DEPT FOR WORK AND PENSIONS SUPPORT FOR MORTGAGE INTEREST: INFORMAL CALL FOR EVIDENCE CONSULTATION PAPER

Transcription

1 DEPT FOR WORK AND PENSIONS SUPPORT FOR MORTGAGE INTEREST: INFORMAL CALL FOR EVIDENCE CONSULTATION PAPER Response by the Money Advice Trust (February 2012)

2 CONTENTS Introduction About the Money Advice Trust 2 A partnership approach who we have consulted 2 Responses to individual questions 3 MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 1

3 INTRODUCTION About the Money Advice Trust The Money Advice Trust (MAT) is a charity formed in 1991 to increase the quality and availability of money advice in the UK. We work with the UK s leading money advice agencies, government and the private sector to increase the availability of money advice, improve its quality, and enhance the efficiency and effectiveness of its delivery. MAT s vision is to help people across the UK to tackle their debts and manage their money wisely. MAT aims to support individuals and micro-businesses in the UK through their debts and into financial health, and to improve the capability, quality and efficient delivery of free independent money advice by: Delivering advice to the public via National Debtline, Business Debtline and My Money Steps; Supporting advisers; Making the case for free money advice; Co-ordinating initiatives to improve money advice; Sharing research and information to shape and influence policy. How we have drawn up this response In preparing this response, we have consulted our partner agencies in the freeto-client money advice sector in order to achieve a consensus view. These partners include: Advice NI Advice UK Citizens Advice Citizens Advice Northern Ireland Citizens Advice Scotland Institute of Money Advisers Money Advice Scotland National Debtline and Business Debtline (where relevant) Payplan. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 2

4 Some of these partner agencies will also submit their own separate responses to this consultation paper. These submissions may include issues not covered below. Please note, our partner agencies may not have provided views on this response where this consultation paper does not cover their specific jurisdiction. Please note that we consent to public disclosure of this response. Introductory comment We welcome the Government commitment to continuing to provide Support for Mortgage Interest (SMI), and support its goal of helping borrowers to stay in their homes and avoid repossession. The free-to-client advice sector hear from many thousands of people every year who are struggling to meet their mortgage repayment commitments, and as such we have a good understanding of how people arrive at a situation where they need help. As an example advisers at National Debtline are dealing with 50% more calls in relation to mortgage arrears in 2011 as compared with A combination of factors has played a crucial role in keeping arrears and repossession as low as possible despite the economic downturn, such as lender forbearance, partnership work with the free-to-client debt advice sector and Government departments, the reduction in the qualifying period for SMI to 13 weeks, the low interest rates and, until recently, paying SMI at a higher standard interest rate. The Government took, and continues to take, a role in working on these issues through the Home Finance Forum, chaired by ministers. Repossession rates have fallen from 2009 to according to the Council of Mortgage Lenders figures but they have forecast a rise in 2012 due to falling incomes, cost of living rises and unemployment.2 Our overarching concern is that many of the proposals as outlined in the paper will have a negative impact on claimants with mortgage arrears, and therefore may reverse this pattern. This would increase the financial burden on society from increased repossessions, lead to increased misery for thousands of families, and adversely affect the capacity of the advice sector in straightened times to deal with the increase in new clients seeking help, at a time when demand for debt advice is forecast to rise sharply Demand, Capacity and Need for Debt Advice in the UK John Gathergood e_uk_update_june_2011.pdf MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 3

5 The other key points we would make, based on the evidence we gather from clients, are as follows: The proposal to pay SMI directly to the claimant may well have undesirable consequences for all parties. We are not convinced that a policy of adding a charge to property for longterm claimants is fair and reasonable, although the following factors should be taken into account: there could be benefits if those claimants who are required to be available for work can continue to receive SMI after 2 years; extending SMI to a greater range of types of mortgage and secured loan might well be advantageous; we would urge Government to give particular thought to proposals to use actual mortgage rates for each claimant rather than the standard interest rate with an obligation on lenders to report changes in interest rate. In the medium to long term, we would urge Government to consider alternatives to SMI as outlined in the various research papers alluded to in our answer to question 19. We believe that a serious assessment of the merits of each approach is warranted in order to reach some conclusions for the future of SMI. Responses to individual questions Putting a charge on property Question 1 Do you think payments for support for mortgage interest should be recouped from claimants who are in receipt of help on a long term basis? We are concerned about the principles that underpin the proposals in this paper to recoup support for mortgage interest (SMI) from claimants for the reasons outlined below. The proposals as they stand mean that the burden principally rests on the homeowner who will have to pay both their mortgage and their SMI back. Long term the Government recoups their money as does the lender. We feel that the burden should be more evenly spread as keeping people in their homes has benefits for Government, lenders and the borrowers themselves. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 4

