Loans replace benefit for mortgage interest
Henri Krishna describes new rules regarding help with mortgage interest and similar help from next April.
From 6 April 2018, offers of repayable loans will replace benefit support for mortgage interest or certain loans secured on a claimant’s home (SMI).
The new SMI loans involve a charge on the property and will attract interest which will continue to accumulate until the loan is paid or written off. SMI loans will not replace housing costs paid for service charges, ground rent, co-ownership schemes, or certain forms of rent which will continue to be met under the current rules.
The regulations introducing the provisions for the loans and amending the existing SMI scheme are The Loans for Mortgage Interest Regulations 2017, SI No.725. The loans are provided by the DWP but advice about the loans is contracted out to SERCO.
When are claimants affected?
Basically, all claimants who are, or who may have been, entitled to SMI as benefit are affected. In the run-up to 6 April 2018, claimants who may be eligible for the new loans should receive a DWP letter and information leaflet advising them of the new arrangements. The DWP letter will be followed by a call from SERCO about both the loan scheme and other options for meeting loan repayments.
If the claimant chooses to accept a loan offer, the first payments can be made for assessment periods (for universal credit (UC)) or benefit weeks (for other qualifying benefits) starting on or after 6 April 2018. The start date may be subject to the claimant completing a waiting period. If the claimant initially refuses the loan, s/he can change her/his mind at a later date provided s/he meets the eligibility criteria for a loan. If the claimant decides not to take the loan, SMI payments through her/his benefit will end on 5 April 2018, unless transitionally protected.
Who is transitionally protected?
If claimants are already getting SMI on 5 April 2018, they may get transitional protection of their current payments, but only for a very
limited period. If entitlement to the qualifying benefit continues, transitional protection will continue until at least the last day of the first benefit week or assessment period ending on or after 6 April 2018.
Transitional protection may continue for a slightly longer period if an SMI loan offer has been accepted. This allows for SMI as benefit to continue for several weeks while the agreement and associated required documents are returned to the DWP.
Who is offered a loan?
The eligibility criteria for being offered an SMI loan are broadly the same as those for the current SMI benefits. The benefit regulations are amended to replace the current amounts included as SMI in benefit, but otherwise the criteria remain the same. Therefore a claimant will need to:
- be entitled to, or treatedas entitled to, a qualifying benefit (income-related employment and support allowance, income-based job-seeker’s allowance (JSA), income support, UC or pension credit (PC));
- be liable, or treated as liable, for owner-occupier payments;
- have served any waiting period (which includes periods served but not completed under the current SMI scheme). A 52-week linking rule applies for qualifying benefits other than UC;
- for UC, not receive any earnings during that assessment period.
The loans will need to be:
- for a home the claimant normally lives in (with some temporary absences allowed);
- for qualifying benefits other than UC, taken out to acquire an interest or carry out repairs or improvements to the property, normally before entitlement to the qualifying benefit started.
How are loans calculated and paid?
Most of the same rules for calculating and paying the current SMI scheme apply to SMI loans. These include the maximum amount of eligible loans (for most claimants £200,000 and for PC claimants £100,000) and the standard interest rate on the qualifying loan, currently 2.61 per cent. This is used to calculate the annual amount of the loan, which is then divided by 12
to give a monthly amount for UC claimants or 13 to give a four-weekly amount for other qualifying benefits and payments made directly to the lender. If payments are not made directly to the lender, then the SMI loan will be calculated and paid to the claimant at the same intervals as her/his qualifying benefit.
Non-dependant deductions may be made from the SMI loan amount as for the current SMI scheme.
SMI loans will be paid indefinitely unless the claimant stops meeting the qualifying conditions. Claimants can choose to stop receiving an SMI loan at any point. There are no time limits on how long income-based JSA claimants can get an SMI loan for, unlike the two-year limit under the current SMI scheme. A four-week run-on period applies where a claimant ceases to be entitled to a qualifying benefit other than UC either because s/he or her/his partner starts earning too much.
How can claimants get a loan?
Acceptance is voluntary and claimants should seek advice – see below. To get an SMI loan, a claimant must accept a loan offer and return any required documents. Before a claimant can accept a loan offer, the Secretary of State must satisfy the ‘information condition’.
The ‘information condition’ is that the claimant is provided with relevant information about the terms and conditions of any loan, plus how to get further information and independent legal and financial advice. This information must be provided to both the claimant, her/his partner or any joint claimant, even if the partner or joint claimantis notliable for the qualifying loan, within the six months prior to the loan offer being accepted. The ‘information condition’ has been contracted out to SERCO who will meet it via a telephone conversation with the claimant and her/his partner or joint claimant.
Once the information condition is satisfied, the claimant can accept a loan offer by requesting and returning a loan agreement plus other required documents. The other required documents are:
- in England or Wales, confirmation that where all legal owners are in the benefit unit a charge has been executed on the mortgage in favour of the Secretary of State;
- in England or Wales, confirmationthatwhere any legal owner is part of the benefit unit but at least one is not, an equitable charge has been executed in respect of the beneficial interest in the property of the claimant;
- in Scotland, confirmation that each legal owner in the benefit unit has executed a standard security in respect of their interest in the property;
- confirmation that consent has been obtained from any occupiers of the property who are not legal owners to creation of the charge or standard security described above.
How and when will loans be repaid?
SMI loans will accumulate interest on a daily basis added at the end of each month from when the first loan payment is made until the loan is repaid. The rate is specified in the regulations as the ‘weighted average interest rate on conventional gifts’ before the start of the defined relevant periods, as published by the Office for Budget Responsibility.
Recipients of an SMI loan are not required to repay it or any interest until the property is sold, otherwise transferred, assigned or disposed of, or the claimant and her/his partner dies. Where the property is transferred to the claimant’s partner upon death and s/he continues to occupy the property, or to the claimant from a former partner under certain court orders or agreements for maintenance, the loan is not repayable at that point. However, until it is repaid, it will continuing accumulating interest. Voluntary payments of a minimum of £100 (unless the outstanding balance is less) can be made at any time. Repayments will normally be made from the proceeds of any sale, transfer, assignment or disposition, or from the estate of the deceased person. Where there is not sufficient equity in a property, repayment will be limited to the amount available after any prior ranking charges against the property have been repaid.
Claimants need to understand that from April SMI is in the form of the offer of a repayable, interest-bearing loan, that involves a charge on the property. Acceptance is voluntary and they should seek indpendent legal and financial advice about what is best for them.
Inclusion of SMI payments as part of means-tested benefits under the current scheme effectively passports some claimants to other benefits such as maximum council tax reductions or free school meals. This is because it might only be once SMI is included in the claimant’s applicable or maximum amount that s/he is actually entitled to the passporting benefit. This passporting is not protected under the SMI loan scheme as the loans are separate payments from the qualifying benefit, and claimants are not treated as receiving a qualifying benefit for these purposes. As such, claimants who would only be entitled to the passporting benefit because of the inclusion of SMI will lose out.
The contracting outof the information condition is an area for concern. What provisions are in place if a call is not received? What triggers SERCO to make the call? Experience of the current SMI scheme suggests that it is not well understood within the DWP and frequently claimants miss out on payments because the necessary forms are not sent to them, all of which may equally apply to the new loans. Further, the information condition requires both members of a couple to receive the required advice, and draft information produced by the DWP suggests that both members will need to be together when the call is received, which may prove difficult or lead to delays in some cases.
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