TECHTALK This article originally appeared in MAY 18 edition of techtalk. Please visit www.scottishwidows.co.uk/techtalk for the latest issue. MORTGAGE BENEFIT REFORM AND THE NEED FOR A PLAN B Support for mortgage interest benefit was replaced with DWP loans charged on the property from April 2018. We explain the new rules both for those clients who may be directly affected and to show how this can prompt reviews of mortgage clients protection needs. JOHNNY TIMPSON Johnny Timpson is Scottish Widows protection specialist. Johnny is a member of the Income Protection Task Force, the IPTF Welfare Working Group, Seven Families project team, Building Resilient Households Group, Cii Insuring Women s Futures Advisory Panel and DWP Disability Champion for the Insurance Industry & Profession. THE BACKGROUND In December 2011 the then coalition government, as part of its commitment to working age welfare reform, published Support for Mortgage Interest Informal call for evidence. Whilst this document attracted little publicity at the time, its contents proposed that the Support for Mortgage Interest (SMI), the key welfare benefit and safety net for mortgage holders, be reformed. Help with mortgage payments has been a feature of the welfare state, from its creation by Beveridge in 1947. And in reality a form of mortgage welfare support predated this by almost 20 years. The coalition government suggested that SMI should only be given for short-term crises, and that longer-term support should be provided by a DWP mortgage interest loan. Yes, this is a Department for Work and Pensions loan to pay a proportion of the mortgage interest payments on the mortgage loan, with a charge taken on the property. The issue went quiet for the remainder of the coalition government, but reappeared in the 2015 Budget. In July 2017, regulations were laid down and, from 6th April 2018, the support provided by SMI for both current and new claimants is provided by way of this new DWP loan that is subject to compound interest and a charge on the property. Mortgage safety-net change has implications for the seven million families in the UK who have a mortgage.
WHO AND WHAT WILL BE IMPACTED? This reform has been described by the Shelter charity as the most significant reform to mortgage welfare in 70 years. As a mortgage safety-net change, it has implications for the seven million families in the UK who have a mortgage. Before the changes, there were an estimated 124,000 claimants receiving SMI, with 45% being of Pension Credit age. The average weekly amount of SMI for pensioners was about 20, while for those of working age it was about 40. That equates to mortgage amounts of 40,000 for pensioners and 80,000 for those of working age, based on the DWP s impact assessment. 20pw Average weekly amount of SMI for pensioners THE NEW RULES AND SWITCHING FROM OLD TO NEW SCHEMES The rules for the new structure were laid down in the Loans for Mortgage Interest Regulations 2017, part of the changes implemented by the Welfare Reform and Work Act 2016. The scheme is different in many areas from that considered in the 2011 consultation document, but retains the core feature of interest support, as a part of benefits entitlement, being replaced with a DWP loan scheme administered by Serco on behalf of the DWP. And for most people who use this facility, this will be secured by a charge on their property. The DWP commenced a phased relevant information mailing detailing the change to existing SMI claimants in September 2017. The mailing has been phased by the main benefit type being claimed, e.g. Pension Credit, Employment and Support Allowance, Jobseeker s Allowance etc. The relevant information pack about the scheme and its consequences is a sizeable document and is followed by a call from Serco to discuss the claimant s options. The regulations define the pack contents, specifying that it includes: a summary of the terms and conditions 40pw Average weekly amount of SMI for people of working age an explanation about charges and security an explanation of the requirement to accept a charge and information about where further independent legal and financial advice can be received. Serco then follow the mailing up with scripted telephone calls. Once claimants have agreed to take out a loan, and agreed to the associated conditions, the process begins. People who are currently receiving SMI benefit will all have been contacted before April 2018. Once a claimant, and any partner, has agreed to a loan by signing and returning the agreement, then charges or other measures will be put in place as soon as possible after the first loan payment has been made to their mortgage lender. Where all legal owners are within the benefit unit, a charge in favour of the Secretary of State must be executed. (A benefit unit is defined as an adult plus their spouse or cohabitee (if applicable) plus any dependent children they are living with.) Where not all the owners are within the benefit unit (for example, in the case of shared ownership properties) then those owners who are within the unit must execute an equitable charge in respect of their beneficial interest. In Scotland, each legal owner within the unit must execute a