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SMI changes are essentially a rebranding exercise – MCI

by: Phil Whitehouse, managing director of MCI Mortgage Club
  • 14/11/2017
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SMI changes are essentially a rebranding exercise – MCI
Originally announced in the Summer Budget of 2015 by George Osborne as part of a sweeping series of cuts and changes to the welfare system, government plans to scrap the Support for Mortgage Interest (SMI) benefit and replace it with a loan scheme finally passed into law this July.

SMI has existed under various guises since the 1940’s and is designed to help homeowners claiming benefits such as Jobseekers Allowance and Pension Credit to repay interest on up to £200,000 (or £100,000 for pensioners) of their loan or mortgage.

It is currently claimed by around 135,000 households in the UK as a free benefit. Under the new legislation however, claimants will be required to apply for SMI as a repayable loan, secured against their home and subject to interest payments.

Reaction to the new rules has been predictably hostile and shrill, with some critics warning that the loans will further undermine household finances at a time of dire economic uncertainty; that existing claimants are not being given adequate financial guidance to sensibly weigh its pros and cons and that, ultimately, the scheme could lead to a rise in people losing their homes.

But is there substance to these claims or are they merely an excuse to criticise a government, struggling to come to terms with runaway expenditure at huge public cost, for political gain? Let’s find out.

 

£170m per year

With UK national debt currently standing at around £1.7trn (or the equivalent of £26,000 per person) and welfare related expenditure continuing to spiral, there is an increasingly compelling argument for financial prudence at the highest level, as well as cost cutting measures designed to ease the burden of public financial liability.

SMI costs taxpayers £170m per year under the present benefit rules, but the new loan system should save an estimated £150m in revenue.

The benefit was originally conceived to provide short term cover for people trying to return to work but whose property was under threat of repossession. In recent years however, there has been a marked increase in long term claims, and the government believes that it is unfair to ask taxpayers, many of whom are unable to buy their own homes, to subsidise the interest payments of a tiny minority of people.

All of which seems fair enough, especially given that the effect of austerity measures is felt universally across Britain, irrespective of state support. If anything, it should encourage more mortgage holders to consider buying insurance policies to protect against a fall in income.

 

Pensioner impact

Many commentators refer to the high proportion of low income pensioners claiming SMI (almost 50%) as evidence that a loan system will impact most heavily upon the vulnerable members of our society.

In fact, SMI loans will be charged at a lower interest rate than a conventional bank or other commercial loan and will only have to be paid back when a homeowner chooses (the operative word here) to sell their home, chooses to transfer the property or, in the final reckoning, dies.

If there isn’t enough equity to cover the remaining balance moreover, then this will be written off in order to spare any children or other beneficiaries from having to assume the debt, thereby providing a true safeguard for genuinely needy people moving forward.

All of which could be argued that help for the poor and elderly hasn’t been taken away at all but that the nature of support has changed in a way that is arguably fair for them, fairer for taxpayers and fairer for society at large. It seems it essentially amounts to an exercise in rebranding.

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