6 We are of the view that these provisions will disproportionately impact lone parents, carers or the long-term sick and those with disabilities or over pensionable age. Not only will claimants have the legal responsibility to pay their mortgage whilst on benefits, they will be accruing a further debt, secured on their houses, with added interest. We are concerned that these proposals are inconsistent as there is not the equivalent requirement on those in receipt of housing benefit to pay back the help they have received with their rent. Whilst we recognise that there is not an equivalent scenario for tenants in being supported with the appreciation of a privately owned asset, there is an argument in relation to the value of the public subsidy that has gone into the right-to-buy policy for tenants of social landlords over the years. In contrast, however, the paper points out that it is much cheaper to pay SMI at current levels than the bill for housing benefit. This makes SMI good value in comparison to the costs of housing benefit particularly in the private rented sector. The paper quotes official DWP statistics as follows: The average weekly SMI awards stood at in May 2011, this compares to an average weekly Housing Benefit award of The current maximum possible SMI award is 139 per week for working age recipients with an eligible mortgage of 200,000. Paragraph 32 of the paper states: The interest rates which currently prevail do, however, make the costs of SMI relatively low. Clearly the help offered by way of SMI may change if interest rates eventually increase from their current historic lows. And when interest rates return to their historic trend, SMI will become more expensive, and could potentially become more expensive than other forms of housing support. It could also be argued that in many areas of the country where there is little growth in house prices that the state is not assisting such claimants to build up an asset at all. Stagnant house price growth and negative equity in many areas outside London and the South East mean that in such cases the state is merely supporting claimants to stay in accommodation that is cheaper than the equivalent costs of housing benefit in the private rented sector. It also saves the costs of repossession. The consultation paper is unclear what would happen if the house was sold or the claimant died and the house had insufficient equity to clear the charge on the house. What would happen to the outstanding debt and interest that had built up in these circumstances? MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 5

7 In our experience it is generally unrealistic to rely on selling up and downsizing whilst on benefit. As the borrower will be very unlikely to be able to obtain a new mortgage for the new property whilst on benefit, this will only be an option for those with such substantial equity that they could buy outright, or have a very cooperative mortgage lender who will allow them to transfer part of their existing mortgage to the new property. Selling up and entering social housing is also an unrealistic option as in many cases local authorities will regard voluntary sale as rendering the household intentionally homeless. If the household is therefore forced to rent privately this will further inflate the housing benefit bill, thus creating the scenario where money has been saved from the SMI bill only to be spent in much higher amounts under housing benefit in the private rented sector. Question 2 What period of time would represent a long term basis? For example, two years? Many of the groups that would be affected would be likely to be on income-related benefits for many years because of long-term illness, disability, caring responsibilities or over pensionable age. Therefore, we do not consider a period of two years to be a sufficiently long enough period in this context. We would urge Government to consider whether the starting point for long-term should therefore be reconsidered. Even at current mortgage interest rate levels SMI payable at 30 a week over 10 years would amount to a charge on property of 15,600 without taking account of the statutory interest that it is proposed will be accruing. If the argument in the paper is correct that those seeking work on income-based Jobseeker s Allowance are likely to be in and out of work on a short term basis then they may not be the group most affected by this proposal. Question 3 What are your views on the idea of recouping support for mortgage interest payments from longterm claimants through a charge on their property? We support the payment of SMI to cover the full amount of claimant s actual mortgage interest. We do not favour an increase in the waiting period as this would inevitably result in a build up of mortgage arrears and an increased risk of repossession. We hope that the Government can be dissuaded from recouping SMI from long-term claimants for the reasons outlined under Q1. We could only be convinced of its merits if proposals included paying SMI to cover the actual mortgage interest with no increase in the current 13 week waiting period. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 6

8 If recouping SMI payments through a charge on property is adopted with the caveat that there should be no waiting period (or a reduction of the 13 week waiting period), that SMI interest should be paid at the actual interest rate charged by the lender, and with the retention of support up to the mortgage level of 200,000 then this would go some way to assist claimants. The administrative burden could be greatly reduced by a requirement on lenders to inform the DWP of changes in interest rate in a timely manner. We would also suggest that as the lender would benefit from a guarantee to receive full interest payments that there should be further discussion as to whether lenders should be required to agree a maximum interest rate for those on SMI. See our response to question 4. There would need to be safeguards in place to ensure that the DWP was unable to attempt to recoup the charge in any circumstances apart from sale of the property or death. Also there would need to be careful consideration as to when the charge could be recouped on the death of the claimant. There would need to be adequate protections built in to protect the remaining household who may need to stay in the home where the main mortgage is paid off or who may wish to take over paying the mortgage. It should not be possible to attempt to enforce the charge on the property in such cases. There should also be protections built in to ensure that the charge cannot be enforced in any other cases. We oppose the proposals to add interest to the charge. The claimant is already being charged interest by their mortgage company. They are then getting assistance to pay that interest through SMI. To then be charged interest on their SMI seems to be unfair. SMI is good value for money compared to housing benefit. It does not appear likely that administration costs for a long-term charge sitting on a property would be substantial. If it could be demonstrated that there are administrative costs, perhaps a flat-rate charge could be added to reflect these costs. Adding interest runs the risk of profiting from individual claimants misfortune. It is one thing to decide that there is a case for recouping SMI but another to gain interest on balance. Question 4 Are there other ways that Government could recoup or reduce the cost of long-term SMI claims? We would suggest that further consideration should be given to putting a requirement on lenders to reduce the interest rates on mortgages to a standard lower set rate once a borrower becomes eligible for SMI. This would assist the borrower to stay in their homes and avoid repossession. It would also reduce the costs to the Government of SMI overall and would lessen the administrative burden of making payments. This could be recouped through extending the term of the mortgage. In summary, Government could require lenders to charge less interest whilst borrowers are claiming SMI but this could be recouped by the lender by adding to the end of the term or extending the term. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 7

