From April, the SMI, which is claimed by low income pensioners and the unemployed to help with interest payments on their mortgages, will be converted from a benefit to a loan repayable with interest.
But Johnny Timpson, protection specialist at Scottish Widows, warned that joint mortgage households with multiple earners are especially at risk owing to a ‘no-earnings’ rule attached to SMI, and need to think about a ‘Plan B’ should the unexpected happen – because they cannot rely on state help.
Timpson said: “[SMI] has underpinned mortgaged homes across the UK since 1948, and is the only back-up in place for many families if they were unable to pay their home loan.”
However, Timpson pointed out that mortgage holders living in Universal Credit (UC) full roll-out areas are subject to an additional condition, where entitlement to future support is subject to a ‘no earnings’ rule.
This means that if a partner or other parties to the mortgage is still working and earning, they will not be able to claim SMI, despite it being converted to a loan.
Timpson warned that the rule meant that households seeing a loss or reduction in income cannot receive SMI if anyone else in that household is still in work.
“This could have major implications for two-earning households with joint mortgages,” said Timpson.
“Many families will be unable to cope with any unexpected financial shocks,” he continued, “And while some can rely on savings, many others can’t.”
According to Scottish Widows’ research, almost half of UK households have savings of less than £1,500.
A worrying change
The planned changes to SMI stirred controversy when it was revealed that only one in 20 households on SMI have signed up for the new loan scheme – prompting calls for the conversion to be delayed until proper information is distributed.
After April, SMI payments will need to be repaid with interest when the property is sold, transferred into new ownership, or on the death of the recipient, or their partner.
However, a Freedom of Information (FOI) reply obtained by insurer Royal London found that of 124,000 currently receiving SMI benefits, only 6,850 households had signed up for the new loan scheme by 22 January, with another 18,177 considering the move.
Moreover, despite the government starting to contact benefit claimants last July, and with only 8 weeks until the changes take place, not all claimants have been contacted.
“The worrying reality is that millions of households still believe they can rely on the state or family help if they’re unable to work due to illness or injury,” Timpson continued.
He added: “[The no-earnings rule] effectively means that many people have no realistic financial safety net in place to deal with an unexpected loss or reduction in income.
“It’s more important than ever for them to have a ‘Plan B’ to repay their mortgage should the unexpected happen.”