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Lenders set out case for benefit reform


Published: 1 February 2012 | Author: Bernard Clarke

Lenders are urging that payments of benefit intended to cover mortgage interest should be paid at the rate applying to individual loans. Support for mortgage interest (SMI) is currently paid by the government at a flat rate, which, in most cases, is likely to differ from the rate payable on a borrower’s mortgage.

The current rate of payment of SMI, at 3.63%, is determined by the Bank of England average mortgage rate. But we believe it would be fairer – and potentially cheaper for the government – to pay the benefit to borrowers at the rate payable on their individual mortgages. That would lessen the problem of some borrowers facing a shortfall because the benefit does not cover their interest payments in full, while others have their mortgages overpaid by the state.

In March last year, we undertook analysis based on members’ data on 8,300 recipients of SMI. We concluded that the government could save around £26 million a year by paying benefit at the rate payable on individual mortgages. Additionally, if the government applied a cap of, say, 1.5% above the current standard interest rate, it could save a further £13 million, bringing the total annual saving to almost £40 million.

We will be setting out these arguments in response to an informal call for evidence on SMI by the Department for Work and Pensions (DWP). Our response will argue that both the current limit of £200,000 for qualifying mortgages and the 13-week waiting period for entitlement to benefit should be kept as they are.

We believe that paying SMI at the rate of interest payable to the lender, with a cap, would be better than any tweaking by the government of the standard rate at which the benefit is currently paid. But if the government continues with the existing arrangements and SMI is paid to some recipients at a rate higher than the interest payable to the lender (and cannot be refunded to the DWP), we believe there should be a mechanism to ensure that any “over-payment” is applied to the mortgage account. 

SMI is currently paid from the government straight to the lender through the Mortgage Interest Direct (MID) scheme. This minimises the risk of the benefit not being used for its intended purpose and enables the government to cover the costs of the process, as lenders pay per transaction.

If the government decides to dispense with MID – in pursuit of its wider policy objective of encouraging benefit recipients to take greater responsibility for their financial affairs – we believe there is an increased likelihood that recipients will fail to meet their mortgage payments. 

On the issue of limiting the period for which a recipient is entitled to receive SMI, we believe it is important to distinguish between claimants of working age (who may need incentives to get back into employment) and the elderly or those suffering from long-term disability.

A two-year limit on payments of SMI may be appropriate for benefit claimants of working age, although we believe the government would need to consider all the implications carefully. To help recover some of the costs of paying SMI over the longer term to elderly or long-term disabled claimants, we accept the principle of putting a charge on the property. But the details of how this would be administered would also need careful consideration.