerbated if they also have to pay money back to the Government on top, says Royal London.
If the SMI loan amount is more than the equity left within the home when it is sold then the remaining balance is written off but this could still leave claimants with no way of purchasing a new property meaning they will be forced back into the rental market.
Long-term claimants could face bills running into thousands of pounds. Royal London analysis shows that a Pension Credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claim SMI for five years, the typical claim duration for pensioners. If they were to claim it for ten years then the loan amount would stand at £11,744.
Once the mortgage term ends they face the prospect of having to repay the SMI loan as well as the outstanding capital sum on their mortgage. While people of working age might be able to extend their mortgage term to give themselves more time to pay, those in retirement may struggle to get a lender to agree to do so.
Royal London personal finance specialist Helen Morrissey says: “Up until this point SMI has been paid as a free benefit but any payments made from April 2018 will now need to be repaid with interest – this is a massive policy shift. The Government needs to make sure that people have the help and advice they need to decide whether or not to take out a second mortgage to pay for this. But instead, thousands of people are getting letters that miss crucial details such as the interest rate on the mortgage. The government is pointing people in the direction of the Money Advice Service and Citizens Advice but they can only provide guidance as opposed to tailored advice. Some people will find the process too daunting and will lose their mortgage help next April, with a risk of repossession.
“Others will sign up, but this will make it even harder for those with interest-only mortgages to clear their outstanding balance at the end of the mortgage. While those able to do so should seek regulated financial advice about their options, the government must ensure that those unable to pay for this advice are given adequate support so they can make the right decision for them.”