Thousands of struggling homeowners, many elderly or in poor health, are in danger of losing their properties when a key financial safety net is axed next year.
Debt experts say some of the country’s most vulnerable borrowers are in for a ‘nasty shock’ when the Government scraps Support for Mortgage Interest benefit in April 2018.
This financial lifeline protects mortgage borrowers who have fallen on hard times from building up payment arrears and being repossessed by their lender.
‘Nasty shock’: Householders are facing a message as welcome as a call from the Godfather
It does this by paying a portion of the interest payments due on the home loan. Many of those who have received a bombshell letter are shocked at the prospect of losing a benefit worth on average £1,300 a year.
It is awarded to homeowners who are already in receipt of certain state benefits – such as Income Support or the Jobseeker’s Allowance.
Most at risk are the 60,000 borrowers who are pensioners and receive Pension Credit. They have few means of improving their incomes and making good the loss of the benefit.
The Department for Work and Pensions is writing to 124,000 people warning them they will need to make alternative arrangements to meet the cost of interest on their mortgage.
Instead of the benefit, it is offering claimants the option to take a ‘Support for Mortgage Interest Loan’ to cover interest payments.
This loan will be secured on their home and is repaid when the property is sold, ownership is transferred or the owner dies.
If the sale price falls short after the main mortgage is paid off, the loan is written off.
The loan is available on a maximum home loan of £200,000 (£100,000 for those on Pension Credit) with the money sent directly to the lender.
THE new loan alternative comes with an interest charge. This is forecast to be 1.7 per cent but will rise if the Bank of England base rate increases and can change twice a year.
Interest payments will be compounded, meaning interest builds up on interest causing the original debt to balloon the longer it remains in place.
Analysis by insurer Royal London for The Mail on Sunday suggests someone ‘receiving’ £20 a week in help at an interest rate of 1.7 per cent would run up a debt of nearly £5,500 over five years – a typical period for a pensioner to claim.
Consumer groups fear many of those receiving the benefit will not understand the implications of switching to a loan – and could see any equity in their homes quickly eradicated.
Jane Tully, a director at the Money Advice Trust, the charity that runs National Debtline, says the axing of the benefit could not be more ill-timed, with households already struggling to make ends meet against a backdrop of surging living costs and low wage growth.
She says: ‘These changes will make it harder for people to recover their finances in the long run.
Worries: Thousands are at risk of losing properties
‘We are also concerned that if people do not agree to the new loan and their benefit payments stop, this may result in mortgage arrears and the threat of losing their home.’
Homeowners need to decide before next April whether to opt for the ‘interest loan’ or meet the cost some other way. But it may prove a Hobson’s Choice, with few other options available.
As well as a letter, claimants will receive a phone call from services provider Serco on behalf of the Government. The caller will spell out how the new loan works as well as alternatives. Sally West of charity Age UK says: ‘Some people are telling us they are not going to take on the extra burden of a loan and intend to find money from somewhere else.
‘This could mean them cutting back on essentials such as not turning on the heating when winter bites.’
West believes those who agree to take the loan are storing up problems for the future.
She says: ‘Some people may be planning to downsize at a later date but with the new loan they could have little or no equity left when their main mortgage and the interest loan are repaid.’
West adds: ‘The guide sent to affected borrowers recommends those who are unsure to seek financial advice. But these are low income households and financial advice costs money.’
Risks: Debt expert Sara Williams
Sara Williams of consumer blog Debt Camel believes the new loan arrangement will make it more difficult for homeowners to remortgage to a better loan deal.
She says: ‘If you are only temporarily out of work – perhaps while children are young or until you find another job – then having this secured loan will reduce the equity in your home and make it harder to remortgage at a good rate in future.
‘If you are a pensioner with an interest-only loan, you may have been hoping your equity will build up over the next few years until your mortgage ends. This scheme will reduce the chance of that happening.’
In practice most people will not find a better option unless they have family or friends who are prepared to help. This is because the new loan will be at a lower interest rate than available from commercial lenders – and no repayments are required even if you start working again.
To accept the new arrangement a borrower (and partner if the house is jointly owned) needs to sign a loan agreement and a charge form – documentation that amounts to a bewildering 64 pages.
Williams says: ‘I am worried that people, especially pensioners, will be too scared to sign it. Those who are unsure should seek assistance from their local Citizens Advice which will look at their entire financial situation, including the benefits they receive and other debts they may have.’
Shocked: Helen Morrissey of insurer Royal London
Helen Morrissey of insurer Royal London, says: ‘I am shocked that people are being asked to make this decision without appropriate support. This could lead to them not taking up the loan offer for fear of accruing a large debt and then finding themselves struggling to meet the interest payments on their home loan.
‘There could also be a nasty shock in store for people inheriting a property from someone who then finds there is not only a mortgage outstanding but an interest loan as well.’
Gordon Andrews, financial planning expert at Old Mutual Wealth, believes the axing of the benefit ‘removes a critical safety net’. He says: ‘There is no guarantee that property price rises will cover the extra debt burden for those who take the loan option. Indeed most forecasts suggest house prices are likely to fall in the near future.’
Andrews says one option for those still in work but worried about paying the mortgage if they lose their job is mortgage payment protection insurance.
He says: ‘This is likely to cover both your capital repayments and the mortgage interest. But find out whether the policy pays you directly, or your lender, as a payout from this type of policy could affect entitlement to some income-related benefits.’
The Department for Work and Pensions says the axing of Support for Mortgage Interest benefit will save taxpayers £170 million a year.