Support for Mortgage Interest – when can you claim government assistance with your mortgage in the UK?

The Support for Mortgage Interest (SMI) scheme is one of the least well-known government support schemes. The low profile of SMI is due to its very specific eligibility criteria and unusual operating procedures; nevertheless, it is worth being aware of its existence – after all, it cannot be ruled out that, in your case, this form of assistance could bring you significant benefits. In this article, we will answer the question of what the SMI scheme is and explain how it works.

Support for Mortgage Interest

Support for Mortgage Interest has been one of the non-repayable benefits for people on low incomes since 1948, and in 2018 it was transformed into a support scheme involving interest-bearing mortgages. These are provided by the Department for Work and Pensions (DWP), the body responsible for social, pension and maintenance policy.

Once you qualify for the scheme, the DWP will pay part of the interest on your mortgage instalments on your behalf. Each of these payments will build up a debt to the state, subject to an interest rate which currently stands at 4.6% and may change at any time.

This debt only needs to be repaid when the property is sold or transferred to another owner. If the amount of the debt exceeds the price for which the property was sold, the surplus is usually written off. Although the lack of an obligation to repay the debt before selling the property may seem advantageous, in practice the interest increases the amount of the debt every year – which is why early repayment is strongly recommended.

Who is eligible for Support for Mortgage Interest?

As SMI is intended for people on low incomes, eligibility depends on the benefits you receive. To qualify for the scheme, you must therefore be receiving one of the following benefits:

• Universal Credit (for at least the last 3 months);

• Pension Credit;

• One of the legacy benefits, i.e. benefits that are gradually being replaced by Universal Credit (for at least 39 weeks).

In addition, if you live with a partner, they must consent to you claiming the benefit.

What proportion of the mortgage payment will SMI cover?

The way in which government assistance under the Support for Mortgage Interest scheme is calculated may seem rather complicated. The amount paid does not depend on the size of the mortgage payment, but is determined on the basis of a government-set interest rate of 3.66%. A single interest rate has been set for everyone for several reasons – to ensure social fairness (preventing greater assistance for more expensive or luxury mortgages) and to facilitate the mass payment of SMI (if the amount of the payment depended on the borrower’s mortgage, each application would have to be assessed separately).

There are strict limits on the amount of debt from which the assistance is calculated. In the vast majority of cases, this will be £200,000, and for those receiving pension credit, the limit is reduced to £100,000. This means that even if your mortgage balance is £250,000, the benefit will be calculated on the basis of £200,000.

It is worth noting that the frequency of SMI payments depends on the benefits you receive:

• with Universal Credit, SMI will be paid monthly;

• with other benefits, it will be paid weekly,

but the amount is always calculated on a weekly basis.

We will therefore calculate the benefit amount for mortgages with balances of £150,000 and £250,000 at an interest rate of 5%:

mortgage 1:

£150,000 * 3.66% = £5,490. Divided by 52 weeks, this amounts to £105.58.

mortgage 2:

As the SMI limit is £200,000, the benefit amount must be calculated based on this figure. £200,000 * 3.66% = £7,320. On a weekly basis, this amounts to £140.77.

This amount covers part of the interest portion of the repayment. If the mortgage carries a higher interest rate than the government rate of 3.66%, this means it will not cover the full interest, and you will have to pay the rest yourself:

For example, if a mortgage with a 5% interest rate and a balance of £150,000 has an instalment of £2,000, then:

• The capital portion is £1,375;

• The interest portion is £625;

• SMI will cover £457.5;

• You still have to pay £1,542.5 of the instalment.

Is it worth it?

Support for Mortgage Interest can be a good option, but you should think very carefully before taking it up. The most important thing to remember is that SMI does not reduce your mortgage repayments ‘just like that’. Every smaller amount paid to the bank generates an ever-increasing debt to the government, which will eventually have to be repaid. To illustrate this, let’s use an example:

Let’s say you’ve been using SMI for 4 years and have received a total of £10,000. If you were to forget about the debt you owe to the government, after 20 years you’d have to pay back nearly £25,000!

When it turns out that the debt has more than doubled over the years, this can be a major blow to your finances.