9 A similar proposal has been put forward by the Minister for Welfare Reform, Lord Freud who stated: It is not right that mortgage lenders are charging high street prices when they are guaranteed bulk payments from the government. They borrow money at a reduced rate all the time, so I know there is scope to average winners and losers in a way that is viable to them and would protect claimants from repossession. 4 There are other proposals which have been put forward as alternatives to SMI. We have included a brief outline of these in our answer to question 19. Question 5 Should there be a fixed period of grace before the charge is applied? Yes, see our response to question 2. We query whether 2 years is a sufficient period of grace given the likely groups of claimants to be particularly affected by the proposals. The period of grace should be applicable to those with long-term needs as well as cover those with a short-term income shock. Question 6 Once it is applied should it relate to the total value of the support provided? If there is a period of grace then any charge should not include the SMI paid during the initial period, whatever period is chosen. Question 7 Should the proposal to put a charge on a property be extended to cover all recipients of SMI, effectively abandoning the two year limit in place for claimants who receive SMI with Jobseeker s Allowance or its future equivalent with Universal Credit? We have never been in support of limiting support available to those on Jobseeker s Allowance to two years. This policy is unnecessarily punitive. Clearly it was planned as an incentive to find work. It does not, however, deal with the reality during difficult economic circumstances that in many areas there is little or no work to be found. 4 MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 8

10 We therefore reluctantly support the proposal to extend the policy of putting a charge on the property to all recipients of SMI if that is the only way to avoid repossession for those on Jobseeker s Allowance in the long term. The standard interest rate Question 8 Do you think that the current method of calculating the standard interest rate is the fairest and most effective method? We would agree that a standard interest rate is efficient to administer for the decision makers. However, it has led to hardship for those whose mortgage lender s interest rate is above the standard amount. This applies typically to people who have taken out higher interest mortgages from non-status or subprime lenders perhaps due to impaired credit ratings and existing financial difficulties. This group of borrowers is therefore most vulnerable to financial pressures and will find it difficult to find the extra money to pay their mortgage interest on top of other bills. Citizens Advice evidence shows that since 1 October 2010 when the standard rate of interest changed for calculating help with housing costs from 6.08% to the average mortgage rate published by the Bank of England (currently 3.63%) for many individuals there is now a shortfall in the amount of help payable through the SMI scheme and the actual amount of interest they are paying on their mortgage. This change in standard interest rate is impacting on claimants who are paying higher rates of interest than the average mortgage rate, especially those with fixed rate mortgages and many claimants who have borrowed from sub-prime lenders who are more likely to be paying higher rates of interest. In December 2007, Citizens Advice England & Wales published a report showing the high number of CAB clients subject to possession claims by subprime lenders. 5 The Citizens Advice NI Dealing with Debt project evidence has shown a sharp increase in the mortgage debt figures, from 479,287 to 9,038,508, an increase of 1,785.82% which far exceeds the increase in service capacity over this period. This large figure encapsulates many larger mortgage shortfalls 6 and shows the increasing number of large repayments due in interest on many mortgages. 5 Set up to fail, Citizens Advice, December 2007, page 6 6 Mortgage shortfall is defined as when house has been sold in negative equity and the client is liable for the balance. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 9

11 Case studies from Citizens Advice NI A Newry client lost their job and now receives Jobseeker s Allowance. The SMI commences after the 13 week waiting time and the full assistance at the interest rate of 3.63% will not cover the client s full interest payment. The client will have to pay 150 per month from their benefit or face the accruing arrears and possible repossession action. The client is a lone parent and has numerous other debts due to losing their job. Their mortgage is for 80,000 with an interest rate of 5.9% and the assistance will be restricted to 242 per month they have to pay mortgage interest of 363 (total including capital of 492) client has other non priority debts. A Derry Client was informed that their SMI would be reduced from 27 to 18 per week which means they will have to pay the shortfall from their Income Support. The client will have difficulty managing this drop in income and subsequent financial hardship. We therefore support moving to a system where the actual interest rate for the mortgage is taken into account for individual borrowers or alternatively where mortgage lenders are required to reduce the interest rate to the standard interest rate for the period of time SMI is paid. Question 9 Is there another method of calculating a standard interest rate for SMI that may be fairer or more effective? The current method of calculating SMI is certainly fairer than the previous method which did not reflect the actual interest rates being charged to borrowers in reality. The DWP recognise this in the Support for Mortgage Interest Equality Impact Assessment. 7 By setting the standard interest rate at the Bank of England published average mortgage rate (3.67% in April 2010), we estimate that just over half of all support for mortgage interest customers (around 115,000 people) will continue to have their eligible mortgage interest outgoings fully met by their benefit awards. Most customers receiving a shortfall under this arrangement (around 110,000 people) would still have the lion s share of their eligible housing costs met by support for mortgage interest; creating only a relatively small level of arrears, and based on conversations with the Council of Mortgage Lenders we would expect lenders to demonstrate forbearance in the vast majority of these cases. 7 MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 10

