According to the Department of Work and Pensions, key stakeholders found the changes to SMI in 2009 and 2010, delivered help swiftly and effectively to borrowers and enabled lenders and money advisers to support borrowers effectively.
The report showed that respondents found other initiatives such as the Mortgage Rescue Scheme (MRS), played a supporting role in helping borrowers.
The changes to SMI introduced in January 2009, included eligibility at 13 weeks for borrowers in receipt of Jobseeker’s Allowance (JSA), Income Support (IS) or Employment and Support Allowance (ESA) and fixing the Standard Interest Rate (SIR) at 6.08%.
Other moves included increasing eligible capital limit to £200,000 for new working-age claimants and putting a two-year limit for the receipt of SMI for new JSA claimants.
From October 2010 the SIR was reduced to 3.63%.
Lenders, money advisers, Jobcentre Plus staff and key policy stakeholders all reasponded to the report and said that SMI temporary measures were generally highly effective during 2009 and 2010.
Lenders reported that the SMI changes underpinned its willingness and ability to forbear and not seek possession. The report found that lenders were also more prepared to consider conversion to interest only mortgages.
Money advisers and key stakeholders noted that the temporary arrangements were beneficial to borrowers and resulted in a greater likelihood that forbearance could be agreed with lenders.
The report also found that SMI was not equally effective for all borrowers.
Those with higher rate loans, older mortgages (where the proportion of the payment was for capital repayments), mortgages above the capital limit, or who had extensive equity withdrawal and ineligible costs could still face a gap between payments due and SMI receipts.
Overall, however, the DWP said the 2009 changes resulted in more people being assisted, more fully and sooner.
Lenders were most concerned by the October 2010 reduction in the SIR to 3.63%, said the report.
“The timescale for the introduction of the change gave borrowers and lenders little time to plan for reduced help. All lenders had a preference for payment of SMI at the borrowers’ actual interest rate, but otherwise for a more gradual adjustment. A small minority of lenders would have preferred some lengthening of the waiting period to the rapid and significant drop in the SIR.”
Since the reduction in SIR, the majority of lenders reported seeing an increase in the number of borrowers with shortfalls on their payments. They also noted that the full impact of the reduction in the SIR was in some cases masked by the previously generous rate that had provided some borrowers with a buffer.
Even with this cushion, the DWP said that “SMI is now less effective than it was between January 2009 and October 2010 in terms of preventing or limiting arrears.”
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