Support for mortgage interest

With effect from 6 April 2018, SMI is made as a loan from the government. [1] Prior to this date, SMI was paid as part of a claimant’s benefit award. An SMI loan does not replace SMI benefit automatically (see below).

Broadly, eligibility for a loan payment under SMI remains the same as it was when paid as a benefit.

Transitional protection

• SMI can continue to be paid as a benefit payment to existing claimants up to: [2]

• 7 May 2018 where the DWP has been unable to contact the claimant5 November 2018, or later in limited circumstances where the DWP believes the claimant lacks capacity and the claimant has not accepted or refused the loan.

Claimants should be referred for independent financial advice about whether to proceed with the loan. A generalist or debt adviser can provide information on the consequences of accepting or not accepting a loan, but should not advise on whether the individual applicant should go ahead. Other options may be available such as:

• contacting the mortgage lender to explore other ways of managing mortgage repayments

• asking a credit union, bank or building society for a loan.

See the section Mortgage arrears for information on options.

Existing claimants in receipt of SMI payments should have been written to before February 2018 explaining the change to SMI payments. They should also have received a phone call from Serco, an organisation working on behalf of the Department for Work and Pensions (DWP) to explain the changes and to discuss alternative options.

Signing up to an SMI loan

A claimant will be required to sign a charge form in order to secure the SMI loan against the claimant’s home. If the claimant’s partner is a joint owner s/he will also be required to sign the form. [3] This charge is registered at the Land Registry. If there are joint owners that are not the claimant’s partner, the claimant will be required to sign an equitable charge in respect of her/his beneficial interest in the home. [4] This charge is not registered at the Land Registry.

A homeowner, or her/his partner can claim SMI for the home  which s/he normally occupies (or is treated as occupying) where s/he is: [5]

• in receipt of a qualifying benefit

• liable or treated as liable for ‘owner occupier payments’.

Qualifying benefits are: [6]

• universal credit (UC)

• state pension credit

• legacy benefits, ie:

  - income support

  - income-based jobseeker's allowance (JSA)

  - income-related employment and support allowance (ESA).

When a claim for a qualifying benefit is made the claimant will be asked questions about her/his housing costs to find out if s/he is entitled to an SMI loan.

Liability incurred after becoming entitled to a qualifying benefit

It is not generally possible to get SMI on a loan taken on during a period, known as a ‘relevant period’, in which the person to whom the loan was made was:

• entitled to state pension credit or a legacy benefit

• living as a member of a family, one of whom is entitled to state pension credit or a legacy benefit.

The exception to this is where the claimant or her/his partner was previously renting accommodation before buying the home and was entitled to housing benefit the week before the purchase, or the loan was: [7]

• taken out or increased to buy a home better suited to the special needs of a disabled person

• increased to enable the purchase of a new home which would allow a boy and girl aged over ten but under 20 to have separate bedrooms

• was taken out to pay off an earlier loan (although any extra amount will not be covered).

Universal credit claimants: zero-earnings rule

A UC claimant will not qualify for help with interest payments if they or their partner have any earned income. [8] However, claimants in shared ownership properties can claim the housing costs element for their rental payments. [9]

The categories of loan that will qualify for SMI is wider for UC claimants than for claimants of legacy benefits or state pension credit. Claimants of universal credit can get an SMI loan for the following types of payments: [10]

• interest payments on a loan secured on accommodation the claimant occupies as their home

• alternative finance arrangements (for example, Islamic mortgages) in relation to the claimant's home.

Legacy benefit and state pension credit claimants can get an SMI loan for the following types of interest payments: [11]

• on a mortgage loan to purchase the home the claimant normally lives in (for the capital limit see below) or a remortgage to repay a previous loan

• on loans for specified repairs or improvements (generally, those which are done to maintain the fitness of the home for human habitation, or to provide separate sleeping accommodation for members of the claimants family who are aged ten or over when the loan is taken out, or within a year of that date, and who are of different sexes).

SPC claimants can also get an SMI loan for alternative finance arrangements.

