Research and analysis

Summary: Support for Mortgage Interest loans: take-up

Published 29 March 2022

Overview

Support for Mortgage Interest (SMI) loans provide support for homeowners who qualify for an income-related benefit and are unable to meet their mortgage repayments, due to illness, unemployment, a personal crisis, or other income shock. SMI loans aim to prevent repossession by contributing towards mortgage interest payments. Initially provided as a benefit, from April 2018 SMI as a benefit changed to a loan repayable upon sale of the property. SMI benefit claimants were offered the loan in the run up to and following implementation of the conversion to a loan. However, far fewer claimants than expected have taken up the SMI loan. As of June 2021, around 20% of eligible claimants have either accepted or indicated that they intend to accept the offer of loan.

This report explores why take up of the loan has been lower than anticipated. The research therefore examines why people who were eligible for the loan did not take it up, and how they are managing without that support. It also analyses the financial situation of people who have not taken the loan up to see how financially resilient they are to manage a financial shock. This report also investigates how lenders have responded to the change.

Methodology

The research took place in Summer 2020 and involved 700 telephone interviews with individuals who were eligible for an SMI loan at the time of drawing the sample (February 2020) but had not taken it, including 582 who had previously been in receipt of the SMI benefit (‘stock’ respondents), and 118 who had become eligible for SMI since it transitioned to the SMI loan (‘flow’ respondents). Additionally, the research addressed a wider objective to see how lenders have responded to the change to a loan, and this was conducted through several in-depth interviews with lenders.

The overarching research objective is to understand why take-up of SMI loans has been lower than expected and what actions, if any, have those who have not taken the loan taken instead. This breaks down into the subsequent research objectives:

• how former claimants and those newly eligible for the loan are meeting their mortgage payments
• whether they are in mortgage arrears and/or under threat of repossession
• reasons for declining the SMI loan
• likelihood of taking up a SMI loan in the future
• what actions have been taken in response to the end of SMI benefit (for example moving home, downsizing, taking in a lodger, changing employment status, postponing retirement)
• awareness and understanding of SMI loan offer, including how communications could be improved

Key findings

Take-up of SMI as a loan

The findings suggest that SMI loans are helping those most in need as those in more financial difficulty are more likely to say they will take out a loan. A quarter (24%) of those eligible for an SMI loan who have not already taken one up say they would be likely to take one out in future, including 10% who say they would be very likely to do so. However, close to three quarters (72%) say they would be unlikely to take up an SMI loan.

Close to a fifth of those who were unaware of SMI as a loan before the survey, or who did not remember the offer, are very likely to consider taking it in the future (17% in both instances). This suggests that and awareness is a barrier for a minority, and that additional communications might increase take-up among this group

Those who are less financially secure are significantly more likely to consider taking an SMI loan in the future. These include those unable to keep up their current method of mortgage payments for the next year (33%), those not managing well pre-COVID 19 (25%), those who are or have been in arrears in the past two years (22%). This suggests that SMI loans are helping those most in need.

This view was also shared by mortgage lenders in the qualitative interviews. Lenders believed that the change from a benefit to a loan has led to a change in the profile of SMI claimants. Their view was that previously many SMI benefit recipients were largely in receipt of Pension Credit and viewed the SMI benefit as a ‘nice to have’ rather than a necessity. In contrast, current SMI loan claimants were seen to be in real financial need. This could indicate that the DWP support available through SMI has become better targeted.

Loan related issues are the greatest barrier to claimants taking out an SMI loan. More than a third of respondents (36%) do not wish to take out a loan, and 16% are reluctant to add an additional charge to their property. Other loan related issues include: not willing to take a loan from the Government (6%), sentiment that it should be interest free (5%), and difficulty repaying the loan (2%).

Financial situation

A large proportion (71%) of respondents report using benefits to keep up with their mortgage repayments, while one in five (17%) report using help from friends and family, and one in ten (13%) their wages/salary.

