Mortgage Interest Support Consultation

The government are undertaking an ‘informal’ consultation on the way that Support for Mortgage Interest (SMI) works in means-tested benefits.

The main issue of concern to older people and people with disabilities is the proposal that amounts of SMI paid will be recovered after the sale of the property or the death of the claimant.

The government says, in the consultation, that

Our strategic vision for support for mortgage interest in the future is that it should provide short-term help to people at a time of personal crisis such as loss of employment or relationship breakdown and incentivise work.

For longer term needs,

… for example, where a claimant is disabled or takes a mortgage into retirement, the Government believes that taxpayers should not in effect be helping people to acquire personal assets through any potential long-term rises in house prices. We are therefore seeking views on an option to put a charge on property in return for long-term payment of support for mortgage interest.
They propose that claimants would repay the sum they received by way of SMI, plus interest to cover costs to government, from the equity in their property. In the examples in the paper they use a 2% surcharge over the SMI rate to cover costs and interest. The charge and repayment would begin after two years in receipt of SMI as part of long term benefits..

They are also proposing that, under Universal Credit, SMI will not be payable where earnings are over zero. This creates an enormous poverty trap for those looking at part-time work, hardly a way to encourage people into work. They are also proposing to increase the numbers of people with a two year limit on receipt of SMI.

There are some examples in my paper, here, of the effect that this proposal might have on the value of equity in the home, on which many people are depending for retirement and care funding.

If this proposal is implemented there will be a number of detailed concerns in addition to the loss of equity.

What will be the effect of lenders continuing to add the interest difference to the mortgage account after a negative equity level would have been reached with the governments charge?

What will the situation be for a local authority which wishes to place a charge on the home to cover care costs?

The effect of this proposal will be greater than the benefits related consequences. Issues of inheritance, long term care funding, equity release and housing affordability will mean that complex considerations will have to be studied in detail before the proposal can be taken forward and can be expected to be politically dynamite.

Support for mortgage interest – call for evidence, Dec. 2011, DWP. You can get it here.

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