The upper capital limit of a mortgage or loan on which SMI may be made is £100,000 where the claimant: [12]

• is in receipt of pension credit (unless they claimed help with housing costs when in receipt of income support, IBJSA or IRESA and claimed PC within 12 weeks of their previous benefit ending

• claimed a qualifying benefit before 5 January 2009.

In all other cases, the upper capital limit is £200,000.

It may be possible for a working age applicant subject to the £100,000 limit to gain entitlement to the £200,000 limit by stopping her/his claim to a qualifying benefit and starting a new one. However,  the applicant would have to wait for long enough for the linking rule (whereby new claims for benefit made within a certain period of a previous claim having stopped are treated as continuations of the old one) to cease and there would then be a new qualifying period (see below).

The interest rate used to calculate the amount of SMI payable towards a mortgage or other qualifying loan is linked to the Bank of England published average interest rate for loans to households secured on dwellings. This rate is applied regardless of the actual interest rate payable on the claimant's mortgage or secured loan. The current rate is 2.61 per cent. The rate is adjusted whenever the published rate and the SMI rate differ by 0.5 per cent or more. [13] Check Gov.uk for any changes.

An amount may be deducted if there is a non-dependant living with the claimant. [14] This does not apply to universal credit claimants.

A non-dependant is an adult child, friend or relative living with the claimant (but not the claimant's partner, lodger or joint tenant). It is assumed that the non-dependant will make contributions towards the housing costs, whether such contributions are made or not.

The standard qualifying period before an SMI loan can be paid to claimants is the later of: [15]

• 6 April 2018

• 39 weeks of entitlement to legacy benefits

• nine months of entitlement to UC.

For those in receipt of state pension credit there is no waiting period before help with housing costs is paid.

Where a legacy benefit claimant ceases to be entitled to a legacy benefit, but then becomes entitled again within 52 weeks, s/he will not need to satisfy the qualifying period in respect of that new entitlement. [16]

Payment of an SMI loan to help pay a mortgage is normally made direct to the lender. It is paid in arrears every month (universal credit) or four weeks (other benefits). [17] It will be paid to the claimant when the lender is not part of the mortgage payment scheme agreed with the DWP. Most lenders are part of the scheme. [18]

An SMI loan can be paid indefinitely. [19]

Unless the loan agreement is terminated, payment will stop if the claimant ceases to: [20]

• be entitled to a qualifying benefit (although a further four weeks’ payment will be made where entitlement to a qualifying benefit ceases because the claimant becomes employed and that employment is expected to last for at least five weeks)

• be liable (or treated as liable) to make owner occupier payments (this includes a period for up to 12 months where the claimant has fled domestic violence)

• occupy (or be treated as occupying) the relevant accommodation

• the claimant does not comply with the terms of the loan agreement.

SMI loan payments to a UC claimant will stop from the date the claimant or her/his partner has any earned income. [21] See 'zero earnings rule' above.

The interest rate for repayment of an SMI loan is linked to the Office for Budget Responsibility’s forecast of gilt rate. The current rate is 1.5 per cent. The rates may change on 1 January and 1 July each year. Check Gov.uk for any changes. [22]

The interest accrues monthly and is calculated as compound interest, ie interest will be charged on the unpaid loan and on the interest. An SMI loan will continue to accrue interest until it is paid off.

No regular repayments have to be made. The loan can be paid be paid back in full or in part at any time. The minimum amount that can be repaid at one time is £100 or the outstanding balance, if less. [23] Any amount outstanding on the loan will become due if: [24]

• the property is sold

• ownership of the property is transferred or assigned

• the claimant dies and there is no partner or other member of the ‘benefit unit’ living in the property.

The money is to be paid from the claimant’s estate. If there is insufficient equity to repay the loan in full, any outstanding amount will be written off.

A claimant may be eligible to 'port' the loan if they buy a new property to live in. [25] Claimants must arrange this with DWP prior to the sale and will need to provide their solicitors details.