SMI

Altior

I will likely be applying quite soon. Does anyone have any insight into whether there will be any issues with the SMI payments being higher than the interest component?

I have quite a low mortgage interest rate until 2028.

The government via the DWP states, and is fully aware that whilst SMI is designed to cover interest only, but the rate is generic. This means that the exact payment won't usually match the interest. To me this is intended to cover the scenario where the payment is less than the interest.

My concern is how the bank will treat it. For example, say my fixed payment is now £500 pcm, the DWP pays £300 pcm when SMI has started, does this mean I pay £200? The £200 in my example would be lower than the capital component of the payment. So the DWP would effectively be paying down part of the capital, even though that is not the intention of the SMI scheme. Or does it happen a different way? Of course it's a loan, so there is no major benefit to having the loan paying off part of the capital, aside from cashflow.

Thanks

ACG

I cant help with your question I am afraid - would be interested to find out though for my own benefit.

But have you looked at the mortgage charter? Might it be a better option to go interest only rather than taking a loan from the govt? (Im not saying it is a better option, just putting it out there).

Altior

https://forums.moneysavingexpert.com/discussion/comment/82073511#Comment_82073511

Thanks. Yes I have ran lots of scenarios. Unless the goalposts are moved again, my current strategy is to access my DC pension funds to settle the SMI balance. This is in around five years, the loan balance will be pretty modest as my mortgage capital balance is under £100K.

The DC pension was, at least in part, penciled in to pay off the mortgage anyway, rate dependent. I'm going to keep the mortgage charter interest only option in my back pocket if there is an emergency scenario.

I have a tiny overpayment allowance until January as I have used most of it. From my calculations again, I should be ok even if the capital element that the DWP pays is treated as an overpayment.

I have done lots of searching online, across multiple platforms, there is very little user experience of the SMI option online. None of the guidance I can find outlines how payments higher than the interest are treated. I did identify one ombudsman decision where the bank refused to apply it to the capital balance, but that was an interest only product.

ACG

To be honest, I only know a little about it.

If a customer rang about it I would go off and research what I could but my exams are 15 years out of date now and its not cropped up in that time. I have never known anyone use it.

Altior

https://forums.moneysavingexpert.com/discussion/comment/82073566#Comment_82073566

It would have been a flat out benefit back then. Since the government changed it to a loan, demand fell off a cliff!

What I have gathered is that even DWP staff might have to be dusting off the manual, ha.

It is ideal for my particular scenario, effectively I will be deferring the interest of the mortgage for a few years, at a current cost of 4.5%. Total additional interest circa £2K. I could use it as a form of equity release, but my preference is to keep control of the property and get rid of the government charge as soon as possible.

ACG

Thats right, I vaguely remember it changing.

The lad who works for me only qualified 2 years ago, I can have a look through his books but to be honest it never really mentioned much about it, I think it was about half a page. If I can find out anything meaningful I will let you know.

Altior

https://forums.moneysavingexpert.com/discussion/comment/82073623#Comment_82073623

That would be great, thank you.

Altior

I found the answer 🙂

Once SMI is in payment, lenders are required to apply the amount paid to the interest on the claimant’s mortgage and any qualifying loans. Any SMI exceeding the claimant’s liability must be applied in the following order:

• to any arrears of mortgage payment
• capital repayments
• to any other loan with the same lender

Support for Mortgage Interest (SMI) Lender’s handbook