Support for Mortgage Interest (SMI): how the loan works

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.

This guide describes the rules in England, Scotland and Wales. If you live in Northern Ireland, check nidirect for the rules that apply there.

Support for Mortgage Interest

Support for Mortgage Interest (SMI) used to be paid as a benefit. Since 6 April 2018 it has been paid as a loan from the Department for Work and Pensions (DWP), which you repay with interest when you sell or transfer ownership of your home. The DWP is responsible for welfare, pensions and child maintenance policy.

Once you qualify for the scheme, the DWP will pay part of the interest on your mortgage on your behalf. Each of these payments builds up a debt to the government. The loan is charged interest, currently 4.5% a year. The rate can change, but not more than twice a year. You can check the current rate on GOV.UK’s Repaying your loan page.

This debt only needs to be repaid when the property is sold or transferred to another owner. When the home is sold, the SMI loan is repaid from the proceeds remaining after the mortgage and earlier secured loans have been repaid. If that is not enough, the outstanding SMI amount is written off under the scheme’s rules. 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 over time – so it can make sense to repay early if you are able to.

Who is eligible for Support for Mortgage Interest?

As SMI is intended for people on low incomes, eligibility depends on the benefits you receive.

You must be getting one of these benefits: Universal Credit (SMI can start after you’ve had it for 3 months in a row), Pension Credit (SMI can start from the date you start getting it), or income-related Employment and Support Allowance (SMI can start after 39 weeks).

If you have a partner, they must also agree to sign the SMI loan form.

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%.

There are strict limits on the amount of debt from which the assistance is calculated. SMI can help with the interest on up to £200,000 of your mortgage and qualifying loans, or up to £100,000 if you get Pension Credit or claimed a qualifying benefit before January 2009 while under State Pension age. This means that even if your mortgage balance is £250,000, SMI will be calculated on the basis of no more than £200,000.

For Universal Credit claimants, SMI is worked out as a monthly amount (the eligible loan balance × the standard rate ÷ 12); for Pension Credit and income-related ESA claimants it is worked out as a weekly amount (÷ 52). SMI is normally paid direct to your lender.

Using the standard rate of 3.66%, here is how SMI works out as yearly and monthly amounts for mortgages with balances of £150,000 and £250,000:

• Mortgage 1 (£150,000): £150,000 × 3.66% = £5,490 a year (£457.50 a month).

• Mortgage 2 (£250,000): only £200,000 counts because of the limit, so £200,000 × 3.66% = £7,320 a year (£610 a month).

This amount covers part of the interest portion of the repayment. If your own mortgage carries a higher interest rate than the standard rate of 3.66%, SMI will not cover the full interest, and you will have to pay the rest yourself.

For example, if a borrower’s own mortgage has an interest rate of 5%, a balance of £150,000 and a monthly payment of £2,000, then:

• The capital portion is £1,375;

• The interest portion, at the borrower’s own mortgage rate of 5%, is £625;

• SMI will cover £457.50 (the monthly amount for mortgage 1 above);

• The borrower pays the rest of the monthly payment: £1,542.50.

SMI does not cover repayments of the amount you borrowed, mortgage arrears or insurance.

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 payment made on your behalf adds to a loan that grows with interest and must be repaid, with interest, when you sell or transfer ownership of your home (any amount not covered by the remaining equity is written off).

For example, if you owed £10,000 in SMI and the interest rate stayed at today’s 4.5%, interest added monthly would take the debt to around £24,500 after 20 years. The rate can change (up to twice a year), so the real figure could be higher or lower.

Over a long period, the interest can add significantly to what you owe, so it is worth taking this into account before you apply. You can make voluntary repayments at any time (at least £100, or the full balance if it is less).

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.

Your lender may agree to extend your mortgage term. Ask your lender whether this can be done on your current deal or would mean 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 your lender 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.

Another option is a payment deferral (sometimes called a payment holiday): an arrangement agreed with your lender under which you pay less, or nothing, for a set period. Interest usually continues to build up and may be added to your mortgage balance, so your later payments may go up. This may help if you need time to improve your financial situation or your income has suddenly dropped. If you’re struggling, your lender must consider options such as a payment deferral, but whether one is offered depends on your lender and your circumstances.

You could also ask about temporarily switching to an interest-only mortgage for a limited period. 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 is similar to a payment deferral – the difference is that during a deferral you may pay less or nothing and unpaid interest may be added to your mortgage balance, whereas when switching to interest-only, you pay 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. It does not help with your rent.

If you get Universal Credit, the housing element may help with your rent. The ‘housing element’ is available to people who:

• Have a Shared Ownership agreement (in which case the housing element may help with the rent, and SMI with the mortgage interest);

• Rent a flat from a private landlord;

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

This means that if you are on a Shared Ownership scheme, SMI can cover part of the interest on your mortgage, and the housing element of Universal Credit may help with your rent. This can reduce 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 taken out for certain repairs and improvements that make your home fit to live in, such as providing a bath, shower or toilet, repairing heating, damp-proofing, insulation, repairing unsafe structural defects or adapting the home for a disabled person. These may include, for example:

• repairs and improvements without which the home is not fit to live in, such as repairing the heating or unsafe structural defects;

• adaptations for a disabled person, such as ramps, a walk-in shower or modified doors.

To count, the loan must have been taken out for these repairs or improvements and normally used for that purpose within 6 months. Its balance is then added to your mortgage when SMI is worked out, within the same capital limit. Loans for necessary adaptations for a disabled person are not counted towards that limit.

Summary

The Support for Mortgage Interest scheme is an unusual government programme that helps towards the interest on your mortgage. SMI used to be paid as a benefit, but since 6 April 2018 it has been paid as a loan from the DWP, which you repay with interest when you sell or transfer ownership of your home. To qualify, you must be getting Universal Credit, Pension Credit or income-related Employment and Support Allowance. 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.