12 We recognise that there could be problems with the current method of calculating SMI if there is a delay caused by the need to wait for official publication of the average rate by the Bank of England before the DWP can act to increase the standard interest rate. The proposal as outlined in the paper would be our preferred option. Having a system of paying claimants contractual interest rates, subject to a cap, where mortgage lenders commit to notifying the Department of changes in rates within set timescales. This would put the responsibility on lenders and the DWP to ensure that the accurate interest rate was being used to calculate individual claimants SMI. This would tackle the perceived problem with errors, overpayments and the administrative complexity of a system which relied on claimant action to report reductions or increases in their contractual interest rates. We would suggest that adopting this proposal would have advantages for lenders as they could help to ensure the smooth running and accuracy of the system and guarantee that their borrowers receive the correct amount, thus preventing further arrears developing. We do not favour a cap on the interest rates that would be coverable under such a system, as failure to cover the full contractual interest could easily lead to increased repossessions and hardship for individual borrowers. Those subject to such a cap are likely to be the most financially disadvantaged who have taken out sub-prime mortgages in the past. If this option is not achievable, it would still be fairer on borrowers with specific mortgage products if the suggestion in the paper to link standard interest rates to particular products was adopted. Having a system of two or three standard interest rates which would be linked to average rates of particular mortgage products such as tracker, fixed rate or standard variable rate. Claimants would be awarded the standard rate that was appropriate to their mortgage product. This would go some way to assisting the many who find that their mortgage interest rates are higher than the standard interest rate using the current method of calculation. Finally, we would point out that if our suggestion in our response to Question 4 was implemented of a requirement on lenders to charge a reduced rate of interest for SMI claimants, this could be at a standardised rate. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 11

13 Question 10 Should any action be taken in respect of the treatment of excess SMI payments if so, what? We do not agree that payment of SMI should be made directly to borrowers. If SMI continues to be paid to lenders directly, then part of the problem with the requirement for borrowers to forward excess SMI to their lenders would disappear. Any excess would still be paid to their lenders and used to pay the outstanding mortgage and/or mortgage arrears, making it more likely that the borrower can remain in their home. We are much more concerned with those whose mortgage interest rates are higher than the standard rate in payment as outlined above. We do not have any additional proposals for action in respect of excess SMI as the problem does not appear to be significant. Mortgage interest direct Question 11 Do you think that it is the right policy to move away from the Mortgage Interest Direct scheme for most claimants? We believe that moving away from paying mortgage interest direct could have disastrous consequences for claimants and lead to increased levels of repossessions and consequently costs for both the taxpayer and Government. The report Homeowner Support Package Impact Assessment 8 suggests that the average quantifiable cost to the exchequer of a repossession of a vulnerable household is 16,000. NEF Consulting, in a report for the Law Centres Federation, calculated that avoiding eviction of a family of four can result in a saving to government of 34, CLG Impact Assessment September We have estimated that the average e quantifiable cost to the exchequer of a repossession of a vulnerable household is 16,000. This is a cost associated with the HB payments that would be paid to this household in order to house them in Temporary Accommodation (TA), and then in the SRS. 9 NEF Consulting / Law Centres Federation, The socio-economic value of law centres, This figure includes the cost of providing accommodation in London, as well as the cost of providing treatment for depression, the cost of school support for children and the loss of tax receipts resulting from loss of employment; See MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 12

14 These reports demonstrate the huge costs that result from repossession. Where claimants are under financial pressures, there will be many competing demands on their limited resources. It can be extremely difficult for anyone on benefit level income to budget according to which household bill should be their priority (based on the sanctions available to creditors). It is more usual to react to the first urgent bill, the creditor who shouts the loudest or the need to replace essential goods such as a broken washing machine. It is very easy to fall into mortgage arrears as a result. We have serious concerns about the ability for many of a low income, particularly those with low levels of financial capability to be able to manage direct payment of mortgage payments effectively. Furthermore, Warwick University has been involved in a longitudinal study looking at the long term impact of debt advice on low income households. 10 The research looks at the difficulties that many people on a low income experience when attempting to balance a tight budget. Some of those who participated in the study considered themselves to have good budgeting skills but despite this many struggle to keep afloat and avoid getting into debt because of the inevitable tensions and tradeoffs that have to be made when living on a low income. For a recent study in how households will use different and sometimes damaging coping techniques adopted in an attempt to manage day-to-day living expenses on a low income including strategic late payments of bills as well as food and fuel rationing see Facing the Squeeze. 11 Citizens Advice NI established Dealing with debt service report that they have seen an increase in the number of clients who receive their main income from benefits from 19.27% in to 18.9% in and 37% in This shows that clients who are on benefits are increasingly likely to be servicing and also seeking assistance with debts. The process of making payments to their lender directly allows claimants to remain in control of their finances. Citizens Advice NI also report having seen an increase in the number of owner occupiers using the service from 45.19% in to 51.2% in and 55.94% in , and anecdotal evidence of an increase in clients from a whitecollar worker background, showing a changing demographic using the service. Case studies from Citizens Advice NI A Carrickfergus client is divorced and has been unemployed for 18 months. He is in receipt of Jobseeker s Allowance and receives help with mortgage interest payments. The client is struggling to meet the mortgage interest payments since the interest rate changed and is very distressed about this MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 13