standard security. DWP loan payments to the claimant s mortgage lender will then be made at the same rate as that used for current SMI support (2.61% at the time of writing). Whilst the DWP loan payments will normally be made to the claimant s mortgage lender, they may be made directly to the owner in certain circumstances. DWP loan payments will continue to be made indefinitely until a relevant change in circumstance occurs. There will no longer be a two-year Jobseeker s Allowance mortgage support limit that applied under the former SMI scheme. These relevant changes include: ceasing to be entitled to a welfare benefit that entitles the claimant to the DWP loan scheme ceasing to be liable to make owner-occupier payments no longer occupying the premises completing the mortgage in the case of Universal Credit Housing Element (Owner/Occupier), having any earned income. It must be stressed that the ending of the DWP loan payments does not trigger the repayment of the DWP loan and interest. Once loan payments to the mortgage lender begin, then so does the liability to repay both the loan amount and the compound interest accrued on it. The interest rate that is applied will be reviewed twice a year. The rate is set by the forecast of the Office for Budget Responsibility for weighted average interest rates for conventional gilts. The probable initial rate, announced in November 2017, is 1.5% and the rate is likely to be consistently lower than mortgage interest rates. Interest accrues daily from the first day a loan is made and is added to the loan amount at the end of each month.
DWP LOAN AND INTEREST REPAYMENT Repayments of the DWP loan and interest can be done voluntarily, at any time. The minimum amount that will be accepted is 100, unless the total amount outstanding is less. The DWP loan and accrued compound interest must be repaid immediately following certain events. These are: the sale of the property the transfer of title of the property the claimant s death, or in the case of a couple, on the death of the last member of the couple. Recovery is made from the proceeds of sale or transfer, or from the estate in the case of death. If there is insufficient equity in the property, after prior charges have been settled, to settle the outstanding DWP loan and interest, then the additional amount will be written off by the DWP. TRANSITIONAL PROTECTION There are three elements of transitional protection for those switching from SMI benefit to DWP loan within the new scheme. 1 The first, a short-term measure, protects payments during the changeover period if there are operational difficulties, or if the introduction date falls within a benefit week or assessment period. 2 3 The second removes the 39-week qualifying period, where a claimant has previously been in receipt of the older form of SMI benefit. The third deals with those cases where the removal of SMI as a part of the benefit assessment would end qualification for the benefit. In such cases, claimants will be treated as entitled to benefits and offered DWP loans. There are also provisions to continue SMI as a benefit when there is a question of vulnerability and capacity to enter into a DWP loan agreement. This will not apply to new claims, where mortgage lenders are expected to support vulnerable customers and apply forbearance instead. There is no compulsion to take a DWP loan, but it is expected that the majority of those claiming SMI prior to the April 2018 change will do so. However, the low level of response to the phased mailing to current SMI claimants is concerning. TYPE OF BENEFIT IMPACTS SCOPE OF SUPPORT AVAILABLE There are some important differences between the types of benefits claimants are receiving and the scope of mortgage support available via the DWP loan scheme and in the operation of the loan system. For all claimants there must be a liability to make payments, but there is no specific requirement to actually make payments, so loans can continue to be made over a period of mortgage holidays and it is possible that at least some later-life mortgages will qualify. It must be stressed that the ending of the DWP loan payments does not trigger the repayment of the DWP loan and interest. For claimants in receipt of pre Universal Credit legacy benefits and Pension Credits, a supporting DWP loan can be paid only in respect of: a mortgage taken out to acquire an interest in the relevant accommodation carrying out repairs or improvements to the property or to meet a service charge for such repairs and improvements or clearing a previous loan used for one of those purposes. There is a specific list of items which are considered to be eligible for repairs and improvements. Loans taken out while the claimant is in receipt of benefit will not qualify normally unless: the claimant was previously receiving Housing Benefit the loan was to acquire more suitable accommodation to meet the needs of a disabled person or alternative accommodation was acquired to provide separate sleeping accommodation for children or young people over the age of 10 of different sexes. In the case of Universal Credit claimants, the only condition for a qualifying loan is that it is secured on the relevant accommodation.
