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Support for mortgage interest cuts leave homeowners facing hardship

Citizens Advice says a third of homeowners seeking debt advice because of changes to the SMI benefit are vulnerable

Cuts to the help available to homeowners struggling with mortgage repayments mean some borrowers are experiencing hardship and face losing their properties, Citizens Advice has warned.

The charity said a third of homeowners seeking debt advice because of changes to the support for mortgage interest (SMI) benefit were facing repossession action by their lenders. SMI is a means-tested benefit for those unable to pay their mortgage because they are out of work.

The government cut the interest rate at which SMI is calculated from 6.08% to 3.63% in October 2010. It said the high level meant 90% of claimants received more SMI than their mortgage was costing in interest, enabling some to use the excess to reduce their borrowing.

Lord Freud, minister for welfare, expected mortgage lenders to absorb any shortfall, averaging out the interest charged to reflect the fact SMI payments are guaranteed. The government has also urged lenders to show forbearance to mortgage customers who are struggling to make their monthly payments.

But Citizens Advice said analysis of 448 of its clients showed lenders had initiated possession action in a third of cases. The cut, which reduced the SMI received by clients by an average of £135 a month, also caused or exacerbated financial difficulty for 69%, while 43% felt at risk of losing their home.

Citizens Advice said the use of a standard interest rate for calculating the amount claimants should receive each month is ineffective, inequitable, and causes hardship. It is calling on the government to move from using a standard interest rate to using individual claimants’ own mortgage interest rates.

Standard variable mortgage rates currently range from 2.5% to 6.08% in cost, according to mortgage brokers London and Country, with interest charges on a £200,000 mortgage – the maximum allowed for an SMI claim – varying from £417 a month to £1,113. But everyone with a £200,000 mortgage would receive the same amount of SMI – £605 a month.

Citizens Advice’s chief executive, Gillian Guy, said: “The cut to SMI has created a grossly unfair system where people fear losing their home because they are not getting enough help and can’t keep up with the payments, while some are getting enough money to cover more than their interest costs.

“The Department for Work and Pensions’ own analysis suggests using a standard interest rate to calculate SMI is not saving the taxpayer any money nor is it cost effective. Lord Freud needs to realise the current rate is making a tough time harder for many people and there are better ways of doing this: Citizens Advice wants the government to pay SMI at each individual’s interest rate to avoid people falling into hardship.”

SMI was calculated using the claimant’s actual interest rate prior to October 1995, but the then government found this system, which relied on claimants reporting changes in their contractual interest rates, too complicated.

It said the system increased the likelihood of errors and overpayments, and moved to a flat rate system.

However, Citizens Advice said the scheme could work effectively if the mortgage provider calculated how much SMI a borrower was entitled to based on his actual interest rate, and then block-billed the government each month for all its customers eligible for the benefit.

The DWP is now consulting on the future structure of SMI, including putting a charge on properties belonging to SMI claimants after two years as a condition of ongoing support, extending a two-year limit on help to a bigger number of homeowners in receipt of jobseeker’s allowance and ending direct payment of SMI to lenders.

A DWP spokesperson said: “Under the previous standard interest rate, more than 90% of people received more money than was needed to meet their interest payments and some claimants were able to pay off their capital too – this is not good use of public funds and is unfair to taxpayers, which is why we are consulting on how to provide mortgage support more efficiently in the future.”

SMI was claimed by 247,000 people in 2010 (the latest figures available), and has played a key role in preventing homelessness since 2008. Cuts to public spending, salary freezes and a continued rise in unemployment has led to strong demand for advice on mortgage problems: Citizens Advice received 103,487 enquiries in 2010/11, of which 13,100 were about SMI and 11,234 were about possession claims for mortgage arrears. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds