The July 2015 budget saw one change which attracted little publicity at the time, but which could soon impact significantly upon lenders and borrowers alike. Banking Litigation specialist Sandip Singh explains.
What is Support for Mortgage Interest?
Support for Mortgage Interest (SMI) is a state benefit which helps homeowners in financial difficulties to meet their mortgage payments. Eligible homeowners1 are entitled to receive payments towards the interest portion of their mortgage, on loan balances of up to £200,0002. SMI is paid by the government directly to the mortgage lender and is calculated using an interest rate of 3.63%. There is a waiting time of 13 weeks from the date of claim to the date of SMI payment, and in most cases SMI will be paid for up to 2 years. SMI is a non-recoupable benefit, which has been criticised for subsidising the homeowner’s interest in a growing capital asset at the public’s expense. It has, however, also been a contributing factor in managing the levels of arrears and repossessions seen following the 2007/2008 financial crisis.
What is changing, and when?
In the July 2015 budget the Chancellor announced the following changes to SMI. To some extent these were overlooked in amongst other more immediate or sweeping changes, but the changes could now impact significantly upon lenders and borrowers alike.
- As from April 2016, the waiting time for commencement of SMI payments will be increased from 13 to 39 weeks; and
- As from 2018, SMI will change from being a benefit to a state-backed, secured loan which is repayable, with interest.
What is the likely impact for lenders and borrowers?
Eligibility for SMI is strict and so the benefit is already only available for those in financial need. Plus, it is a temporary support for homeowners which, as well as being credited with helping to avoid a much more serious post-recession housing crisis, costs the public purse less than housing benefit3.
So far as the change from SMI being a benefit to a loan is concerned, the Council of Mortgage Lenders (CML) commented at the time of the budget that it is a “radical change… that could have wide implications”4. Detail as to the exact practicalities and logistics of SMI loans still remain to be published and we, along with the CML and other lender and borrower representatives, await further information on these aspects with interest. Although the notes to the Welfare Reform and Work Bill refer to the 2018 change being an “opportunity”, there is the possibility that SMI taking the form of a loan will discourage some homeowners from seeking help from the government; it may drive some to consider the possibility of securing finance from other sources on perhaps less favourable terms; and it may mean that more homeowners simply sell or lose their home.
More immediately, increasing the waiting time for receipt of SMI payments will mean that eligible claimants will face around six months’ worth of additional arrears before help is at hand. That is also likely to mean yet more forbearance on the part of mortgage lenders and more pressure on struggling borrowers to sell their home or face repossession. With the waiting time change set to come into effect in April this year, it is possible that lenders could shortly see a surge in borrower default.