WAITING PERIOD AND UNIVERSAL CREDIT CONDITIONALITY The current 39-week waiting period rule before mortgage support becomes available was put in place before the April 2018 reforms and continues to apply to the DWP loan scheme both under SMI and Universal Credit Housing Element (Owner/Occupier). The latter being the replacement for SMI as Universal Credit starts to fully roll out. However, there continues to be no waiting period for Pension Credit. The maximum amount of mortgage to which a DWP loan can be made is normally 200,000, plus any amount for necessary adaptations for a disabled person. In the case of Universal Credit Housing Element (Owner/Occupier), there will be a new and additional condition for eligibility for the DWP loan. This is a zero earnings rule, which means any earned income will prevent DWP loan payments. This will have major implications for joint mortgage and dual income households when considering their mortgage resilience and appropriate financial protection needs. The existing two-year limit on SMI in Jobseeker s Allowance is not carried forward. The maximum amount of mortgage to which a DWP loan can be made is normally 200,000, plus any amount for necessary adaptations for a disabled person. For Pension Credit claims, that limit is normally 100,000, but it is 200,000 where, before claiming the benefit, the claimant had been in receipt of a higher allowance in a working age benefit. Similarly, the 200,000 limit applies to existing benefit claimants who had SMI mortgages of up to 200,000 under the terms of the Social Security (Housing Costs Special Arrangements) (Amendment and Modification) Regulations 2008. BENEFIT TO LOAN, INTEREST AND CHARGE CONSEQUENCES Although the effects will vary from individual to individual, because of such factors as the amount, length and interest rate of existing mortgages and any house price inflation, it is clear that, for those who choose to remain on this new DWP loan scheme, there will be a substantial impact on the equity that they continue to hold in their home. Equity that was once earmarked to supplement pension, pay for care, or serve as an inheritance, could now have to be repaid, as part of the DWP loan terms. The effect on equity will depend on a number of factors, such as the rate of house price inflation, mortgage rates and gilt rates. OTHER ISSUES There are a number of areas where it is still unclear how the scheme will operate in practice. The consequences for joint owners, where they are not members of the same claim, when a loan becomes repayable could be serious. Where a lender may be willing to transfer a mortgage across to a joint owner, there is no provision in the regulations for this to happen with an SMI loan. It is expected that this is likely to be addressed in future amendments. While it is expected that most lenders, including those whose normal rules restrict further charges, will accept the SMI-linked charge, there are some ( particularly equity release schemes) where this may not be true, in which case no charge would be imposed but civil action for recovery could apply. HELP LINE SUPPORT Should your clients require further information about their SMI benefit and transition to the new scheme, the following DWP contact points may be of assistance. The DWP segments SMI claimants depending on the income replacement benefit that they are receiving and based on this, select the appropriate helpline number. England, Scotland & Wales Pension Credit 0345 606 0265 Employment and Support Allowance Income Support Jobseeker s Allowance Northern Ireland 0345 608 8545 Pension Credit 0300 123 3014 Employment and Support Allowance 0300 123 3012 Income Support 0800 022 4250 Jobseeker s Allowance CONCLUSION Although SMI payments have been relatively small in total, compared with payments of Housing Benefit for private or social tenants, it has seemed to many that the benefits system was supporting people to acquire what is an increasingly valuable asset. It could also be argued, however, that the Housing Benefit system equally enables landlords to acquire an increasingly valuable asset. Whatever the arguments, the impact of the new loan scheme will depend upon external factors in the housing market but with a significant number of UK mortgage holders lacking appropriate financial protection, this reform to the mortgage welfare safety-net gives good reason to discuss mortgage protection needs with both current and new mortgage clients. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655.