With all of the massive changes to welfare and benefits in the emergency budget, the changes to Support for Mortgage Interest (SMI) were largely lost amongst other louder headlines. But despite going relatively overlooked, the Council of Mortgage Lenders described them as the most significant changes for mortgages in the budget. And they will mark a significant shift in the way the benefit is provided, which may have wider ramifications.
The changes set to hit SMI are twofold:
- It’s switching from a benefit to a loan, and
- The waiting period for JSA and ESA claimants is set to increase
First, some brief background on SMI.
At around £300 million per annum, SMI is small in terms of welfare spending, but important. It covers the interest payments for around 200,000 home owners on their mortgages, meaning that they are less likely to be forced into having their home repossessed and – ultimately – to end up homeless.
It’s got tight eligibility criteria and is restricted to very low income households who are out of work, pensioners or sick or disabled. In fact, the overwhelming majority of recipients of SMI either qualify through Pension Credit or Employment and Support Allowance.
It might sound generous for the state to pay people’s mortgages on their private homes, but the fact that it only covers interest payments means that recipients aren’t able to use it to increase their stake in their home at the taxpayer’s expense. It’s also considerably cheaper than paying to rehouse them in the renter sector. The average SMI claimant receives around £1800 a year, compared to the average housing benefit claimant who receives £5000.
Following the budget, SMI is set to change fundamentally.
It has, until now, operated much like any other benefit. Tax receipts have been used to make a payment from the state to the recipient (albeit in the case of SMI it has gone directly to the mortgage provider), which tops up their income and is not repaid.
But from 2018 it will move from a state benefit to a state-backed repayable loan. A charge will be placed on the recipient’s mortgage and they will be expected to repay the amount that they have received, plus interest, either when they get back into work or when their home is sold.
Shelter has previously warned that switching SMI to a loan may discourage some households from seeking help and instead encourage them to sell their homes. We, like lenders, are waiting for more details to see how the changes may affect the quality of the support that is provided for those who need it.
But the significance of the change is potentially broader.
Moving SMI to a loan markedly shifts what home owners can expect to receive from state support. In effect, society will no longer provide support for home owners who get into difficulty – they will be expected to pay for it themselves. Given the announcement this week that the government is looking at getting people to pay into savings accounts to cover sickness benefits it’s in line with a broader direction of travel.
Although it’s easy to feel squeamish about such a change, it isn’t necessarily all bad.
In the first place, the fact that SMI claimants own a considerable asset (which is likely to be appreciating in value as they claim) makes their situation fundamentally different to housing benefit claimants.
More important than this, though, as I’ve written above, access to SMI is currently very, very tight. Reforming it by making it self-financing might offer an opportunity to widen the support that it gives to more households who get into payment trouble. The support it gives could also be improved in other ways, like offering the support for longer for JSA claimants.
But the second change to SMI – re-extending the waiting period from 16 to 39 weeks in 2016 – seems to look this opportunity in the face and then decide to ignore it. The extension means that from 2016 the few home owners who are eligible will have to wait the best part of a year before they can get the support that might keep them in their home.
This is not only something that we should regret as a missed opportunity; it may have serious practical implications.
The cut in waiting period for SMI is one of the things credited with helping people stay in their homes following the recession. With an increase in interest expected around the same time as the waiting period will increase and other pressures, such as unexpected rises in unemployment, an ever-present risk, concern that this change could lead to more repossessions is legitimate. Given that, not using the opportunity created by making it self-sustaining seems short-sighted.
 Because of the way the interest payments households receive is calculated there’s a chance that some actually do get more than their interest payments actually cost. This is because all recipients receive an amount calculated on a standard rate of interest (rather than what they actually pay). However, this also means that some households paying higher interest rates are left with a shortfall.