15 A client from Fermanagh CAB has been unemployed for some time. Their only income is Jobseeker s Allowance for a couple of a week. Due to the change in interest rate the client will now have to pay 130 towards mortgage interest payments. The client is distraught about this and worried about losing the home. We would suggest that it is vital for mortgage payments to go directly to the lender. This protects the vulnerable against repossession and engenders a feeling of safety for claimants that at least the roof over their heads is protected as far as possible. As the Council for Mortgage Lenders points out in its initial response to the paper: 12 Another major concern for lenders is the proposal to abandon mortgage interest direct, which ensures SMI is paid directly from the government to the lender. Instead, the government is proposing to pay benefit to the householder "so that claimants take responsibility for making their mortgage payments to their lenders in the same way that many of them did when they were at work. We acknowledge the merits of encouraging personal responsibility but, in practice, any move away from mortgage interest direct must mean that some funds intended to meet mortgage costs are diverted to other spending by some claimants. In our view, it is difficult to justify this potential use of taxpayers funds. We would also support the position taken by the Building Societies Association in their commentary on the proposals. 13 We question the need, however, to change the current process of direct payment of SMI to the lender, as this ensures in every case, SMI is being used for the purpose it is set out for. Direct payment to the borrower could, in some cases, result in the money being used for other purposes. This undermines SMI and could leave the borrower in a more vulnerable position with their mortgage. We acknowledge that consumers should be encouraged to have personal responsibility for their finances, however the current payment system works and we see no reason to change it. We would also point out the difficulties that could arise if SMI payments are made in respect of an eligible couple or a family and the payee has addiction problems or is otherwise disinterested in safeguarding the family home. (For example, if a relationship is breaking down and the payee has no long-term commitment to staying in the home with the rest of the family.) MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 14

16 We have similarly supported arguments against the plans to pay housing benefit automatically to tenants under Universal Credit. In a recent survey carried out by the National Housing Federation, 93% of tenants in the social rented sector argued that it is better for housing benefit to be paid direct to landlords. 14 Shelter found in a recent survey that of those claimants who would choose payments to be made directly to their landlord, 95% were struggling too manage their finances. 15 We have supported the proposed amendment to the Welfare Reform Bill giving tenants choice to pay their housing costs directly to their landlord. 16 We understand that as a result there is now to be a review led by the Centre for Regional Economic and Social Research at Sheffield Hallam University to evaluate the effect of direct payments to tenants by way of six demonstration project areas. 17 We would urge Government to make no final decisions on the direct payment of SMI to claimants until the results of this review have been published and a full consideration of the recommendations is carried out. Question 12 If we move away from paying support for mortgage interest by Mortgage Interest Direct, in what exceptional situations should claimants have their mortgage interest payments made direct to the lender and what criteria could be used to determine when this should happen? We do not support any move away from paying support for mortgage interest through Mortgage Interest Direct. If the Government does decide to move away from paying support for mortgage interest by Mortgage Interest Direct it is vital that vulnerable groups should retain the protection of having their mortgage interest payments made direct to the lender. We support a broad definition of vulnerable to include people living on a low income which would apply to people in receipt of SMI for the reasons given under question 11. Any individual claimant of SMI should be able to request payments to be made direct whether in arrears or not. Furthermore to safeguard the families of payees, we believe that partners and other family members (in certain circumstances) should be able to request that SMI is paid via Mortgage Interest Direct data/assets/pdf_file/0007/221659/lha_directpayment_briefing.pdf MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 15

17 At the very least, anyone who is in arrears with their mortgage should be automatically eligible to have their mortgage interest payments made direct to the lender. We also believe that county court district judges should be required to request Mortgage Interest Direct in all suspended possession cases. This requirement could be built into the Mortgage pre-action protocol. There will be further groups that should be considered eligible, mirroring the current rules for housing benefit, such as where someone is likely to have difficulty managing their affairs or where it is improbable that they will pay the rent. The potential consequences both in costs to Government and personal household trauma of repossession as outlined above should be sufficient to override policy considerations of encouraging people on benefits to manage their own budgets. For many claimants there are not the same options of paying their mortgage through a direct debit. Where there is a bank account that becomes overdrawn, not only may the mortgage not be paid, but overdraft interest and charges will be incurred and debt problems will begin to spiral out of control. It may be difficult for the claimant to open a new bank account that has a direct debit facility or to close down their existing account in those circumstances. The treatment of home improvement loans Question 13 Do you think that the Department should move to a simplified approach for home improvement loans, subject to a cap on the amount of loan on which interest is payable? Yes, we strongly support the simplification of the treatment of home improvement loans. We agree with the position outlined in the paper that the rules are much too restrictive and tightly drawn. As the paper says in point 58: The current rules around home improvement loans are difficult and timeconsuming to apply. The proposed simplified approach of allowing all loans for housing-related expenses to become part of the SMI scheme would be beneficial for claimants and have the benefit of simplicity and speed for decision makers. The paper outlines a list of envisaged exclusions to the scheme such as: loans for debt consolidation, and non-housing-related expenditure such as cars, holidays, business and personal loans. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 16

