Johnny Timpson's Blog

Regular insights on all things protection from our Technical
and Industry Affairs Manager, Johnny Timpson

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27 March 2018

Mortgage welfare reform and the need for a protection 'Plan B'

Next month marks another step in what has been the biggest, most sustained change to the welfare state since the time of Beveridge. On April 6th 2018 the main state benefit for UK mortgage holders, Support for Mortgage Interest (SMI), changes from a benefit to a loan.

I've been talking about welfare reform for a number of years now, but why do I think this is so important for our industry? We know that people in the UK are under-protected, and many households don't have adequate savings in place to cope with the impact of serious illness or death. It's also the case that many clients don't know, or over-estimate, what state benefits they would be entitled to, so it's clear that educating your customers on these reforms can be used to reinforce their need for a 'Plan B', in the form of appropriate financial protection.

Here's a reminder of what's happening in April and what this means for your protection conversations:

Support for Mortgage Interest

The key benefit for mortgage holders has already undergone radical change. In 2016, the government extended the waiting period to claim the benefit from 13 weeks to 39 weeks. And now the benefit is changing to become a loan, which means that the government will pay the mortgage interest but not the capital, for the first £200,000 of an outstanding mortgage (£100,000 if the mortgagor is in receipt of Pension Credit). For working age mortgagors, this could mean in many cases SMI may not even cover all of the interest payable on a mortgage, with the average house price paid by first-time buyers in London a whopping £409,975.1

This has implications for clients and their families who make up the 10.1 million mortgagors in the UK2, with the change impacting both new and existing claimants. Those who claim under the new welfare mortgage safety-net scheme effectively end up with a second loan to pay the interest payments on their mortgage loan.

At the moment there are an estimated 124,000 claimants receiving SMI, with 48% of them being working age and 52% of pension age3. The average weekly amount of SMI for working age benefit claimants is £40 and £20 for those in retirement, which equates to an average outstanding mortgage amount of £80,000 for those in work, and £40,000 for pensioners4. Those who claim SMI over a long period could be looking to pay back several thousands in interest on return to work or the sale of the house.

Although worryingly, at the same time as the Chancellor's recent Spring Statement, the Office for Budget Responsibility's (OBR) Economic and Fiscal Outlook paper, reported only 10,000 SMI claimants had replied to a DWP mailing and Serco calling programme about the changes, to say they wish to take up the new loan.5

SMI will also form part of Universal Credit and be subject to a new "no earnings" rule. So if there are other parties to the mortgage and a spouse/partner is still working and earning, there will be no welfare mortgage support available.

What does this mean for protection conversations?

UK mortgage holders represent a key segment for the advised market, with 49% of those with a mortgage aged between 35 and 55 years6. Our own research shows that UK mortgage holders are significantly under protected, 47% don't have life cover and 81% do not have critical illness cover.7 With such a high number lacking appropriate financial protection, this reform to the mortgage welfare safety-net gives all advisers good reason to discuss mortgage protection need with both current and new mortgage clients.

Further reading:

Read my previous article on "helping you have better mortgage protection conversations with your clients" here.

Source 1: Halifax, First Time Buyer Report, 2017
Source 2: GOV.UK 2014-15 Family Resources Survey
Source 3: Exploratory memorandum, The loans for Mortgage Interest Regulations 2017 DWP
Source 4: DWP Impact Assessment for Converting Support for Mortgage Interest (SMI) from a benefit into a Loan, 2015
Source 5: Office for Budget Responsibility. Economic and Fiscal Outlook Paper
Source 6: GOV.UK 2014-15 Family Resources Survey
Source 7: SW Protection Research, 2017

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