Lenders welcome government re-think on benefit payments
Published: 26 June 2012 | Author: Bernard Clarke
Draft rules from the government indicate that ministers have heeded the views of the lending industry, and now accept that benefits intended to cover mortgage interest payments should continue to be paid directly to the lender.
The Department for Work and Pensions (DWP) had been consulting on proposed reforms to universal credit, under which it had sought views on whether benefits meant to cover mortgage interest payments should in future be paid to claimants, rather than their lenders. The government had considered whether this could encourage benefit recipients to take greater responsibility for managing their financial affairs.
Lenders are opposed to such a change because it is likely to lead to an increase in mortgage arrears. Although the industry understands the government’s desire to promote greater financial responsibility among benefit recipients, the payment of financial support for home-owners directly to the lender through the mortgage interest direct (MID) scheme does guarantee that funds are used for their intended purpose, and helps to minimise arrears.
In updated draft regulations for universal credit, the government is now suggesting that payments intended to cover mortgage interest should be "paid direct by the department to the claimant’s mortgage lender on a monthly basis."
The draft regulations continue: "The mortgage interest direct scheme is intended to reduce the threat of repossession for owner-occupiers receiving help with their mortgage interest payments through the benefits system." We welcome the government’s new approach to payments, and will be looking at the rest of the draft regulations in more detail.
Direct payments of benefit are in the best interests of home-owners because they minimise mortgage arrears. Debt advice agencies generally favour direct payments as they reduce the risk that households struggling to prioritise their debts do not spend payments intended to cover their housing costs on other things. And direct payments are in the best interests of the government and taxpayers, as they guarantee that benefits are used for the purpose intended.
Having consulted on proposals to pay benefit covering housing costs to owner-occupiers, the government’s decision apparently to retain payments of MID is an important concession to lenders. But the industry remains concerned about other scheduled changes to the payment of support for mortgage interest (SMI).
At present, SMI is paid on mortgages after a 13-week qualifying period and covers interest on loans of up to £200,000. But these arrangements are temporary, and timetabled to revert in January to the former qualifying period of 39 weeks and loan cap of £100,000.
Lenders and borrowers have succeeded in keeping mortgage arrears and possessions significantly lower than expected in the current economic downturn. All have been helped both by low interest rates and sustained support from the government to keep mortgage payment problems in check.
The decision to retain MID is welcome. But lengthening the qualifying period for SMI – and reducing the size of loans covered – may contribute to an increase in payment problems from next year onwards if the government does not extend the current arrangements.