Later Life  

Pensioners face repossession due to benefit change

Pensioners face repossession due to benefit change

Thousands of pensioners could be put at risk of repossession when they lose government help with their mortgage payments in six months’ time, an insurer has warned.

The support for mortgage interest (SMI) handout, which is paid to around 65,000 pensioners, will be withdrawn in April 2018 and replaced by a second mortgage from the government, which will be repaid with interest when the property is sold.

But Royal London has warned the letters that are being sent out to notify borrowers of the changes are not clear about key details such as what the interest rate on the loan will be – and many pensioners will not have access to advice.

If they fail to comply with the letter, the insurance firm warned borrowers will lose help with their mortgage and could face repossession if they get into arrears as a result.

The Department for Work & Pensions (DWP) stated the SMI would continue to provide "robust" protection against repossession and recipients will receive written information about the loan. 

They will then be called by, or be able to book a telephone appointment with, the SMI information provider, and the DWP will also make them aware of independent help and advice.

While the government has yet to confirm the interest rate that will apply to the loan, investigations by Royal London suggest it could be around 2.2 per cent initially.

The insurer said SMI recipients on pension credit, who have interest-only mortgages stretching into retirement, may not have the money to pay off the balance on these mortgages when they come to an end, but this will be exacerbated if they also have to pay money back to the government on top.

Although the remaining balance is written off if the SMI loan amount is more than the equity left within the home when it is sold, this could still leave claimants with no way of purchasing a new property, forcing them back into the rental market.

Analysis by Royal London showed a pension credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claim SMI for five years, which is the typical claim duration for pensioners.

Once the mortgage term ends they face the prospect of having to repay the SMI loan as well as the outstanding capital sum on their mortgage, and they could struggle to find a lender that would be willing to extend their mortgage term.

Helen Morrissey, personal finance specialist at Royal London, said: “Some people will find the process too daunting and will lose their mortgage help next April, with a risk of repossession.

"Others will sign up, but this will make it even harder for those with interest-only mortgages to clear their outstanding balance at the end of the mortgage.