18 We would be grateful for clarification as to whether both secured and unsecured loans taken out for housing-related expenses would qualify for assistance under the new proposals whereas secured or unsecured loans for non-housing related expenditure would not qualify. We note evidence from Citizens Advice NI who report trends showing a recent rise in the number of people in arrears with secured loans after comparatively low figures. In 2006/07 this made up 789,587 and only 5% of the total debt seen by the service. In 2007/08 the amount decreased. In with the onset of recession secured lending remained around 5% of the total debt seen by the service. In 2010/11 secured loans have increased to 6.67% of the total debt amount seen by the service and representing 2,485,305. We are unable to support a proposal to cap the amount of the loan on which interest is payable. We are unable to identify a good reason for introducing such a cap. The proposal outlined in the paper appears to be an arbitrary figure: equivalent to a percentage of the eligible home improvement loan(s) in each case say 70% or 80%. Claimants would still be paying the capital and insurance related elements of the loan and would be hard-pressed to pay the extra amount such a cap would entail. Linking rules Question 14 Do you agree that the 12 and 52 week rule should be retained for SMI purposes? Yes we are strongly in favour of retaining the 12 and 52 week linking rules if it is intended to retain waiting periods in order to qualify for SMI. Abandoning the linking rules would be unfair to claimants and would act as a disincentive to increase working hours or take up short-term work. We note that this is particularly relevant to Northern Ireland given the large number of people in shortterm and part-time work. This calls into question the need to consider wider structural issues, for example the availability of jobs and working conditions when considering changes to the welfare benefits system. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 17

19 Question 15 Do you agree that certain other linking rules should no longer apply as a simplification measure flowing from the introduction of Universal Credit? No, we do not agree that the 26 week linking rule that allows claimants who leave benefit because their income from a Mortgage Payment Protection Insurance (MPPI) policy exceeds the amount of benefit to which they are entitled should be abolished. Where MPPI income means they exceed the applicable amount it seems reasonable to treat claimants as entitled to benefits during that period once the MPPI expires it is not reasonable for the claimant to be expected to serve the waiting period for SMI. There would be a danger that such a change in policy would appear to punish those with the forethought to take out a MPPI policy and penalizes homeowners who have provided for their mortgage during a period of unemployment, often forfeiting benefits due to the status of MPPI as income. It also fails to reward them for saving the costs to the state for the weeks that the MPPI policy paid out to cover their mortgage payments and SMI was not required. We do not support the abandoning of the 104 week linking period for work and training beneficiaries. Under this rule, the claimant or their partner would return to the same level of benefit if they become incapable of work again within 104 weeks of starting work. The 52 week linking rule would not be a fair and reasonable substitute for people who were risking a move into work where there is a long-term illness or disability. Loss of the long-term protection afforded by the 104 week linking period would be likely to enhance the perception of risk for those groups. The perception of risk would instead be enhanced by a reduced 52 week linking period. We fail to see this move to be an increased work incentive as suggested in the paper. Time limiting Question 16 Should certain categories of claimants, for example lone parents and people with a disability, moving onto Jobseeker s Allowance (or the equivalent within Universal Credit) be exempt from timelimiting? We do not favour time limiting for any categories of claimant. We do not agree with Government that the two-year time limit is the right policy as suggested in point 66 of the paper. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 18

20 From 5 January 2009, a two year time limit was introduced for SMI which applies only to some claimants who receive SMI with income-based Jobseeker s Allowance. The Government believes that the two-year time limit is the right policy. It is underpinned by the principle of providing short-term help through the benefits system and sharpens the incentive to return to work. We do not believe that it is appropriate for SMI to be provided indefinitely to do so would damage work incentives and increase the burden on taxpayers. Ideally, we would favour the indefinite provision of SMI to all categories of claimant as in the current economic climate; however incentivised a claimant may be to return to work, in many areas of the country, the jobs are just not available. It is not in our view fair to base policy on the assumption that it is down to the individual s lack of incentive that they have been unable to find work. The results of such a policy will be to increase hardship and make repossessions and homelessness much more likely. However, we would urge Government to adopt the proposal to include those claimants who are actively seeking work in the category of those who are able to continue to receive SMI after the time-limited period of grace in return for a charge on their property. This will have the advantage of ensuring that all claimants are treated in a similar way. It will also mean that those groups required to be actively seeking work will have their home protected from repossession. As the paper says in point 67: We will also need to consider any potential interaction of time-limiting with our approach to putting a charge on property, particularly in terms of allowing a period of support for mortgage interest before a charge is applied, as this could have a bearing on the desirability of a two-year time limit. Alternatively, if this does not happen, there are further difficulties with time-limiting. The paper suggests under point 68 that the 2 year limit on SMI should be extended to groups who move on to equivalent of income-based Jobseeker s Allowance under Universal Credit such as lone parents (whose youngest child is over a set age) and people who are found to be fit for work and stop getting ESA. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 19

