Changes to Support for Mortgage Interest Payments
Recent changes to the rules on the support for mortgage interest benefit may lead to an increase in the number of borrowers struggling to keep up with their mortgage payments.
What is Support for Mortgage Interest?Support for mortgage interest is a state benefit which is payable to some homeowners to help them pay their mortgage each month. The benefit works by making a contribution towards the interest element of the mortgage instalment.
Who is Entitled to Support for Mortgage Interest?Support for mortgage interest may be payable to homeowners who are also in receipt of another state benefit such as income support or job seekers’ allowance. Support for mortgage interest may also be available to homeowners in receipt of pension credit but different rules on eligibility apply. For example, for those on pension credit, there is no waiting time before being able to claim but the payments available may be lower.
Previous Changes to Support for Mortgage InterestAt the height of the recession, in early 2009, it was feared that record numbers of homeowners could face repossession and eviction unless financial help was made available to those who were struggling to keep up with their mortgages. The government took steps to increase the financial help available to homeowners who had bought their properties with mortgages.
Changes to the rules on support for mortgage interest introduced at that time, by the previous administration, included:
- the interest on up to £200,000 of the mortgage would be paid as opposed to the previous limit of the first £100,000. This meant that, for many more benefit claimants, support for mortgage interest would now pay all or most of the interest on their loan;
- the waiting time between claiming the qualifying benefit and being entitled to support for mortgage interest was reduced from up to 39 weeks to 13 weeks. This change would make a dramatic difference to the mortgage arrears likely to have built up by the time the payments kicked in. Consequently, borrowers would be more likely to be able to afford the payments on the mortgage and a contribution towards the arrears.
The Latest Changes to Support for Mortgage InterestSince coming into power in the May 2010 general election the UK's coalition government has warned that cuts to public spending would be necessary to address the country’s high budget deficit. Since that time the government has been announcing a series of new austerity measures to reduce government outgoings.
Amongst the coalition government’s cost-cutting measures is a change in the way that support for mortgage interest is calculated. Technically, eligible borrowers are entitled to a monthly payment equal to the interest on the first £200,000 of their mortgage debt. However, this is not calculated by reference to the interest rate which applies to each eligible homeowner’s mortgage. Instead a single interest rate is used to calculate the amount of support for mortgage interest payable to all claimants.
The interest rate used to calculate the amount of support for mortgage interest payable had been 6.08%. It was argued that, at a time of historically low interest rates, this was far too high. Indeed, the government has claimed that calculating support for mortgage interest at 6.08% meant that 92% of claimants got higher payments than they actually needed. From 1st October 2010 the rate used to calculate these payments was reduced to the Bank of England average for mortgage interest rates – which at that time was less than 4%.
The Impact of the Changes to Support for Mortgage InterestHomelessness advisers immediately voiced concern that this cut in the rate used to calculate support for mortgage interest would result in a sudden and significant drop in the payments being received by many claimants. It was said that this could result in a surge in the number of homeowners facing repossession due to mortgage arrears. It is estimated that about 100,000 households will suddenly find that their benefit payments no longer cover the interest on their mortgage. (Conversely, at least as many households will probably still be receiving too much.)
Some observers have argued that this cut in support for mortgage interest will hit the poorest families the hardest. They say that these families are likely to have mortgages with the highest interest rates to start with and will therefore be left with a much greater shortfall to make up. The problem may be compounded when interest rates finally begin to rise - which could result in a substantial increase in the number of homes being repossessed.