The Council of Mortgage Lenders is urging the Government to continue for another year the extensions to its Support for Mortgage Interest scheme, which it says have helped minimise the number of UK repossessions.
The scheme is designed to provide short-term help to people suffering a personal crisis such as loss of employment or relationship breakdown and who are struggling to meet their mortgage repayments. SMI is available to certain benefit claimants and pays a proportion of claimants’ mortgage interest.
In 2009, the Government temporarily cut the qualifying period from 39 weeks to 13 weeks and extended the higher capital limit from £100,000 to £200,000 in response to the housing crisis. The changes are due to end in January 2013.
The CML is urging the Government to extend both measures for another year, arguing that the temporary extensions have helped an estimated 250,000 people remain in their homes.
London & Country mortgage specialist David Hollingworth says the scheme is necessary considering the economic uncertainty. He says: “It is fairly logical in a market that is showing no signs of growth and may in fact contract a little bit to continue with a scheme that was originally put in place as a measure of forbearance, offering better and quicker benefit support for those who were struggling. In conjunction with lenders showing greater forbearance, this has helped keep repossession numbers in check.
“It is better to have people stay in their own homes and give them a chance to work through their problems. If people can get themselves back on their feet, there is no reason to think that they will not be able to keep their heads above water.”
John Charcol, senior technical director Ray Boulger says the Government must be careful that schemes such as SMI do not put borrowers in a worse position than if their property had been repossessed earlier.
He says: “You will probably struggle to find any borrower who says ‘if I get repossessed, it is better to do it sooner rather than later’, but there will be circumstances where that is true, for example where someone has no realistic chance of getting another job. If their property is declining in value, then the longer things go on, the bigger the debt will be when the property is repossessed.
“However, the 13-week timeframe is sensible as while some people will have savings that allow them to keep their mortgage payments for a number of months, this is clearly designed to help those who do not. If they go into arrears, then a nine-month wait before the mortgage is paid is likely to be too long, particularly if there is not much equity in the property.”
CML spokesman Bernard Clarke says FSA guidelines are designed to prevent borrowers sinking into unmanagable debt. He says: “If it is not in the best interest of the borrower to extend the forbearance because they have no chance of recovering their financial position, then the FSA expects firms to move to possession and not worsen the pain for the borrower.
“If you leave it for 39 weeks before you provide help, you are much more likely to put the borrower in that position than if you offer that help after 13 weeks.”
Budget cuts have led the Government to revise housing benefits but the CML says there are ways to fund SMI without levying extra costs on the taxpayer.
It has suggested the Government revise the method used to calculate SMI, which is based on a standardised rate of interest. The rate, which is now 3.63 per cent, is based on the Bank of England’s monthly average mortgage interest rate. The CML says the Government should retain each borrower’s existing mortgage rate.
It has also suggested the Government introduce a charge on properties for long-term claimants that can be recovered when the property is sold.
The CML’s August News and Views, published last week, says: “Although SMI is currently paid at a standard rate, we argue that paying benefits in line with individual borrowers’ actual mortgage rates would be a better approach in the long term. It would ensure there are no ‘winners’ or ‘losers’ in the benefit system through over- or underpayments
“Of course, lenders understand that continuing with the existing temporary rules for SMI imposes an additional burden on public funds. We support the principle of recovering some of the extra costs of SMI through a charge on the property for some long-term claimants and we are keen to explore this with the Government.”
The Association of Mortgage Intermediaries director Robert Sinclair supports the CML’s calls for the SMI to pay interest based on a borrower’s mortgage rate.
He says: “The CML is erring on the side of the consumer here, which is never a bad place to be. Consumers who cannot borrow at the standard rate and so are paying more than the Government offers through SMI must pay the shortfall. This is not fair and the CML is right to call for the scheme to pay interest based on individual borrowers’ existing mortgage rate.”