So far the Government has supported Covid-distressed homeowners by ensuring they can get a mortgage payment holiday from their lender. The scheme was originally meant to last three months, and was then extended to six, and no fewer than 2 million mortgage holders have taken advantage of it.
But now a cliff edge looms. The payment holiday scheme is due to end next month, as is the furloughing scheme. We probably can’t mandate any further forbearance, and though the latter will be replaced with something lighter, an increase in unemployment looks inevitable.
We tend to think of homeowners as well-off and unlikely to be harmed too much by an unemployment problem that will probably be concentrated in the lowly-paid service sectors, but in fact a third of those in relative poverty after housing costs are owners and 42% of owners have no savings at all.
According to the Institute for Fiscal Studies, the proportion of new Universal Credit claimants making their mortgage repayments halved after March and hasn’t recovered, suggesting that ‘the receipt of Universal Credit is not sufficient to get these households paying their mortgages again’ and ‘does raise the question of what might happen to these households when mortgage holidays end’. All of which means we ought to be seriously concerned about a sudden spike in repossessions.
With that in mind, the Centre for Policy Studies has just published a new report on Support for Mortgage Interest, a benefit for homeowners which covers the interest but not capital repayment for mortgagees already in receipt of other benefits and therefore in financial distress. It’s mostly claimed by those on disability, pension and low-income benefits, but after the last financial crisis total spending on the benefit increased by 25% due to an increase in claims made by the unemployed.
For SMI to be any use to a newly unemployed homeowner their mortgage has to be converted to an interest-only product, and the Government should encourage lenders to allow that conversion. The SMI scheme should be the first resort before repossession, and lenders should be required to make distressed borrowers aware of it, especially as it’s a relatively unknown part of the welfare system.
In 2009 the waiting time for SMI claimants to receive their first payment was reduced from nine months to four months, and a subsequent study found this ‘provided an added impetus to lenders to forbear, and advisers found that lenders were more willing to negotiate about converting mortgages to interest-only arrangements and / or concessionary payments to address shortfalls’.
We propose that the waiting time be abolished altogether, not least because of the stress it creates for the homeowner (tenants don’t have to wait for their first rental payment), but also because lenders, having forborne for six months already during this crisis, will be reluctant to do so for another nine months. We’d also like to see this reform made permanent, rather than it be a temporary pandemic measure.
As it stands, receipt of SMI is subject to a zero-earnings rule and is one of the only cliff-edges left in the welfare system after the Universal Credit reforms. This means that anyone claiming SMI loses the benefit if they do any paid work at all, which is obviously a serious disincentive. To avoid that, we propose scrapping the zero-earnings rule for the first six months of any new employment, and perhaps subjecting the withdrawal of the benefit to a Universal Credit-like taper.
SMI used to be a grant, an ordinary benefit, but is now a loan: mortgagees are required to repay the government, with interest charged at gilt rate. When this reform was made in 2018 claims dropped off sharply, suggesting that, understandably, distressed households prefer not to take on additional debt.
But we’d really rather they use SMI, not only to prevent a wave of repossessions and firesales, but also because the alternative is housing benefit, which is far more expensive. And it’s not like the original SMI scheme was costing much in the first place. In the final year before it became a loan the scheme cost only £156m, whereas housing benefit cost £22.3bn.
Rather than simply going back to the old version of SMI, we’re proposing a compromise in which the scheme is a grant for the first three months, after which it becomes a loan, but without any interest being due for the first two years from claim. Even if 1 million claims were made in the period of high unemployment we’re expecting, the scheme would only cost £500m, comfortably compensated for by savings in housing benefit payments. Bear in mind there were only 120,000 claimants after the financial crisis, so we might expect that to be the maximum number in normal times, the cost of which would be trivial.
Finally, these reforms would do something to redress the huge imbalance in the welfare system between renters and homeowners. At the moment, tenants don’t have to wait for their payments, but homeowners do; tenants receive their support as a grant, homeowners receive it as a loan; and tenants receive support when they have low incomes as well as no incomes, whereas homeowners only receive it when they have no income.
This isn’t just a Covid reform either – though it will go some way to preventing a possible wave of repossessions when the existing support comes to an end next month. If made permanent a reformed SMI would, at very little cost, provide homeowners with greater support when they hit hard times in general, making home ownership that bit more attractive.
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