The insurer warned that the policy change could place thousands of pensioners at risk of financial hardship and added that Department for Work and Pensions (DWP) communications were insufficient.
Thousands of low income pensioners and working age benefit claimants have started to receive official letters warning that the help they receive with their mortgages will end in April 2018 unless they sign up to a second mortgage with the government.
But the letters are not clear about the interest rate on the loan and recipients are getting little help with this decision according to 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, it added.
Helen Morrissey, personal finance specialist at Royal London commented: “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 which miss crucial details such as the interest rate on the mortgage,” she added.
Getting advice
Morrissey also highlighted inadequacies in where the government was directing people for support. “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,” she continued.
“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,” added Morrissey.
Support for Mortgage Interest (SMI) is paid to homeowners in receipt of certain income-related benefits such as Jobseekers Allowance (JSA) and Pension Credit. It covers the interest payments on mortgages and some home improvement loans. 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.
Rate uncertainty
The government has not confirmed the interest rate that will apply, but investigations by Royal London suggested that the initial interest rate will be around 2.2%, though this could rise if interest rates rise.
A Department for Work and Pension (DWP) spokesperson commented: “The interest charged on SMI loans will be tied to the Office for Budget Responsibility’s forecast of gilt rates and will simply cover the government’s cost of borrowing to fund the loans. The SMI loan is only repayable after the property has been sold and from proceeds after the outstanding mortgage is paid off. If there are insufficient funds to repay the SMI loan, we write it off.
The DWP spokesperson added: “This reform means we will continue to provide a safety net to help homeowners avoid repossession. However, over time, someone’s house is likely to increase in value, so it’s reasonable that anyone who has received financial help towards their mortgage should be asked to pay that back if there is available equity when the property is sold.”
However the DWP denied there was any uncertainty in the letters, adding: “We are getting in touch with all SMI claimants to explain the change. First, they will receive written information on the loan, and then they will then be invited to book a telephone appointment with the SMI information provider. We are also sign-posting them to independent advice.”
Impact on pensioners
Claimants are receiving letters from the DWP informing them of the change and supplying loan application forms. An estimated 135,000 letters are being issued, with around 65,000 going to pensioners.
Of particular concern is the potential impact on those SMI recipients on Pension Credit who have interest only mortgages stretching into retirement. There is already concern that some may not have the money to pay off the balance on these mortgages when they come to an end, but this will be exacerbated if they also have to pay money back to the government on top.
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 so they will be forced back into the rental market.
Long-term claimants could face bills running into thousands of pounds. Royal London analysis showed that a Pension Credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claimed 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.