21 Currently, anyone who moves onto Jobseeker s Allowance from Income Support or Employment and Support Allowance within 12 weeks of their claim ending (mainly lone parents under the Lone Parent Obligations, or people found fit for work) are not subject to the two year limit and can receive SMI indefinitely. However, as the key Universal Credit principle is making work pay, we believe that from October 2013 everyone receiving income-based Jobseeker s Allowance and the equivalent group in Universal Credit should be subject to the two year rule where they are getting SMI payments. This would mean that they would need to move into work in order to maintain their housing tenure in the longer-term. We do not propose that the two year limit should apply to any other groups of working age claimants or those receiving Pension Credit. This does not seem fair. We would advocate that lone parents and disabled people be treated as exempt, given the many barriers these groups face to work and the incentive to keep them in their homes. A lone parent will still have caring responsibilities for young children, whether deemed to be available for work or not. Losing SMI after 2 years will still result in young children with no protection against repossession and homelessness. Citizens Advice NI report that it has always had lone parents and persons with a disability over-represented in its client group, and this is true of those clients using debt advice. In 2010/ % or 503 of 2233 clients using the Dealing with debt service had a disability. Lone parents are a more difficult group to report on from our statistics, however, in the last three years of the service separated or divorced figures are consistently high at 20%. Also consistent in our figures are the number of clients with dependent children, 30%. Case study from Citizens Advice NI A client from Antrim is a lone parent and receives Income Support with SMI; one of the children has a disability. The client has received notification that they will have to contribute 400 per month instead of 120. The client will almost certainly lose their home as they are not able to maintain this higher level of contribution. If they subsequently have to claim Housing Benefit there will be no savings made by Government. People with long-term disabilities may be declared fit for work but may have special adaptations to their home to help them cope with their disability. Losing their home would be disastrous in such cases. Someone who has been long-term sick and is declared fit for work may well be especially vulnerable to becoming unwell again under such pressures. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 20

22 Question 17 Should there be a limit on the number of times a claimant can access two years of SMI? As we have made clear above, we do not favour limiting access to SMI to two years for any classes of claimant. If this measure is introduced, we do not favour a limit on the number of times a claimant can access SMI. The number of benefit claims made by individuals is unlikely to be due to personal choice. Most claims will be due to a change in financial circumstances that cannot be prevented such as loss of job, illness or relationship breakdown. It would be unnecessarily punitive to expect claimants to limit their claims in future. Waiting period and capital limit Question 18 Have either of these two measures (13 week waiting period or 200,000 capital limit) been effective in reducing the likelihood of repossession? Where possible, please supply evidence to support your response. There appears to be a general consensus amongst advice providers and both the Council of Mortgage Lenders and the Building Societies Association that the 13 week waiting period and the 200,000 capital limit have been effective in reducing the likelihood of repossession. We welcome the Government-backed mortgage safety nets including SMI and the Mortgage Rescue Scheme, which we believe to have played a significant role in preventing repossessions from spiralling out of control along with lender forbearance and the availability of advice. We believe that the Government should remain committed to providing these mortgage safety nets. There have been a number of reports investigating the effectiveness of recent measures in reducing the likelihood of repossession. A report by the Council of Mortgage Lenders and Shelter to the Home Finance Forum was instrumental in persuading Government to extend the measures beyond the October 2010 comprehensive spending review. 18 The report states: Discussions with lenders indicate that retaining these two measures is very important. They have a significant impact on the ability for lenders to offer forbearance for temporary difficulties. The University of York report for the DWP An evaluation of the January 2009 arrangements for Support for Mortgage Interest 19 is very helpful in setting out recommendations in relation to SMI. 18 Document available on request MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 21

23 The research concludes: SMI contributes effectively to the sustainability of housing costs in the short-term. The shorter waiting time has helped the sustainability of owneroccupation. SMI is a potentially effective means of supporting short-term unemployment without disincentivising work. SMI payments are typically small compared with the size of other housing benefits. It is a cost-effective means of supporting home-buyers who are in temporary financial stress. SMI will be less effective at sustaining owner-occupation in the longerterm. The University of York follow-up report for the DWP An evaluation of the January 2009 and October 2010 arrangements for Support for Mortgage Interest: The role of lenders, money advice services, Jobcentre Plus and policy stakeholders 20 contained the following key findings. Lenders, money advisers and key stakeholders interviewed confirmed that the temporary changes introduced in January 2009 were highly beneficial in terms of preventing possessions. The arrangements delivered help swiftly and effectively to borrowers and enabled lenders and money advisers to support borrowers effectively. They are equally clear that the reduction in the SIR introduced in October 2010 reverses many of the previous benefits. Lenders highlighted the already noticeable increases in shortfall payments and money advisers noted that more lenders were now less able or less willing to forbear. All respondents perceived that where borrowers receipt of SMI came to an end after two years (particularly in the absence of employment) it was unlikely that lenders would be able to support them further to sustain their homeownership. The fall in repossessions was welcomed by the free-to-client advice sector in their report Turning the tide Evidence from the free advice sector on mortgage and secured loan possession actions in England in July We suggest this is due not only to exceptionally low interest rates, but also to improved government safety nets, forbearance and support from lenders, and support from free housing and debt advice agencies MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 22