SMI should be treated as an emergency measure, in a situation where, due to job loss or the need to retire, you are experiencing a significant drop in income with no realistic prospect of it increasing. If you decide to use Support for Mortgage Interest, it is a good idea to draw up a repayment plan so that you can clear your debt to the government as quickly as possible.

Alternatives

Before you start claiming SMI, it is worth considering other options that will reduce your monthly payment or give you time to improve your financial situation.

The most popular of these is extending the repayment term. Most banks agree to this solution without the need for a remortgage. The monthly repayment is calculated based on the outstanding balance, the interest rate and the length of the mortgage term. If you agree with the bank to extend the term, your monthly repayment may be reduced. Bear in mind, however, that this solution increases the total cost of the mortgage, as interest is charged over a longer period.

For those who need time to improve their financial situation or whose income has suddenly dropped, potentially making it difficult to meet repayment deadlines, one option is a ‘payment holiday’. This is a period agreed with the bank during which repayments are suspended and you do not have to pay anything at all. The downside of this solution is that interest continues to accrue during the repayment holiday, and once it ends, the total amount is added to the remaining mortgage balance. As a result, the interest portion of the instalment increases again after the repayment holiday. Suspending mortgage repayments is also a relatively uncommon solution, and not every lender offers this option.

Another, less commonly used option is to temporarily switch to an interest-only mortgage. This means that, for a set period, you will pay a lower monthly instalment consisting solely of interest. In this way, the repayment of your principal is effectively put on hold, whilst you continue to pay the interest as it accrues. This solution is very similar to a repayment holiday – the only difference is that during a repayment holiday you pay nothing, and the interest is added to the mortgage balance, whereas when switching to an interest-only mortgage, you pay only the interest, and the mortgage balance remains unchanged.

Support for Mortgage Interest under the Shared Ownership scheme

It is important to note that if you are on the Shared Ownership scheme – meaning you pay both monthly mortgage repayments and rent – SMI still only covers the mortgage interest. This means you must pay the full rent out of your own pocket.

Fortunately for those receiving Universal Credit, there is a separate benefit available for rent. It is called the ‘housing element’ and is available to people who:

• Have a Shared Ownership agreement (in which case the Housing Element covers the rent, and SMI covers the mortgage);

• Rent a flat from a private landlord;

• Live in social housing (Council or Housing Association).

The amount of money you can receive under the housing element for Shared Ownership depends on the number of bedrooms in the property. The rules are quite strict in this regard and allow for one bedroom for each of the following groups:

• Each adult couple (married or cohabiting).

• Each other adult (aged 16 or over).

• Two children of the same sex under the age of 16.

• Two children of any sex under the age of 10.

• Any other child (who cannot be ‘paired’ according to the above rules).

If the number of bedrooms in your home matches the above rule, the housing element will cover the full rent. If there is one extra bedroom in the property, the benefit will be reduced by 14%, and if there are two or more, the reduction will be 25%.

This means that if you are on a Shared Ownership scheme, SMI can cover part of your mortgage repayment, and the housing element can cover your entire rent. This significantly reduces the cost of your home.

SMI and interest on other loans

The general rule under the Support for Mortgage Interest scheme is that payments cover part of the interest on a mortgage. Other loans do not, as a rule, qualify for SMI, but there is one exception. This applies to loans for so-called essential repairs or disability-related improvements, i.e. repairs or renovations to parts of the home that are absolutely essential for living. These may include, for example:

repairs to the roof, plumbing, or other elements without which the house is not ‘fit for human habitation’ (i.e. safe and reasonably suitable for living in);

adaptations to the bathroom, stairs, entrance, etc. for a person with a disability (e.g. ramps, walk-in shower, modified doors).

For SMI to be granted, the DWP requires evidence that such loans were necessary. This involves providing purchase invoices and a proper justification for the expenditure. Once the DWP approves the application, the amount of SMI received will increase proportionally to the balance of the second loan (the £200,000 limit still applies).

Summary

The Support for Mortgage Interest Scheme is an unusual government programme that provides a subsidy towards monthly mortgage repayments. Unlike other benefits, the amounts received in this case are effectively an interest-bearing mortgage that must be repaid when the property is sold or transferred to another person. To qualify for the scheme, you must be receiving one of the benefits for people on low incomes. If you are aware of the consequences and have a plan to repay the debt as quickly as possible, SMI could be a good solution that reduces your monthly payments.