Those in receipt of Pension Credit are particularly likely to report using benefits (81%). It should be noted however, that those on Pension Credit have the lowest monthly repayments (30% under £100 per month) and are also least likely to work, which may explain why they are most likely to manage repayment from their benefit. In contrast, those in receipt of Universal Credit are less likely (54%) to report using benefits and instead are more likely to report using their wages/salary (23%). It is possible that the group using wages/salary for repayment have experienced a change in circumstances, for example entered work, since the sample was drawn. This small group of claimants would, therefore, no longer be eligible for an SMI loan.

Just under a fifth of respondents (17%) are currently in arrears or have been in the past two years, rising to 32% of those in receipt of JSA and 24% of Employment Support Allowance (ESA) claimants. A similar proportion of respondents (14%) have missed mortgage payments in the last two years, rising to 19% of those receiving ESA and 20% of those receiving Universal Credit. Around a third stated that they were in arrears due to a general reduction in household income. However, around one in six (16%) reported that this was due to the loss of the SMI benefit, and their decision not to take up the SMI loan.

A quarter of participants reported that their personal finances had got worse since the start of COVID-19. This was a result of a general increase in spending, for example higher bills and a reduction in working hours.

Effect of the loss of the SMI benefit

Among respondents, 86% said they had previously received the SMI benefit. However, this may be an underestimate because, as is the case for SMI as a loan, the SMI benefit was paid automatically to the mortgage provider, and so claimants may not be aware that they previously received SMI benefit payments.

Of those who recall receiving the benefit (59%), over half (57%) say losing it has affected their ability to keep up with mortgage payments, including 25% who say it has affected them a lot. Those who are more financially insecure are particularly likely to report being impacted, for example four in five (81%) of those who are currently or have been in arrears in the past two years.

Overall, 40% of those who recall receiving the benefit took no action when it stopped being paid to their lender, and this increases to 59% amongst those who say they were not impacted by the change. By contrast, among those whose ability to keep up with mortgage payments was affected by the loss of the SMI benefit, four in five (80%) took some action when it stopped being paid to their lenders. The main actions taken were to reduce spending (28%), to borrow from friends and family (15%), or to renegotiate their mortgage (7%). Other actions were taken by 2% or less.

Awareness of SMI as a loan

Awareness of SMI as a loan is high, with most of those eligible for it having heard of it prior to the survey (76%) and most of these knowing about it for over a year (80% of those aware of SMI). Recall of communications about the change to a loan is also high (73%), and while the majority (76% of those who recall SMI communications) felt informed by them, this means that a quarter (27%) of eligible non-recipients do not recall the offer, which could suggest it should be offered again.

Understanding of the SMI loan

Of those who are aware of SMI as a loan, the majority (84%) have some understanding of it. When asked what they know about it, the most common responses are that it helps with mortgage repayments (42%), and it is a loan (39%).

Respondents showed some knowledge about the loan repayments, with 19% knowing repayment is made upon the sale of the property and 13% understanding interest is to be paid with the loan repayment. One in ten (10%) mentioned that it was previously a benefit, and one in twenty (6%) that the amount given has been reduced (although this was not in fact the case).

While very few mentioned the 9 month waiting period, this was a key issue identified by lenders in the qualitative phase, with several highlighting this as a significant barrier, and some suggesting that shortening the waiting period would better meet the needs of those who urgently require support to cover their mortgage interest. Communication with lenders during this waiting period was also criticised, in particular the lack of clarity on whether the claimant would be eligible after the waiting period made advising their customers more difficult.

Policy impacts

In response to early findings from the research, policy officials updated GOV.UK, and informed lenders through a targeted newsletter, that claimants who had previously turned down the loan could take it up the loan offer at any time and backdate to the first date of eligibility if their circumstances had not changed. The research has improved our understanding of why people turned down the loan offer, however, there are no findings in the report that indicate a need for major changes to the current policy approach.