Mortgages.scot

Homeowners across the UK, not just Scotland now have access to a new scheme that provides support with mortgage interest. It is available to anyone who owns a home or is in a shared ownership scheme.

As always with Government related schemes they may change from time to time so always seek out the most up to date information.

What is SMI?

It is a Government loan issued through the Department of Work and Pensions (DWP). It is given to those who are having difficulty paying their mortgage. Depending on meeting the qualifying criteria the DWP may pay the interest on mortgage payments on a mortgage up to £200,000. So if a borrower has a mortgage of £400,000 then the payments on the amount above £200,000 still need to be maintained by the borrower, not the DWP.

How do you qualify?

SMI is only available to those who are in receipt of certain benefits. These include.

1. Income-based Jobseekers Allowance (JSA)
2. Income-related Employment and Support Allowance (ESA)
3. Income Support
4. Universal Credit
5. Pensions Credit

There are some additional conditions which would need to be checked when enquiring for a loan. For example, those receiving Universal Credit who also work and earn an income from that work do not qualify for SMI.

For items 1 through to 4 above the scheme offers interest support on up to the first £200,000 of the mortgage outstanding. If receiving Pension Credit it is reduced to £100,000.

SMI has a qualifying period before it will start. Currently, it is 39 weeks from the date the qualifying benefit was claimed. So not instant by any means.

Something worth noting is that where there is more than one borrower, the DWP may only pay interest on half of the mortgage if the other borrower does not qualify. They can also go a step further by reducing the amount payable if for example, the borrower has adult children living in the property who could contribute by paying rent.

The DWP will likely only cover the interest on the loan that was taken out to purchase the property along with any additional lending to repair/improve the property. If the borrower has taken out additional funds to repay debt then it is unlikely they will cover the interest on that amount.

As it’s a Government agency you can be sure the rules will change even if only subtlely from time to time so it is always best to check the most up to date guidance.

The main elements of SMI
The biggest confusion around SMI appears to be what it will actually cover, so to be clear on this.

The scheme pays only the interest on the mortgage up to the first £200,000. So if the mortgage is £150,000 the DWP may pay all of the interest on the mortgage but they will not pay the capital element.

The most common type of mortgage is capital repayment. An example;

In the above example, the DWP may pay the interest amount of £375 each month for as long as the borrower qualifies by continuing to receive specific benefits. That means the borrower must still make a payment of £336 to the lender each month.

Interest on the loan

Interest is payable on the loan for as long as it is outstanding at a rate of 0.6%. That could change over time but it should always be a very low amount given it is a Government-backed loan.

Repayment of the loan

The loan along with the interest does not need to be repaid until one of three events.

• The property is sold
• The property is transferred to someone else
• The borrower decides to repay it

If the borrower has a partner residing in the property who will inherit it upon their death then the loan will not need to be repaid until their death.

In some circumstances, it may need to be repaid earlier, for example, if the borrower is declared bankrupt or a formal debt agreement such as an Individual Voluntary Agreement (IVA) is entered into.

Property charge

The DWP will take a charge over the property to secure their loan. This prevents the property from being sold or transferred without their knowledge. It is no different to the charge the mortgage lender also has.

The lender will always be the 1st ranking charge meaning if the property is sold they will always receive their outstanding balance first, assuming there is enough to cover it. The DWP charge will rank behind the lender. Any balance remaining will be given to them. Should there be anything left after that it will be sent to the borrower.

The lender will be notified of this charge, it is important to also note that the DWP charge could cause issues later if the borrower was to try and remortgage, apply for a further advance or move home.

Whilst the DWP are unlikely to object to the borrower remortgaging or moving as long as it does not reduce the likelihood of the loan being repaid, it does notify the current lender and all future lenders that there were financial difficulties at some point.

Shortfall

If the property is sold and the amount available is insufficient to repay the loan it will be written off and nobody will be pursued for the remaining balance.

To be clear though. If the DWP believe the borrower intentionally sold the property for an amount lower than it was worth or simply gave it away then they may still pursue the entire balance.

Summary

SMI can be a lifeline in that it could keep a borrower in their home. Unfortunately, it has so many caveats that it may not be enough for many. Especially for those who are struggling to pay their mortgage full stop.

That they will still need to cover the capital element of the first £200,000 and then all of the payments above this amount may mean that SMI is not going to help.

However, it’s an option and for those that may benefit it is certainly worth investigating.