Ian Smart – Product Architect, Royal London
Most people assume the government will take care of them and their families if they die or become too ill to work, but this isn’t always the case.
Revisions to state benefits over the past couple of years have made the financial safety net less robust than before.
The introduction of Bereavement Support Payments in 2017 represented a fundamental change to bereavement benefits (which are now only available for a maximum of 18 months) while the switch to Universal Credit has created uncertainty around what benefits are available now and in the future.
More recently, in April 2018 the Department of Work and Pensions (DWP) introduced Support for Mortgage Interest (SMI) loans to help people cover their mortgage payments if they’ve stopped earning an income. This replaced previous state benefits to cover mortgage interest payments. A crucial point that mortgage holders need to be aware of with this loan is that the DWP will put a charge on the property.
It’s reassuring to know that your clients could still get help with mortgage payments if they find themselves in a tough financial situation. But the flip side is they now need to pay this money back with interest, charged currently at 1.7% per annum. It should therefore only be treated as a last resort, making it more important than ever that your clients protect their income to avoid getting into debt or losing equity in their homes.
How the government loan works
To qualify for an SMI loan a claimant needs to be getting one of the following benefits: Income Support, Income-based Jobseekers Allowance, Income-related Employment and Support Allowance, Universal Credit or Pension Credit.
As mentioned already, in contrast with how the state helped with mortgage repayments before April this year, the amount received is treated as a loan and must be repaid when the person dies or sells their home. So, unless the home owner has protected their mortgage, the equity in the property will get eaten into, especially if they’ve not been able to work for a number of years.
Although the DWP don’t make any credit checks before offering someone a loan – so a person’s credit rating won’t be affected – they will apply a daily rate of interest to calculate how much the home owner will receive. The current standard interest rate used to calculate SMI is 2.61% per annum. This is an important point to consider, because this rate might well be lower than the actual interest rate for the loan with the mortgage lender. If this is the case, there will be a shortfall between the SMI payments and what someone has to pay their mortgage lender. So, for some people, taking out an SMI loan might not be their best option.
There’s also an upper limit on how much of their mortgage someone can get help on through SMI. For people getting Income Support, Income-based Jobseekers Allowance, Income-related Employment and Support Allowance or Universal Credit the limit is £200,000. But for people receiving Pension Credit, the upper limit is usually £100,000, unless you were getting one of these other benefits when you first applied for the SMI loan.
“It’s more important than ever that your clients protect their income to avoid getting into debt or losing equity in their homes.”
It’s also worth bearing in mind that there’s a long wait of 39 weeks, or nearly 10 months, from when someone makes a claim for the SMI loan until they get their first payment (unless they’re getting Pension Credit, in which case payments are made straight away).
What’s more, the DWP’s own figures show that the number of people accepting loans has ground to a halt in recent months, with 21,000 people either accepting or intending to accept the loan but nearly three times as many (61,000) having declined one. Unless people have some form of protection in place it’s hard to see how they will avoid falling into arrears.1
How will any insurance payments affect means-tested benefits?
The DWP has confirmed that any income people get from an insurance policy that specifically covers their mortgage payments won’t be taken into account when assessing means-tested benefits. This applies to both legacy benefits and Universal Credit.
This means that people can take out insurance that’s intended to cover their mortgage payments without any fear that their benefits will be cut if they can’t make the repayments and need to make a claim.
However, if the person has a choice over how to spend the payments, then only the amount the DWP decides has been used for the mortgage cover will be disregarded.
The DWP will also take into account the amount of insurance paid out when looking at an application for an SMI loan, although this situation is unlikely to arise as someone getting an insurance payment to cover their mortgage is unlikely to need a loan.
Opportunities for advisers
In the longer term we could see new mortgage-specific products being brought to market.
In the meantime, it’s important to continue making sure people are aware of the risks of not protecting their mortgage should they die or find themselves unable to work because of sickness or injury. Unfortunately, many people still believe that whatever happens the government will look after them and fail to take out any form of protection. Recent figures suggest only 35% of adults have life insurance, 12% critical illness cover and 9% an income protection policy.2
These changes are an ideal way to highlight how clients can’t rely on the state alone – the reduction in state benefits means that for most individuals protection should be an essential part of their financial planning.
For more information about the SMI loan visit: https://www.gov.uk/support-for-mortgage-interest/what-youll-get
1 Conversion of Support for Mortgage Interest (SMI) from a benefit into a loan, gov.uk, April 2018
2 State of the Protection Nation Report 2018, Royal London