The Trust’s Policy Manager Meg van Rooyen makes the case for reforming Support for Mortgage Interest in the wake of Covid-19.
This week the FCA is set to confirm plans to extend its prohibition on mortgage repossessions until April. Together with the FCA’s other forbearance measures, this is a welcome reprieve for homeowners who are building up mortgage arrears due to the impact of Covid-19 on their work and incomes.
This is, however, a problem delayed – not a problem solved – and the FCA can only do so much to address the challenge of Covid-19 mortgage arrears. The government needs to step in, urgently – starting with much-needed reform to the Support for Mortgage Interest scheme.
What is Support for Mortgage Interest?
If you’re an eligible homeowner, the Support for Mortgage Interest (SMI) scheme helps with interest payments on your mortgage. The scheme rules were fundamentally changed in 2018 with payments moving from a benefit to a loan which attracts interest. This loan has to be paid back only once the house is sold, or when the claimant dies. The scheme only covers mortgage interest, and not capital repayments.
If people have any break in their claim under Universal Credit rules, they have to start the waiting period all over again. Crucially, under Universal Credit, people lose mortgage interest help if they take up any paid work, under the “zero earnings” rule, which risks disincentivising some people from working.
In the wake of the last major economic shock, in 2009 the waiting period was reduced to 13 weeks as a government response to the financial crisis to help reduce repossessions. The waiting period was then increased again to 39 weeks in April 2016.
Why does the 39 weeks wait matter?
Lenders and money advice agencies alike know from experience that early intervention is the key to resolving financial difficulties. But, if you are eligible for SMI, you have to wait 39 weeks before the benefit kicks in. The 39 week wait means that people will be well over six months in arrears with their mortgage by the time SMI starts to be paid – by which time it will be significantly more difficult for them to resolve their financial situation. It is not at all clear that lenders will be able to offer forbearance for nine months. In addition, lenders will also need to be prepared to accept interest-only payments once SMI kicks in, as SMI does not cover the capital element of a mortgage.
In November, figures from UK Finance showed that there were 127,000 mortgage payment deferrals still in place for their borrowers – after reaching a peak of 1.9 million earlier in the year. The number of homeowners struggling to meet mortgage payments is likely to increase as unemployment rises. This means many people could be left with deepening mortgage arrears and the very real threat of repossession once the FCA’s extended prohibition comes to an end in April.
What should the government do?
There have been calls from industry and the advice sector for the government to change SMI rules in the short term as a ‘quick win’ to protect people from repossession. The most recent call for action comes from the Centre for Policy Studies. They argue that “the first three months of SMI should be paid as a grant, not a loan, and the Government should charge no interest on the next nine months of any claim.”
We have set out five steps that the government should take to improve the mortgage safety net in the wake of coronavirus.
- Reduce the 39 week wait for payments to 13 weeks to protect new claimants of Universal Credit. In addition, people should also not have to start the waiting period all over again if they have a break in their claim.
- Remove the Universal Credit “zero earnings rule”, which means that people do not receive any help with mortgage costs if they did any paid work or have any income from self-employment during a particular period.
- Consider the Centre for Policy Studies proposals for immediate payment of three months SMI as a grant with an extended interest-free time period to the loan.
- Beyond SMI, consider the case for a new simplified Mortgage Rescue Scheme – learning the lessons from the scheme introduced after the 2008 financial crisis – to help minimise repossessions in the wake of Coronavirus.
In the bigger picture of the enormous steps the government has taken to support household finances over the last 10 months, these are a relatively simple set of measures that the government could implement.
However, the impact they could have on people’s lives is huge, preventing people from losing their homes and becoming homeless as a result of the financial devastation wrought by Covid-19. This could also reduce the toll on mental and physical health mortgage repossession has and the resulting housing benefit bill. We will continue to push for these changes in the coming months.