Thousands of low-income pensioners face having their homes repossessed after they stop receiving government help with their mortgages in six months’ time, an insurance firm has warned.
Insurer Royal London said the Government was failing to inform people about major changes to the Support for Mortgage Interest in April next year.
SMI is a free benefit paid to people covering the interest payments on mortgages and is set to be replaced with what Royal London called a “second mortgage”.
From April next year SMI payments will need to be repaid to the Government with interest when the property is sold.
However, Royal London said that the Government has not confirmed the interest rate which will apply.
Investigations by Royal London suggest that the initial interest rate will be around 2.2%, though this could rise if interest rates go up.
Helen Morrissey, personal finance specialist at Royal London, said the change was a “massive policy shift”.
She said: “The Government needs to make sure that people have the help and advice they need to decide whether or not to take out a second mortgage to pay for this. But instead, thousands of people are getting letters which miss crucial details such as the interest rate on the mortgage.
“The Government is pointing people in the direction of the Money Advice Service and Citizens Advice but they can only provide guidance as opposed to tailored advice. 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.”
There are worries that some pensioners may not have the money to pay off the balance on their mortgages when they come to an end, but this will be exacerbated if they also have to pay money back on top.
If the SMI loan amount is more than the equity left within the home when it is sold then the remaining balance is written off, but this could still leave claimants with no way of purchasing a new property so they will be forced back into the rental market.
Analysis from Royal London shows that 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. If they were to claim it for 10 years then the loan amount would stand at £11,744.
A DWP spokesman said: “This reform means we will continue to provide a safety net to help homeowners avoid repossession.
“However, over time, someone’s house is likely to increase in value, so it’s reasonable that anyone who has received financial help towards their mortgage should be asked to pay that back if there is available equity when the property is sold.”
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