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Falling short

27 February 2012

Falling short

The case for abolishing the standard interest rate used to calculate support for mortgage interest

Falling short [PDF 310 kb]

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Summary

The support for mortgage interest (SMI) scheme aims to help homeowners in receipt of one of four means-tested benefits to stay in their home by providing payments to cover their monthly mortgage interest and provides a crucial safety net for the poorest home owners. To calculate the amount of help due under the SMI scheme, a standard interest rate is used rather than the actual interest rate charged on each mortgage. This is to make the scheme administratively simple and reduce overpayment.

This report uses CAB evidence to argue that the use of a standard interest rate to calculate the amount of SMI claimants receive each month is ineffective, inequitable and causes hardship to claimants. The evidence set out in the report demonstrates that the Government's decision to reduce the standard interest rate from 6.08 per cent to 3.63 per cent in October 2010 has had caused significant detriment to claimants.

Analysis of CAB evidence on SMI since October 2010 shows that:

  • CAB clients experienced an average shortfall between the amount of SMI received and their contractual mortgage interest payment of £135 per month.
  • Contrary to Government expectations mortgage lenders have not absorbed this shortfall; 33 per cent of CAB clients seeking advice on this issue reported that their lender had initiated possession action, or were threatening to do so, following the change.
  • The reduced level of support available to claimants has had a significant detrimental impact on claimants; in 29 per cent of the cases analysed, the client concerned reported that the reduction in their monthly SMI payments had had an impact on their mental health.

While the current system for calculating the amount of support available to claimants is administratively simple, we are concerned that it has failed to adequately meet the needs of claimants and does not provide value for money. We recommend that the Government introduces a system whereby SMI is paid at the actual contractual interest rate of each claimant. We also set out our proposal for a more cost effective way of administering SMI claims