Mortgage holders face an increased risk of home repossession with new government plans to limit State Support for Mortgage Interest (SMI).
Support for Mortgage Interest (SMI)
Support for Mortgage Interest (SMI) is a government support scheme set up in the aftermath of the financial crisis to provide support to mortgage holders who suffer unemployment and can no longer meet their loan repayments.
Under the SMI scheme the State agrees for pay for mortgage interest on home loans up to a limit of £200,000 after the borrower has undergone 13 weeks of consecutive unemployment. It is important to note that only contributions to interest payments are made and not capital/principal repayments.
For the purposes of making State support payments, under the current scheme arrangements it is assumed that homeowners have an interest rate of 6.08 per cent on their loan, irrespective of the actual interest rate charged by lenders.
Changes to the SMI scheme
The government now plans to change the interest rate used when calculating the support payments from the current rate of 6.08 per cent to the average monthly mortgage rate published by the Bank of England, which currently stands at a mere 3.65 per cent.
These changes are due to be implemented by the government in October this year. Both the Council of Mortgage Lenders (CML) and the Consumer Credit Counselling Service (CCCS) argue that the reduction in the home loan rate used to base payments will inevitably result in many current and future claimants losing their homes to repossession.
Don’t rely on government support
Even with the existing government scheme there are very strict conditions to be met to receive the benefit, meaning that thousands of households are excluded from the SMI scheme anyhow. The benefit would be paid for a maximum of two years also.
Two important exclusions include individuals with savings of £16,000 or more and couples where the remaining employed partner has an income of around £5,000 per annum or more.
Furthermore, to qualify for SMI the applicant must also be claiming Income Support (IS), Job Seekers Allowance (JSA), Employment and Support Allowance (ESA) or Pension Credit.
Thus, it is very unlikely that any mortgage holder will qualify for Support for Mortgage Interest (SMI) if they are to be made redundant unless they are a single borrower with very limited savings or no savings at all.
Take out mortgage insurance
In this light, it makes sense to take out mortgage payment protection insurance (MPPI), which can cover up to 125 per cent of loan repayments for up to two years.
These plans can be taken out to cover the risk of unemployment (forced redundancy) in addition to accident and sickness. MPPI is usually taken out as part of a total mortgage protection plan with life insurance and critical illness cover.