Business Debtline – March 2018

Support for Mortgage Interest (SMI) was a government backed scheme to help claimants pay the interest on their mortgages that did not have to be repaid. However due to changes to the scheme from 05 April 2018, those in receipt of SMI will now be offered a loan that is secured on their property and not as a benefit. With only weeks to go until this change happens, households have been contacted asking them to agree to the changes; however this has created a lot of worry and stress for claimants as for most, this is the first time they have been aware of the changes and many do not understand them.
 

So what are the key issues?

Qualifying Period – Claimants must be in receipt of certain benefits for 39 weeks before qualifying for the Loan for Mortgage Interest (LMI). Therefore, it is likely claimants will have considerable mortgage arrears before they receive LMI, or the lender may have already instigated repossession proceedings.

Financial and Legal Advice – Claimants are being asked to agree to a secured loan on their property which they should seek professional financial advice on. Unfortunately, the advice sector has not received any guidance on how to approach this subject. Some feel this is broaching on financial advice and not within our remit, while others feel it is enough to provide guidance to clients. For claimants to seek financial advice which would incur professional fees, counterintuitive to government’s position on the importance of financial capability. 

Arrears Issue – Current claimants do not migrate automatically from 05 April 2018 unless they agree to the loan and return the documents in time. Those who do not understand the documents will be caught unawares and unintentionally fall into arrears which can affect their credit rating and relationship with their lender, not to mention the arrears will exist on their account going forward.

Interest Rate – This is not fixed but variable, and will be charged at the office for Budget Responsibility’s forecast of the gilt rate. As this is expected to rise over the coming years, and the interest calculated is compound, the loan balance could increase considerably for claimants locked into SMI for a long period. 

Vulnerable Claimants – There has been virtually no additional considerations made for vulnerable claimants, to help them make this decision. 

Jointly Owned Properties – If a joint owner who resides in the property doesn’t agree to the LMI, then it will not be paid. Ambiguity rises where a joint owner does not reside in the property and does not agree to the LMI. Government has said they that no charge will be put on the property. However, there is no guidance as to whether the government could put a statutory charge on at a later date. This ambiguity creates confusion and claimants cannot make informed decisions on whether the LMI is in their best future interests.

Insolvency – The government have guidance on what they deem as a potential default which could result in the LMI ceasing and / or a request that the LMI and interest is immediately due and payable. However, more ambiguity arises when a client enters into bankruptcy or debt arrangement. This therefore creates a lot of confusion and further ambiguity for both claimants and debt advisers, as they cannot advise those receiving SMI on options on dealing with debts if they are having financial difficulties. The department need to clarify and confirm the position on this immediately, similar to the jointly owned issues detailed above, as this could change claimants views on whether they should apply for the loan or not.  

Temporary Claimants – For those who would only need temporary assistance, for example those raising young children or out of work for medical reasons. By receiving this loan they will reduce their equity and make it more difficult to re-mortgage. 

Pensioners – For older claimants who were considering downsizing in the future and using their equity to purchase a new home, the loan will reduce their equity and could potentially end their hope of moving to a smaller property with no mortgage.

Repossession Risk – the less equity in a property, the more likely a lender will initiate repossession if you are in arrears so they can potentially get more in return. 
 

What are the benefits?

Claimants do not have to start to repay the LMI immediately if you get back into work. The LMI only needs to be repaid when the house is sold, transferred to someone else, or on death. Claimants do not have to maintain any monthly repayments on it.

If the house is sold and the equity in the property is unable to clear the SMI loan, the remaining balance is written off, therefore no shortfall is owed. No credit check is carried out so claimants automatically qualify for the loan. LMI repayments can be made at any time, above a minimum repayment of £100, unless the balance outstanding is below £100. 
 

So what needs to be done to help claimants?

Government should clarify their position on issues highlighted above, and remove all ambiguity to ensure claimants can make an informed decision on whether the LMI is suitable for their long term interests. They are also providing no additional advice or help for vulnerable claimant, which is an issue that needs to be immediately addressed. 

In practice claimants generally won’t have a better alternative to the LMI, but they will only add to the current deprivation of the lowest income households in Northern Ireland. A major concern is that the implementation of the LMIs has been made without proper due consideration to claimants who need free tailored specialist advice on this matter, which affects the most socially deprived once again.

Advice NI’s Business Debtline is available on 0800 0838 018 for those who are self-employed and Limited Company Directors needing advice on their business debt or personal financial difficulties. The service opening hours are 9am to 5pm, Monday to Friday. You can also visit our website to access factsheets and further advice click here.