It is the first time the Department for Work and Pensions (DWP) has clarified its position regarding means-tested benefits and is particularly important with the changes to Support for Mortgage Interest (SMI) introduced in April.
However, DWP has only explicitly confirmed the exemption will apply to mortgage payment protection insurance (MPPI) income or similar payments.
Industry experts believe this will lead to a shift in product development to allow the allocation of a dedicated amount towards the claimant’s monthly mortgage payment.
While this will work for new policies with a regular paid benefit, such as income protection or MPPI, there is still uncertainty about how existing policyholders will be treated.
Lump sum payments from life insurance or critical illness claims used to pay down a mortgage loan are also a concern, though it is hoped there will be more detail on this shortly.
Not count as unearned income
The clarification was prompted by a request from The Building Resilient Households Group of the Income Protection Task Force (IPTF) about how pay outs from protection policies will be treated under the new SMI system.
From 6 April people who suffer a loss of income from sickness or other causes can no longer receive state benefits to cover their mortgage payments.
Instead some may be offered a Support for Mortgage Interest Loan (SMIL) in which case DWP will, where possible, put a charge on their property.
For Universal Credit (UC), DWP said: “From 6 April 2018 any payments or any payments analogous to payments for mortgage protection should not be taken into account as unearned income in UC.”
A similar clarification has also been made for the existing Job Seekers Allowance (JSA), Income Support, and Employment and Support Allowance (ESA) benefits.
Payment direct to lender
In a statement, the IPTF noted that the key point was that any income received from an insurance policy which is specifically intended and used to cover mortgage payments will be totally disregarded when entitlement to means-tested benefits is assessed.
But it highlighted two conditions which should be noted:
- If insurance pay-outs are restricted to the payment of a mortgage (e.g. by being paid direct to the lender) they will be fully disregarded. But if the claimant has choice over how to spend the payments then only any portion which DWP judges to be intended and used for mortgage cover will be disregarded.
- If a claimant applies for a Support for Mortgage Interest Loan their insurance payout will be taken into account when their offer of a loan is considered. However, this scenario is unlikely to be a common one as people would have no need for a loan while receiving insurance payouts which fully cover their mortgage.
Simplified mortgage IP
Building Resilient Households Group joint chair Richard Walsh said: “This clarification means that people who choose to protect their mortgage payments with an appropriate insurance policy can do so without fear that their pay-outs will lead to their benefits being cut.
“Advisers should alert clients to the risk that loss of income through sickness or other causes may lead to mortgage holders spiralling into debt – and advise on appropriate protection.
Protection Review chief executive Kevin Carr told Mortgage Solutions that this was likely to result in a spate of product development from insurers.
“I suspect we will see some sort of simplified mortgage income protection (IP) product. It wouldn’t surprise me if IP products start to ring fence the mortgage benefit and non-mortgage benefit,” he said.
“But the question mark will be over existing policies, and what will happen with those policies is more of a grey area,” he added.