DWP SMI Loan Conversion

LharkStar

Hello,

Now that the DWP is rolling out the SMI assistance conversion to loans, I just have a question about the interest they will be applying. I've had no luck with Serco (speak to Money Advice Service), no luck with Money Advice Service (speak to DWP), and I'm still waiting to hear from the DWP.

The loan will have 1.7% Compound Interest, applied daily, calculated monthly, and I will receive an annual statement.

I'm trying to figure out what to expect in terms of building interest, if I proceed with this.

So, based on £200 PCM, i.e. £2,400 PA, what interest would I expect to pay?

And would this amount increase from year to year? My mortgage is for 10 more years, I am 59 and disabled and unlikely to work being the worst case scenario. Would the interest applied each year keep increasing, year by year, as the debt mounts?

I just am having difficulty getting my head around this Compound Interest thing!

I realise that it could rise or fall from 1.7% over the years, but I'm only interested in a rough idea of what to expect, based on the circumstances I've outlined remaining the same, to keep it simple!

I'd be grateful for any advice, thank you.

pmlindyloo

Would this calculator help?

http://www.thisismoney.co.uk/money/cardsloans/article-1633405/Loan-repayment-calculator.html

p00hsticks

pmlindyloo wrote: »

Would this calculator help?

http://www.thisismoney.co.uk/money/cardsloans/article-1633405/Loan-repayment-calculator.html

I'm not sure that that calculator will be helpful, as whereas in a straightforward loan you borrow a lump sum up front and then make repayments to gradually reduce the amount oustanding, with the SMI loan I imagine that the amount of the loan is gradually increasing each month as the payments are made to cover the mortgage interest each month.

LharkStar

Yes the latter is correct! No lump sum, just a gradually increasing loan...

BorisThomson

Are you paying towards the capital element of your mortgage also? This will affect the calculation.

LharkStar

No, I am on interest only now, and will be for the foreseeable future.

BorisThomson

LharkStar wrote: »

No, I am on interest only now, and will be for the foreseeable future.

In that case the mortgage will not be decreasing, and the government loan will continue increasing.

Assuming they are paying £200 a month, after twelve months you will owe £2,422. After a second year you will owe £4,886, and after three years roughly £7,400.

You'll note that the amount paid in interest gets larger each year, this is because you are being charged on the full amount owed. You also need to keep in mind that interest rates are very low at present, and any future BoE increase will be reflected when the DWP reviews the rate they charge.

Ames

What plans do you have to pay off the mortgage in ten years? Would you be better off selling now before the debt to the DWP gets too high?

BorisThomson

Ames wrote: »

What plans do you have to pay off the mortgage in ten years? Would you be better off selling now before the debt to the DWP gets too high?

In the OP's situation the lender will generally extend the mortgage into retirement on an interest only basis.

LharkStar

Thanks for the replies! I won't be paying off the mortgage, it's too far gone now, with me being on interest only, and there's no way I could chip away at the borrowing now. I'm almost 60 and with my disability it's unlikely things will change to the extent that they would need to for me to pay off the borrowing.

But I do have a 'reasonable' amount of equity, as the flat is already worth more than double what I paid for it 10 years ago, so in 10 years it should be even more. However it's all relative, and the equity I do have (and will have) will always mean me moving into something extremely modest and away from the area where I live now. This is why I can't sell up now... the equity as it stands would not be enough to move elsewhere that would be in any way reasonable or practical for me at this point in time. I've become quite dependent on local amenities and a support network.

So, in 10 years time, I shall either have popped my clogs, or I will have to move elsewhere. Maybe by then my choices will be better with what equity I have at that point.

I note what Boris Thompson has said... that possibly my lender would extend my mortgage into retirement on an interest only basis. Really??? I never even imagined that would be possible. I figured that once my mortgage term is finished, that would be it... "Give us the keys and get out!" I will be almost 70 by then and on a pension. Do lenders really do that sort of thing???

BorisThomson

I note what Boris Thompson has said... that possibly my lender would extend my mortgage into retirement on an interest only basis. Really??? I never even imagined that would be possible. I figured that once my mortgage term is finished, that would be it... "Give us the keys and get out!" I will be almost 70 by then and on a pension. Do lenders really do that sort of thing???

They do, it comes under their obligation to treat customers fairly. I've dealt with cases involving Santander and Barclays in the past year, Barclays had to be pushed a little but Santander proactively offered the option. As long as you keep making payments it's not in their interests to force you out, not least because the courts are not keen on granting repossession orders against post retirement and disabled people!

That's not to say that things won't have changed in ten years time, but it's not something I would be overly concerned about.