Those borrowers that are entitled to payments of support for mortgage interest, many of whom are elderly and disabled, currently have it paid by the government directly to their lender at a flat rate of 3.63%. This rate has not changed since October 2010 – when it was cut from 6.08% against a backdrop of falling borrowing costs. But from 6 July this year, there will be a further cut in the rate cut to 3.12%.
The cut in the rate of SMI in 2010 occurred because the government introduced a new benchmark against which it should be set – the Bank of England's average monthly mortgage rate. Under the rules drawn up at that stage, there would only be further changes in the rate of SMI if the Bank’s average mortgage rate rose or fell by more than 50 basis points.
More recently, however, borrowing rates have been edging steadily downwards and in April this year the average mortgage rate fell to 3.12% by the Bank’s measure – meaning that for the first time it was more than 50 basis points below the rate of SMI set in 2010.
Around 230,000 households were receiving payments of SMI in 2013, according to a House of Commons library report. Some 94,000 of these households were occupied by older borrowers, who were entitled to the payments because they were receiving pension credit.
At that stage, the maximum possible payment of SMI – for those subject to the £200,000 mortgage cap – was £139 a week. But the average payment made was only around £30 a week. For working age claimants, the figure was slightly higher at £38 a week; for those on pension credit, the average was around £18 a week.
In the aftermath of the financial crisis, support was extended to provide help for borrowers at an earlier stage, and to cover larger loans – partly to reflect higher housing costs.
Over the years, support from SMI has kept in check the number of cases of possession, which was particularly helpful in the aftermath of the financial crisis. Even with the additional costs, this may have been a more attractive option for the government than increased homelessness and higher payments of housing benefit to former owner-occupiers moving into rented accommodation following possession of their home.
Government predictions suggest that the amount paid is expected to fall by almost half in less than a decade – from £517 million in 2010/11 to £272 million by 2017/18.
