Brendan Burgess
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A proposal for a Repayable Mortgage Interest Supplement
21 September 2023
The writer is a consumer advocate and founder of the Consumer Forum, www.askaboutmoney.com. The opinions are my own and not the views of the contributors to Askaboutmoney.
This is an updated version of previous submissions made by me to the following.
- Damien English as Minister of State for Housing February 2019
- Heather Humphreys as Minister for Social Protection in June 2020
- Michael McGrath as Minister for Public Expenditure June 2020
- Pre-Budget Submission October 2020
- Submission on Review of Mortgage to Rent Scheme January 2021
- Pre-Budget Submission August 2022
Overview
- Mortgage holders who would meet the income criteria for Housing Assistance Payment, should be given a Repayable Mortgage Interest Supplement.
- The payment should be paid directly to the lender and not to the borrower
- This would be paid as a repayable loan secured as a second mortgage on the home, in the same way as the Fair Deal Loan Scheme is a charge on the family home.
- It would be repaid by the recipient
- When their income recovers
- When they sell their house
- By their estate after they die
- Interest would be charged on it at the same rate they are being charged by their lender
- In April 2018, the UK converted their Support for Mortgage Interest from a welfare payment to a repayable loan. See Appendix for details.
- It was paid to the borrower rather than to the lender. Many borrowers treated it as an additional welfare payment for their living expenses and did not pay it on to their lender.
- It was a disincentive to return to employment. The MIS would be lost when a person returned to work which often meant that they were worse off by returning to work.
- It was seen as a subsidy for the lenders.
Making it repayable has many advantages
- It will dramatically reduce the cost to the Exchequer
- It will ensure that it will be only claimed by those who need it
- It will remove any disincentive to return to work
- It removes the criticism that it is a subsidy for homeowners, who are generally better off than renters
- As it will cost the Exchequer a lot less, it can be applied much more widely and would help a lot more people.
When the Mortgage Interest Supplement was operational, most homes were in negative equity, so making it repayable wouldn’t have made much difference.
But now, with the increase in house prices and the Central Bank mortgage lending limits, most homes are now in positive equity so in most cases, the Repayable Mortgage Interest Supplement will be fully repaid.
The interest charged on the RMIS should be the same as the interest charged by the lender
If the interest charged by the lender is 3%, the interest charged on the RMIS balance should be 3%. If the interest charged by the lender is 8%, the interest charged on the RMIS balance should be 8%.
This would remove any incentive to game the system. For example, if the interest charged on the RMIS were 3% and the lender were charging 8%, it would incentivise the borrower to extend the RMIS as long as possible.
It may actually be worth considering charging a slightly higher rate, to encourage the borrowers to repay the RMIS as soon as possible.
Vulture funds
Vulture funds are currently charging rates of up to 9%.
On the one hand, if the government charges borrowers 9% as I am proposing, it would leave the government open to charges of profiteering.
On the other hand, if the government charges an average market rate, say 4%, it would encourage borrowers who might not otherwise need the scheme to sign up for the scheme as it would be a lot cheaper. They would become dependent on the RMIS long-term and would not repair their credit record.
The RMIS is not a solution to the gouging by vulture funds. The Central Bank and the Government need to address this through requiring the vulture funds to offer their customers the same rates as are on offer from the lender who sold the mortgage.
RMIS compared to Mortgage to Rent
The only government assistance available to homeowners at present is the Mortgage to Rent Scheme.
A fund buys the property from the homeowner
The fund settles the mortgage with the lender and the shortfall is written off
The local authority rents the property from the fund
The former owner who is now a tenant, pays a small rent to the Local Authority.
This is a very expensive scheme as the Local Authority is on the hook for very high rents and for the maintenance of the property. The homeowner loses ownership of their home.
A Repayable Mortgage Interest Supplement would be a far better solution with much wider application.
Appendix Support for Mortgage Interest in the UK
Up until April 2018 SMI was an ordinary welfare payment i.e. it was not repayable.
Around 104,000 qualified for it – 40% of whom were pensioners.
- It was paid directly to the lender.
- It was paid to people on means-tested benefits who were not in full time work.
- There was a two year time limit on it for those of working age.
- There was no time limit for pensioners.
- There was a waiting period of 39 weeks.
- Loan cap: £200,000
- It was paid at an interest rate of 2.6% of the mortgage amount, irrespective of the rate charged by the lender.
- Interest is charged at the UK Government’s cost of borrowing
- It was repayable when the house is sold or the recipient dies
- Only 21% of those formerly claiming it, have applied for it now that it is repayable.
- 77% have declined the loan and are no longer receiving SMI
- 2% have not decided or could not be contacted.
Sources:
https://www.gov.uk/government/publi...terest-smi-from-a-benefit-into-a-loan#history
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