The radically reduced rate payable on the Support for Mortgage Interest scheme announced in the budget is just the beginning of reform, fears the Intermediary Mortgage Lenders Association.
Peter Williams, executive director of IMLA, said: “I think this is just the first shot on reform of SMI. The scheme is fairly expensive and the government believes that this support has become long term for many borrowers who benefit from it.
“They don’t like paying out long term help on what’s meant to be a short term support scheme. I think there’s a government desire to adjust the structure of support, and I worry SMI will be cut in the comprehensive spending review in the autumn.”
On Tuesday, George Osborne announced that the rate at which support for mortgage interest would be paid would be realigned, resulting in a drop in the amount paid to individuals receiving the benefit.
The rate, which is usually set 1.58% above the Bank of England base rate, had been frozen at 6.08% since late 2008, resulting in some borrowers being overpaid as their real mortgage rates fell in line with BBR.
Osborne said: “To put SMI on a more sustainable footing and to better reflect mortgage costs, SMI will be paid at the level of the Bank of England’s published Average Mortgage Rate from October 2010.”
Williams said he understood that the government had been overpaying some borrowers on the scheme but, he said, there is a significant number of borrowers on high fixed rates and high standard variable rates (SVR) who are not overpaid. These people will feel a severe payment shock in October when the change kicks in.
Williams added: “The whole safety net for people struggling financially is looking like it’ll be unpicked; it is already holey but I fear this is the beginning of the end for SMI. The number of people falling into serious arrears is growing steadily. We really need a long term discussion on how to support these people.”
The people who qualify for SMI generally suffer serious credit impairments and are consequently paying higher than average mortgage rates, meaning average rate payments may not be sufficient to cover their costs.
Williams said if SMI was to be abolished, the government must consider putting in place a permanent mortgage rescue scheme.
He said: “IMLA and the Council of Mortgage Lenders have both been arguing to keep the SMI rate high. A lot of lenders have made loan modifications which have brought rates down significantly, but question remains whether it will be low enough to support borrowers currently receiving just over 6%.
“Some people will no longer receive the support they need and there is guaranteed to be a shortfall for many borrowers. If SMI is no longer going to fill that gap we need a proper alternative, possibly in the form of a permanent mortgage rescue scheme.”
The October timetable is abrupt said Williams, who added that the lack of phasing in the transition was “a concern”.