24 The report also found: Low take-up of SMI amongst clients attending court (although this could indicate SMI has worked to keep other borrowers out of court) and half the recorded mortgage interest rates in our survey were higher than would be fully covered by SMI payments. Participating organisations also see evidence in their wider advice work of clients not claiming SMI because of poor information given by Jobcentre Plus. Citizens Advice NI report that their Dealing with debt project evidence has shown a sharp increase in the mortgage debt figures, from 479,287 to 9,038,508, an increase of 1,785.82% which far exceeds the increase in service capacity over this period. This large figure encapsulates many larger Mortgage Shortfalls and shows the increasing number of clients who bought when homes were most expensive, who are struggling to meet repayments. Case study from Citizens Advice NI A Fermanagh client is in receipt of Jobseeker s Allowance and SMI which is to be reduced from to per week, they had a mortgage for 75,000 but had to re-mortgage after a divorce. The client will therefore have a shortfall of 200 per month which the client cannot afford as they only receive the single person rate of JSA which is 65 and client s mortgage is for 132,000. We would suggest that there is a wealth of evidence already that the 13 week waiting period and the 200,000 capital limit have been effective in reducing the likelihood of repossession. There is further evidence that the October 2010 reduction in the standard interest rate has had a negative effect on this trend. It is therefore vital that a solution is found as outlined in our response to question 9 of the paper to enable actual mortgage interest rates to be paid to borrowers under SMI. General Question 19 Do you have any suggestions for options for SMI in the medium and long term that have not been covered elsewhere in this document? We would refer to our answer to question 4 above where we also make some suggestions for the reductions in costs of SMI in the long term. We would urge Government to undertake a full assessment of the options that have been put forward in various discussion papers over the last few years. MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 23

25 Ensuring the right protection is in place for those who are struggling to meet their mortgage repayments is vital. As noted, research shows that repossession rarely benefits anyone; lender, borrower and government all lose out as a result. Establishing a robust and fair safety net for vulnerable borrowers can therefore be to everyone s benefit, and we must continue to work hard to achieve this goal. The report Paying the mortgage? A systematic literature review of safety nets for home owners 22 gives a useful overview of thinking on the subject. In 2004 Janet Ford s report Homeowners Risk and Safety-Nets Mortgage Payment Protection Insurance (MPPI) and beyond 23 looked at the inadequacies of payment protection insurance and SMI and whether the issues raised should: require borrowers to have in place a comprehensive safety-net as a condition of taking a mortgage. We would draw your attention to the Joseph Rowntree Foundation report Developing safety nets for homeowners. 24 We believe there could be considerable merit in a Sustainable Home-Ownership type scheme. We would welcome further exploration of such an initiative in the context of considerations around the replacement of SMI. One of the major benefits of such a scheme is that it would help those homeowners who do not currently qualify for SMI but are at risk of repossession due to short term income shocks. We would also suggest that had this scheme existed at the time of the downturn, the previous administration may not have felt compelled to introduce HMS. The Building Societies Association has released a series of reports on the subject. 25 We draw your attention to the first report Long term safety nets to protect mortgage borrowers 26 We are wholly in agreement with Paul Broadhead s statement in the Foreword that now is the time to carry out a holistic review of the safety nets (Our emphasis). The current safety net provision lacks coherence and is patchy. Moreover, due to intervening life events, people fall into mortgage arrears even during good economic times. It is now time to future-proof the help available for those in mortgage arrears and stitch together a comprehensive safety net MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 24

26 Money and benefits advice must be integral to the development of a robust safety net, both at the outset - to establish suitability (as with the Mortgage Rescue Scheme (MRS) and Homeowner Mortgage Support scheme (HMS)); and afterwards - to address other indebtedness and benefit entitlement. The latest BSA report A joined-up approach to helping mortgage borrowers 27 makes a number of relevant recommendations. SMI should be payable to all loans secured against the property and those outside the limits of the current scheme, with payments to these consumers offered as a grant with a charge secured against the property. The state could then recoup the money paid either as repayments from the consumer or through the proceeds of the sale of the property. SMI should be reformed to extend its availability, pay interest at the rate paid to the lender and offer support for those accessing it long-term. Government should pursue a drive to increase the take-up of insurance which would help to meet mortgage payments and the payments on other debts. More widely we would also argue in favour of reform of the private rented sector as lack of rent controls means that the housing benefit system is effectively supporting private landlords who can profit from housing benefit revenue at the expense of tenants, Government and the taxpayer MAT RESPONSE TO DWP SUPPORT FOR MORTGAGE INTEREST CONSULTATION PAPER Page 25

27 The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: Fax: