The amount of money struggling homeowners can claim to help them meet monthly mortgage repayments is to fall in July, after the government cut the interest rate used to make the calculations.
Currently homeowners entitled to support for mortgage interest (SMI) can get help with monthly payments on a mortgage worth up to £200,000 based on an interest rate of 3.63%. But following a sharp fall in high-street mortgage rates, the rate will be reduced to 3.12%.
The change, will come into effect on 6 July 2015, means that on a £100,000 mortgage arranged over 25 years the amount that can be claimed each month will fall from £303 to £260.
SMI is a means-tested benefit that can be claimed by people receiving income-based jobseekers allowance, employment and support allowance and pension credit. It is designed to cover a borrower’s interest payments to their bank or building society, but not the original capital they borrowed. It is currently claimed by 161,000 people.
The rate was previously cut from 6.08% in 2010, and following that reduction Citizens Advice warned that some of its clients were facing repossession<. In the same year, the budget introduced a change which meant that if the average mortgage rate recorded by the Bank of England was at least 0.5 percentage points different to the SMI rate, a change was triggered.
The average dropped in April 2015, forcing the cut.
A DWP spokeswoman said: “It makes sense that the mortgage interest support we pay is tied to the Bank of England rate and that it should change as that rate changes.
“Mortgage support is not designed to cover an individual’s entire mortgage interest payment, but instead offers a measure of support for some people to prevent repossessions.”
Mortgage rates for new customers have been tumbling as lenders attempt to increase their mortgage share, and recent months have seen a flurry of deals launched at record low interest rates.
However according to the Bank of England’s data the average standard variable rate mortgage is still above the SMI cap, at 4.53%. Some lenders charge more – Santander’s current rate is 4.74%, while Kent Reliance charges 6.08% and Newcastle building society has a rate of 5.99%.
The Council of Mortgage Lenders said that in 2013, although up to £139 a week was available to claimants, the average amount being claimed was £38 a week. However, anyone who currently just covers their monthly payment with the maximum available will face a shortfall after the change.