Support for Mortgage Interest loans

Support for Mortgage Interest (SMI) is a government loan scheme helping with the interest costs of mortgages and certain home loans for claimants of means-tested benefits:

• Universal Credit, as well as the means-tested ‘legacy’ Department for Work and Pensions benefits it is replacing.
• Pension Credit.

SMI used to be a social security benefit but became a loan scheme in 2018. Only claimants in rented accommodation can receive non-repayable support for housing costs.

From April 2023 SMI was reformed to allow Universal Credit claimants to access support while working and shorten the qualifying period households must get Universal Credit for before they can receive support.

How Support for Mortgage Interest works

Working-age claimants must receive Universal Credit for a three-month qualifying period before they qualify for SMI. This was reduced from nine months in April 2023. Pension Credit claimants can get SMI immediately.

SMI can help with the cost of interest on mortgages and certain other home loans up to specified loan caps:

• £200,000 for most working-age claimants.
• £100,000 for Pension Credit claimants.

The amount of SMI payable is not based on the actual amount of interest households pay on their mortgages or loans. Instead, it is calculated using a standard interest rate – 2.65% in July 2023 – based on the average mortgage rate published in Bank of England statistics. Payments are generally made directly to lenders.

SMI loans are repayable with interest when the property is sold, ownership is transferred, when the claimant dies, or on a voluntary basis. The interest charged on the amount of SMI loan payments is set for six-month periods at the average gilt rate published by the Office for Budget Responsibility. The current (1 July to 31 December 2023) rate is 3.28%.

Recent reforms and issues

The Labour Government made several changes to the SMI scheme from January 2009, as part of a wider package of measures following the 2007 to 2008 financial crisis. The qualifying period for SMI was reduced from 39 to 13 weeks; the loan cap increased to £200,000 for new working-age claimants; and the standard interest rate was frozen at 6.08%.

The changes were expected to be temporary but largely remained in place throughout the remaining Labour and Coalition Governments. The exception was the standard rate, which was linked to Bank of England statistics early in the Coalition Government in October 2010.

In the 2015 Summer Budget, the Conservative Government announced plans to increase the qualifying period for SMI to 39 weeks from 1 April 2016, and to change SMI from a benefit to an interest-bearing loan, secured against the mortgaged property, from April 2018.

Aside from being converted into a loan scheme, SMI was largely unchanged from the predecessor benefit.

SMI changing to a loan scheme and falling take-up

The Government justified the conversion of SMI to a loan as providing better value to the taxpayer, and was made in the context of wider measures designed to make savings on social security spending.

After April 2018, the number of people getting SMI dramatically declined. In the quarter ending February 2023 there were 11,787 households with an SMI loan in payment, compared to a caseload of more than 100,000 before the change. The chart below shows the caseload for SMI benefit claims up to March 2018 and for SMI loans in payment from November 2018 to February 2023.

^{Sources: DWP Benefit expenditure and caseload tables (Table 3c) and SMI loans in payment data accessed via from DWP  Stat-Xplore}

^{Note: The two data series are not strictly comparable. However, the chart does illustrate that although the SMI caseload was already in decline, the move to the loan scheme resulted in a major fall in the numbers accessing support.}

The decline in take-up has been much greater than was expected when the change was legislated for. The DWP published Support for Mortgage Interest loans: take-up in March 2022. This found that most households eligible to claim SMI surveyed were unlikely to under the new rules, and “loan related issues” were the greatest barrier to take-up.

Several commentators have called for a full or partial reversal of the 2018 change on the basis that current provision deters struggling households from getting help.

2023 changes to earned income rules and qualifying periods

In the November 2022 Autumn Statement the Chancellor, Jeremy Hunt, committed to reducing the qualifying period from nine to three months for Universal Credit claimants from April 2023. Several think tanks and campaigning organisations had argued the nine-month qualifying period exposed households with limited financial resilience to significant financial stress.

He also removed the ‘zero earnings’ rule so that working Universal Credit claimants could receive SMI. Previously, no SMI could be paid when a clamant or their partner was doing any paid work, which had been criticised as a disincentive to work.

The standard interest rate

The ‘standard interest rate’ is based on the average mortgage rate published in Bank of England statistics. The standard rate changes when the Bank of England average mortgage rate differs by 0.5 percentage points or more from the rate in payment. The relevant measure is comprised of the surveyed stock of existing mortgage rates, including those currently on fixed terms. As a result it does not respond quickly to the changes in rates faced by those on variable rate mortgages, which increased significantly from 2022. Some commentators have pointed out this means the current (July 2023) standard rate, 2.65%, is lower than the interest rates many households are facing.

The Government says it has “no plans to amend the calculation of SMI.”

Frozen loan caps

The loan caps are not routinely reviewed to take account of inflation or increasing house prices. The last change to the cap was in January 2009, when it was increased to £200,000 for new working-age claims.

Impact of the rising cost of living

A period of inflation higher than the Bank of England’s 2% target began in late 2021. The Bank has been raising interest rates to try and get the inflation rate down. This has led to higher borrowing costs for households, notably on mortgage interest rates and calls for further support to be provided.

On 23 June 2023, the Chancellor, the principal lenders and the Financial Conduct Authority agreed a range of support measures for people struggling with mortgage payments. This package is comprised of a ‘mortgage charter’ aiming to encourage mortgage providers to support struggling customers. It did not include any further changes to SMI or state financial support aimed at struggling mortgage holders, although SMI claimants will benefit from the Government’s Cost of Living Payments and other financial support.

The Resolution Foundation, a think tank focused on living standards for those with low and middle incomes, has suggested the most likely form of direct government support offered in response to rising mortgage costs would be further changes to SMI, including:

• Increasing loan caps.
• Updating the standard rate.
• Further reductions to the qualifying periods.
• Reversing the 2018 conversion of SMI into a loan scheme.

This, it argues, could provide targeted support, would be cost effective, and would have relatively little inflationary impact compared to measures providing broader support.